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Got Gold Report - COT Flash May 28



-- Posted Monday, 31 May 2010 | | Source: GoldSeek.com

Bottom line:  COT report reveals COMEX commercial traders cover shorts modestly for gold,  COMEX swap dealers cash in the shorts they capped the silver market with last week.  Indicators more bullish than bearish, but acting strangely.   Gold -1.7% and the gold LCNS -4.1%.  Silver -5.7% and the silver LCNS plunges  -13.1%.  Details just below. 

 

HOUSTON – We remain nervously on the sidelines with our short-term gold-silver ammunition, but, as always, we remain thankful we hold physical metal in our longer-term arsenal. 

 

The activity shown in this week’s peek into the positioning of the largest traders of gold and silver futures didn’t cause us to take a last minute long position in late Friday trading, but we certainly considered doing so in the afterhours session.  

 

However, with a Fitch downgrade of Spain (to Aa+ from Aaa) already in the news, the U.S. President down in Louisiana grand standing in the Louisiana heat, and early looks at some of the indicators we are most interested in looking either lame, flat or negative, in the end we decided that the sidelines will do us just fine until Memorial Day Monday evening at least.

 

Lest even we forget why the COT report, or rather our focus on the changes in positioning of the Big Sellers (BS) of gold and silver futures is important, the reason we track them closely is because the very large, well-funded and presumably well-informed professional traders’ positioning has the very real potential to move the gold and silver markets on a short-term basis.

 

Before we head into the data this week, we would like to call attention to comments made by Steve Wynn, the CEO of Wynn Resorts (NYSE:WYNN) in a CNBC interview Friday, May 28 in Las Vegas.  Wynn is the first CEO of a major U.S. company we have seen that calls it like it is and isn’t afraid of offending someone in the process.  Please take the time now to view this extraordinary video clip at this link. 

 

Kudos to Steve Wynn for having the courage of his convictions and the presence to communicate it on television. 

 

Let’s see what the BS of precious metals have been up to, starting this week with gold.

 

Gold COT

 

The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET today, Friday, May 28, 2010.  The report is for the close of trading as of Tuesday, May 25. 

 

Everyone will remember that GotGoldReport.com is focused on the changes in positioning of the largest futures traders in that report – the traders the CFTC classes as “commercial,” including the bullion banks, large dealers and swap dealers combined.  We refer to those commercial traders as “LCs” for “Large Commercials.”  

 

As gold dropped $20.87 or 1.7%  to $1,204.03 COT reporting Tues/Tues, COMEX commercial traders reduced their combined collective net short positioning (LCNS) by 11,365 contracts or 4.1% from 279,744 to 268,379 contracts net short as the open interest INCREASED by 11,602 contracts from a very high 579,758 to an even higher 591,360 contracts open. 

 

We usually regard a decrease in the LCNS on a material increase in the open interest as leaning more bullish than bearish, but let’s see what else the data show. 

 

As of Tuesday the gold open interest on the COMEX was within 2,593 contracts of the highest open interest in our records, which occurred January 15, 2008 at 593,953 contracts open.  Extremely high open interest in the futures markets are a double edged sword.  Extremely high open interest underscores that the demand is there, but it also can mean that the “normal” amount of “horsepower” which can be deployed on the long side in that market has already been expended.

 

At extremely high open interest levels, such as right now in gold, if one is to be bullish, then it has to be under the assumption that extraordinarily strong demand is coming on the heels of all the demand which has already been deployed.     

 

Here's the nominal LCNS graph for gold futures (Graph1): 

 

 

Since Tuesday, gold has more or less drifted sideways in a narrow band between roughly $1,201 and $1,218.  We noted aggressive selling in New York near $1,216 on both Wednesday and Thursday, and equally aggressive bidding earlier today, Friday, near $1,202.  The gold market seems to be waiting for a near-term catalyst to make a more definitive move in other words.  

 

Here’s what we know so far; as of Tuesday, the largest commercial sellers of gold (as a group) were reducing some, but not a huge amount of their “hedging” as gold pulled back about $20, but as that occurred the open interest on the COMEX was actually expanding to almost a new record.

 

Clearly more than normal demand was coming into the market, otherwise the open interest would have fallen on decrease in the LCNS. 

 

The LCs actually reduced their net short positioning by almost as much as the increase in the open interest! What that means is that the LCs were not, that’s NOT aggressively “hedging” gold futures as of Tuesday.  Had they been aggressively on the sell side then, we would not have seen a reduction in the LCNS. (We use the term “hedging” loosely because the CFTC does.)     

 

When compared to all contracts open, the relative commercial net short positioning (LCNS:TO -  the most important graph we track) actually dipped down to 45.4% from last week’s 48.3% of all COMEX contracts open. 

 

Here's the LCNS:TO graph for gold (Graph 2):

 

 

Ordinarily if we were to see this kind of action in the LCNS:TO near where we sense strong resistance, we would quickly change our mind about that resistance, because this is not the kind of action we expect from the Big Sellers (BS) if they are in full defense mode – if they were very confident of lower gold prices in the near future.   

 

We are used to seeing the largest commercial traders strongly increasing their collective net short positioning when THEY think gold has reached upper resistance – when THEY are confident in lower gold prices just ahead.

 

The reason is as simple as it seems.  At much higher gold prices there is usually more of an incentive for holders and traders to hedge future deliverables, future production, on-hand or promised inventory or their existing long-term long positions in other markets. 

 

So when gold reaches up to near old highs or up above them to new highs we fully expect to see the BS guys in there taking all the short action they can book.  And in years past when we saw that, it sent those of us watching the big dogs a short-term signal to be a little more careful, to tighten up stops, to get ready for the next smack down…

 

Lately, however, big increases in the gold LCNS (the nominal commercial net short positioning) have been losing some of their downside “punch.” In essence, the big stands by the commercials on the short side have had somewhat lesser effects than we had grown accustomed to prior to 2009.   

 

Such as when they jumped all over the short side of gold on April 6 of this year, adding a staggering 37,215 contracts net short that week as the open interest jumped 30,710 contracts with gold then at $1,134.64. 

 

Or like they did on November 24, 2009, when the LCs added a big 24,558 contracts net short as the open interest actually declined 11,866 contracts with gold then trading at $1,168.97.

 

Or like they did back on September 8, 2009, when the big commercials absolutely hammered the short side of gold to the tune of a whopping 54,089 more contracts net short as the open interest ballooned 67,010 contracts with gold then at $995.40.  On that particular occasion, the LCNS:TO soared up to 60% of all open contracts! (The LCNS:TO is currently near 45%, much lower.)

 

What do each of those examples all have in common?  Well, the obvious answer is that despite all of that short-gold position taking by the BS, gold has managed to march on higher relentlessly, hasn’t it?  Did it not close this past week with a $1,200 handle?

 

To be fair, in each of the above cases of BS gold short selling, gold did eventually trade lower than the closing price on the date of the reports mentioned, but not for very long, and when gold did trade lower, we saw the LCNS and the LCNS:TO coming back in, just as we might expect it to. 

 

Something is different this time.  Here we are with gold over $1,200 the ounce, within one or two day’s volatility of a new all time high for the metal, and instead of an LCNS:TO near 60%, instead of an LCNS:TO which screams to us that the largest gold sellers are supremely confident in lower gold prices just ahead, the relative commercial net short positioning comes in this week almost 15 percentage points below that – with the open interest near an all time high.     

       

We no longer associate an LCNS:TO of 45% as overtly bearish for gold and haven’t since 2007. That doesn’t mean that gold can’t fall from here, it certainly can and it might, but what this number is telling us is that some goodly portion of the short positioning on the COMEX is now held by other traders than the “ BS usual suspects.”  Whereas before we might have thought in terms of the commercials as being pretty much the majority of the sell pressure on the COMEX, today, with this particular report, the signals are that the largest of the largest gold sellers are less than confident in lower gold prices – with the selling slack now being taken up by other market makers doing their own hedging.

 

Yes, we see this as a completely new development.  One we have not seen since the first inkling of it in September of 2009.     

 

Our antennae are up, we are on the sidelines with our short-term bullets and we are anxious.  Anxious not because of our long-term physical holdings, those give us comfort.  We are anxious because we sense something extraordinary is afoot, something potentially historic … and while we do not want to miss out on a potential major move, our instinct is to be cautious when our indicators perform in unusual ways.   

The above is an excerpt of the full Got Gold Report – COT Flash Report update.  To continue reading as Gene turns next to the silver COT please click on this link: 

And thank you for doing so. 

 

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets.  In 2000 Gene started sharing his own market research with fellow traders and fund managers.  Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web. Gene’s more in-depth market reports, insights and trading ideas are available at www.GotGoldReport.com.  

 

Gene Arensberg

Links:  Steve Wynn   http://www.cnbc.com/id/37392344


-- Posted Monday, 31 May 2010 | Digg This Article | Source: GoldSeek.com




 



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