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Got Gold Report - COT Flash July 31



-- Posted Sunday, 1 August 2010 | | Source: GoldSeek.com

By Gene Arensberg       Esse quam videri – To be rather than to seem

 

Bottom line:  COT report shows large commercial traders piling on new net short positions modestly for gold, still reducing LCNS for silver.  Open interest for gold plunges late week.  Gold -2.6% and the gold LCNS +5.5%.  Silver -0.2% and the silver LCNS  -2.5%.  Details just below. 

 

DEEP SOUTH USA – Writing on the fly this week, so this report may seem briefer than normal.  Then again this is an important week as we are once again long gold.  

 

We had been waiting since May, patiently like good Vultures, for gold and silver to make it into our expected support zones.  Gold finally fell enough to enter our expected zone, which any of our regular readers will know has been the upper $1,150s for quite some time.  Thus, we are long gold with a full position with an average entry of $1,159 equivalent.

 

 

We are simultaneously pleased and disappointed that silver was unable to make it into our “wheelhouse” at the same time that gold did.  We are disappointed, of course, because our short-term silver ammunition remains unfired.  We are pleased because we hold physical silver metal in our long term arsenal. 

 

We are on the road, so with no further delay or distraction let’s look into the COT report for this week.  .

 

By the way, very soon now visitors will need a paid subscription to view our COT Flash reports, our full Got Gold Reports, and our Vulture Bargain Hunter offerings.  To subscribe please see the link above and to the right.  And thank you for honoring us with your support. 

 

Our consultants believe that all of the necessary infrastructure will be in place by the end of August, so we can expect that to become the target for when the “meat” of GGR “goes private.”  More about that soon as we learn the details.       

 

Gold COT

 

The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET yesterday, Friday, July 30, 2010.  The report is for the close of trading as of Tuesday, July 27. (Please note, this report is being filed Saturday, July 31, but it may not be sent to subscribers until Sunday.)  

 

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.”  

 

Gold fell another $30.43 or 2.6% from $1,191.97 to $1,161.54 COT reporting Tues/Tues. As it fell COMEX commercial traders actually INCREASED their combined collective net short positioning (LCNS) by 11,891 contracts or 5.5% from 215,664 to 227,555 contracts net short.  The COMEX gold futures open interest inched 593 contracts higher from 559,473 to 560,066 contracts open. 

 

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

 

 

 Source for data CFTC for COT, cash market for gold

 

Remember that from July 6 to July 20 (three reporting weeks) as gold corrected $48.53 or 3.9% from $1,240.50 to $1,191.97 the biggest “hedgers” and short sellers of gold REDUCED their net short positioning by a significant 74,292 COMEX 100-ounce contracts - a reduction in LCNS of 25.6%.  We noted that as a brisk pace of LCNS reduction in our last COT Flash report for July 25. 

 

This week, with gold moving sharply lower we find the largest commercial traders adding to their net short positioning?  Why would that be?  The answer could be the obvious, that it reflects the LCs “piling on” the short side to pressure gold even lower, as no doubt many will assume. 

 

However, it could also reflect the reentry on the long side of bargain hunting speculators in the context of the seasonal roll from the August COMEX contract to October and December.  Speculators, who reason that the futures can only outpace the physical markets to the downside so far before they really must bounce to realign with the larger physical market, were dipping their toe back in.   

 

Normally we would view an increase in the LCNS on a decrease in the price of gold as arguing more bearish than bullish. When the largest hedgers and short sellers are willing to increase their net short exposure even when the price is falling suggests on the surface they are more confident that lower prices lie ahead. 

 

In this case, as of Tuesday, well before gold showed very much “support,” who could blame the commercials for thinking that gold may be getting close to a seminal breakdown, and thus be willing to add to their “hedging” - to increase their net short positioning?  They apparently did, but in the following three days of trading traders noticed two very important things. 

 

First gold seemed to hit a “floor” on COT reporting Tuesday in the $1,150s and again on Wednesday and yet again on a strangely light volume Thursday.  Second, while that apparent “dry-up” of selling pressure was playing out, traders noticed that the open interest on the COMEX was falling.  By Thursday the total open interest on the COMEX was just over 532,000 contracts, more than 27,000 contracts less than Tuesday’s COT cutoff and yet the price of gold was apparently firming. 

 

We compare the nominal gold LCNS to the total open interest.  That gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category - on the COMEX.   

 

When compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO -  the most important graph we track) rose from the year’s low of 38.6% back up to 40.6% of all COMEX contracts open. 

 

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

 

 

 Source for data CFTC for COT, cash market for gold

 

As gold sold down this COT reporting week from the $1,190s to the $1,160s, the LCNS:TO actually rose modestly.  That is because the large commercial traders added net short positioning as the open interest was near flat.  It is NOT because they added net short positioning as the open interest fell or fell even more than the increase in LCNS, which is quite bearish. 

Had we seen a large increase in the LCNS and a large decrease in the open interest at the same time it would have weakened our confidence for a long position in gold. 

 

Instead, we saw the above, and then a decrease in the open interest AFTER gold seemed to find support in the $1,150s.  It may not sound like much of a difference to some, but the distinction is important to those of us who devour the COT report each week. 

 

Producer/Merchant… Commercials Add Gold Short Positions   

 

The Producer/Merchant commercials (PMs), the category in which we believe the largest bullion banks “live,” reported an all time high net short position of 223,009 contracts in the June 22 COT report.  In the three reporting weeks after that as gold fell roughly $50 from the $1,240s to the $1,190s the PMs covered or offset 68,377 contracts or 30.7% of that position to show a still formidable but much lower 154,632 contracts net short.

 

This week, as of July 27, the PMs added 11,547 new net short positions as gold was testing the $1,150s that Tuesday.  We can say that they were nearly all of the selling pressure that was evident at that time.  We cannot say what has become of the 11,500 brand new net short positions since Tuesday as the open interest for the COMEX fell nearly 30,000 contracts by Friday!  

 

Just below is the Producer/Merchant (PM) positioning graph as of Tuesday, from the disaggregated COT data (COT Graph 3). 

 

 

 

Source CFTC for disaggregated trader data, Cash Market for gold

 

Remember that the blue line in the graph above is expressed as a negative number, so when the commercial net short position falls, the blue line rises and vice versa. 

 

The PMs reduced their net short positions by over 68,000 contracts in the three reporting weeks just prior to this report, so an increase of 11,574 net short contracts needs to be viewed in that context. 

 

Swap Dealers Closing Out Shorts

 

The “other commercials,” the large traders the CFTC classes as Swap Dealers, added a tiny 344 contracts to their net short positioning, showing “just” 61,376 contracts net short, which is not far from their lowest net short positioning of the year set June 1 at 56,946 contracts net short.   

 

Just below is the Swap Dealer no-spread net position graph (COT Graph 4). 

 

 

Source CFTC for disaggregated trader data, Cash Market for gold

 

In our last COT Flash Report for July 25 we said:  “Gold really hasn’t corrected all that much.  If we use the $1,260s as the peak and the $1,170s as the low so far, that is only a decline of roughly $90 or about 7% in U.S. dollar terms.  Yet, during that modest pullback for the yellow metal we are now witness to very large reductions in the commercial net short positioning – at least on the COMEX. 

 

That doesn’t necessarily mean that gold won’t continue to sell off even more.  It can and it might, but it certainly does mean that the largest “hedgers” and short sellers of paper gold have closed out a substantial amount of their collective net short positioning on what amounts to a net $50 drop in the gold price as measured on COT reporting Tuesdays. (We use the term “hedgers” loosely because the CFTC does.)”

 

Notice then, two things.  First gold has indeed attempted to find support in the $1,150s (as we have been expecting) despite some “help” on the downside in the form of Producer/Merchants (PMs) downward “assistance.”  Notice also, that as the PMs WERE willing to take on additional new net short positioning – with gold then in the $1,160s, their more mercenary counterparts, the Swap Dealers, were not apparently so inclined. 

 

Once again the PMs and the SDs are not working off the same page of the same playbook.    

 

***

The above is an excerpt of the full Got Gold Report COT Flash update provided gratis to all this week.  To continue reading as Gene turns next to the silver COT in expanded detail, along with a bevy of new charts and his impressions 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.


-- Posted Sunday, 1 August 2010 | Digg This Article | Source: GoldSeek.com




 



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