-- Posted Monday, 23 August 2010 | | Source: GoldSeek.com
By Gene Arensberg Esse quam videri – To be rather than to seem
Bottom line: With gold approaching past resistance this week’s COT report reveals COMEX commercial traders increasing their “opposition” to gold and to a lesser extent, silver. Silver’s non-confirmation of gold worrisome. Gold +1.7% and the gold LCNS +8%. Silver +1.2% and the silver LCNS +1.9%. Details just below.
HOUSTON – Gold continued its strangely quiet march higher since we last reported here at Got Gold Report. Indeed this week it tested the USD $1,230s - a good thing since we reentered the gold trade with a full position July 27-29 with gold then $1,159.
As it continued its stealthy rise, we have to note that the largest sellers of gold futures on the COMEX have stepped up their “opposition” as we detail below. We also have to note that silver, the second most popular precious metal, has failed to “answer” gold’s move higher – at least so far it hasn’t. For those and other reasons we are compelled now to raise our short-term trading stops for gold. … More about that shortly, but first here is this week’s short-term trading chart for gold metal.
For new readers please note that in this particular chart our impressions as to where gold might encounter support and resistance are highlighted in green and pink respectively. Notice please that gold has steadily advanced since our reentry July 27-29 and is now approaching the area where it found staunch resistance in May and June.
With no further preamble, let’s take a look at this week’s COT report.
Gold COT
The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET Friday, August 20, 2010. The report is for the close of trading as of Tuesday, August 17.
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 added $20.66 or 1.7% from $1,204.39 to $1,225.05 COT reporting Tues/Tues COMEX commercial traders increased their combined collective net short positioning (LCNS) by a large 18,590 contracts or 8.1% from 230,980 to 249,570 contracts net short.
Here's the nominal LCNS graph for gold futures (COT Graph1):
Source for data CFTC for COT, cash market for gold
The COMEX gold futures open interest rose by 20,596 contracts from 523,078 to 543,674 contracts open. As anyone can see, the COMEX commercial traders were apparently willing to increase their net short positioning nearly, but not quite as much as the increase in the total number of open contracts for the period.
Remember that just seven reporting weeks ago, on June 29, with gold then trading at $1,240.50, the combined commercials or what we sometimes call the “LCs” reported a net short position of 289,956 contracts with the open interest then a near record 601,138 contracts open.
Since then, as gold traded lower to test the $1,150s in late July (where we reentered on the long side), then bounced back up to the $1,220s (as of Tuesday, Aug 17), the LCs first reduced their collective net short positioning by more than 74,000 contracts net, but now that gold is approaching its former resistance level the LCs are once again showing their willingness to add to their collective “hedging.” (We use the term “hedging” loosely because the CFTC does.)
Whereas the COT data had been showing that the LCs were less confident of lower gold prices than they were in June, this most recent data suggests they are becoming a bit more confident of lower gold prices. Of course gold has advanced materially along the way so that should not surprise us.
Notice, however, that with gold near $1,225 and “only” about $15 lower than it was in that June 29 report, the nominal large commercial net short positioning is 40,386 contracts less than it was in June with gold then in the $1,240s.
Thus, the “opposition” to gold, although apparently on the increase, has not yet reached the level we might call “aggressive.” Sort of confirming that is the fact that the gold LCNS this week rose less than the increase in the open interest.
Since Tuesday gold tested the $1,230s, but met sufficient opposition there and ended the week very close to the COT cutoff level.
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 for the fourth consecutive week from 44.2% to 45.9% 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 the LCNS:TO moves higher it suggests that the largest commercial traders are more willing to increase their net short positioning for gold futures and vice versa. Just five reporting weeks ago the LCNS:TO reached a 17-month low of 38.6% just prior to our reentry on the long side of gold. It has since then risen up to 45.9% which is considerably higher, but it remains on the low side of the graph above in comparison to where it has been for most of the time since the early 2009 recovery period.
In Texas English what that means is that the LCs have increased their willingness to take the short or sell side of gold, but they haven’t yet gotten obviously aggressive about it yet and their relative net short position today is smaller in comparison to where it has been for most of the last year and a half.
Incidentally, prior to 2009 we would have viewed an LCNS:TO of 46% as getting close to the caution flag zone. But during 2009 the LCNS:TO traded as high as 61.6% and came in above 50% in 36 weeks or 69% of that year. As an interesting comparison, the lowest LCNS:TO in all of 2009 was just 41.9% the week of January 20. Today’s relative large commercial net short positioning is “only” 4 percentage points above 2009’s lowest point in other words, suggesting that the largest “paper gold” sellers are a lot less confident in lower gold prices than they were for most of 2009.
Get that? With gold in the $1,220s the LC’s (the COMEX combined commercial traders) are a lot less confident in lower gold prices than they were in nearly all of 2009 as gold traveled from the $820s to the $1,100s roughly speaking.
We think that lower LCNS:TO readings are also an indirect measure showing us there is additional bull-side “horsepower” on the sidelines in the gold futures markets. That is, when we see an LCNS:TO of something like 61%, there isn’t very much bull side firepower left, but the lower this ratio goes the more bull side firepower there is – all else being equal.
Producer/Merchant… Commercials Add Gold Short Positions
The Producer/Merchant commercials (PMs), the category we believe the largest bullion banks report in, added 10,555 contracts to their net short positioning, showing 168,154 contracts net short.
Remember that the PMs reported an all time high net short position of 223,009 contracts in the June 22 COT report with gold then just under $1,240, so although they added a large amount of net short positioning this week, they are about 54,855 contracts “less confident” of lower gold prices than they were seven reporting weeks ago – so to speak – with gold only about $15 less in price.
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.
Swap Dealers Add Shorts Too
The “other commercials,” the large traders the CFTC classes as Swap Dealers, added 8,035 contracts to their net short positioning, showing 81,416 contracts net short. Over the past four reporting periods the Swap Dealer commercials have added a total of 20,384 contracts to their short bets as gold traded from the $1,160s to the $1,220s.
This week we have to notice that both classes of commercial traders were willing to increase their net short positioning and, as we say, were working off the same page of the same playbook. Regular readers will already know that has not always been the case lately.
Just below is the Swap Dealer no-spread net position graph (COT Graph 4).
Source CFTC for disaggregated trader data, Cash Market for gold
Gold tested the $1,230s on Wednesday, Thursday and Friday following this COT report, but as it did it met with fairly determined “opposition.” We know now that the opposition was likely coming from both classes of commercial trader on the COMEX, division of the CME.
The bottom line is that even though we believe there is still considerable bull side firepower left to deploy, apparently both classes of COMEX commercial traders believe that gold has moved high enough that they were comfortable taking the short side of nearly all the “new” COMEX gold action. The LCNS did not increase MORE than the open interest increased, and ALL of the sell-down attempts this trading week failed to get any downside traction. But the fact that both the PMs and the SDs were on the “same team” this week is a “tell.”
It’s time to protect at least partial profits and to raise our trading stops on our new gold trade until we can see the next round of COT data. More about that in the Summation section below.
Does that mean we now expect a gold sell-down? No, not necessarily. It is just that a sell down would not be as surprising as it would have been last week or the week prior. Just about anything is possible in the short term. With contract expiry looming just ahead, weakening economic data here in the U.S., and with silver unable to “answer” gold’s recent gains, we would be remiss if we didn’t become more cautious just ahead.
Our view is that the COT action for gold is neutral to slightly more bearish than bullish very short term, but we remain of the view that significant dips should be well bid just ahead. Longer term the Great Gold Bull marches on.
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The above is an excerpt of the full Got Gold Report update provided gratis to all this week. To continue reading as Gene turns next to the silver COT, other important indicators and his conclusions 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 Monday, 23 August 2010 | Digg This Article
| Source: GoldSeek.com
