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Speculator ‘Insurance Shorts’ and Swap Dealer Shorts Likely to Spark a Counter Rally in Gold

 -- Published: Sunday, 14 September 2014 | Print  | Disqus 

By Gene Arensberg

HOUSTON – (Got Gold Report) -- Just a little “thinking out loud” on the Managed Money, what I call “insurance short” positions. Doing so shows a considerable amount of gun powder laying on a large wooden box of short covering dynamite, metaphorically speaking.

That's because while The Funds piled on new shorts Swap Dealing banks hung onto most of their record high shorts.

An imbalance is an understatement. See if you agree…

Recall that as of August 12, with gold then $1309, Managed Money, aka, The Funds, held a smallish 21,930 short contracts for gold futures on the COMEX bourse.

Recall that The Funds are trend followers that will generally continue to add to their positions in the direction of the trend until they “break” that trend (or it breaks of its own volition). Below is (are?)* the Managed Money data since July 8 for reference.

Managed Money Disaggregated COT Data

20140911 MM data

From August 12 to September 2 gold declined $44 or 3.4%. As it did, Managed Money traders increased their gross shorts on gold by 31,272 contracts or about 142%. One could say that Managed Money traders were providing a good measure of downside pressure as they increased their “insurance shorts” (the first shorts to be covered once The Funds become convinced the downward impulse has run its course and has reversed). Here's the more familiar graph for the MM shorts.

20140911 MM shorts graph

Now, since September 2, gold has sold off another at least $32 to test the low $1230s, but by Tuesday, September 9, the COT data cutoff date, gold had tested the high $1240s. For COT purposes then we need to use a decline of, call it $17 ($1265 - $1248).

By Tuesday we might estimate that Managed Money had added another, call it 17,000 shorts to something near a high 70,000 shorts. Just a guess. (The last time they held that many shorts was in June with $1240s gold then too, (June 3, 73,063 shorts, $1244 gold).

For reference the Managed Money shorts peaked December 3, 2013 at 83,730 shorts with $1220s gold then. So if we are right about how many “insurance shorts” they have put on, it’s getting up into the nosebleed altitude region again.

Big Time Rally Fuel

There is no stronger bull rush rally fuel for gold on the COMEX than Managed Money insurance shorts in our opinion. But that’s just the COMEX, which answers to the much larger and more opaque OTC physical markets overseas and the LBMA.

Swap Dealers Press their Shorts Again? We’ll Likely See this Afternoon with the New COT.

Meanwhile, just a fast look at the data and graph for gross shorts for the traders the CFTC classes as Swap Dealers, which, as anyone reading GGR already knows, have been reporting extremely high gross shorts in both gold and silver.

As of September 2, the Swap Dealers had not really covered all that many of their extremely high gross shorts, even with the 8,753 shorts covered in the last COT week, which in part enabled the Swap Dealers to reduce their net short position in gold futures by more than 16,000 contracts (20%). (Link jumps to our Sep 5 recap of the Sep 2 COT changes.)

From July 8 to September 2, as gold declined $53.86 or 4.1%, mercenary Swap Dealers did reduce their gross shorts by 30,973 contracts or 18.7% (from an extremely high – but not quite a record high 165,927 -- down to a still extremely high 134,954 shorts). That is an anemic pace of short reduction.

As the data table and graph further shows, the Swap Dealers continued to hang onto much of their extremely high short position as the Managed Money traders ramped up their “insurance shorts.”

Swap Dealer Disaggregated COT Data

20140911 SD data

Swap Dealer Shorts Graph

20140911 SD gold graph shorts


Our view is that this has caused an apparent imbalance in the COT structure and Managed Money traders will be aware of it. For that matter, all traders can be assumed to be aware of it and can estimate where the imbalance will cause disruption. Ergo, they might be a little quicker to break ranks back to the long side given the now massive shorts we assume are now parked in just two classes of traders, (probably something close to 120,000 for Swap Dealers as of Sept 9 and something close to 70,000 for Managed Money, more or less, or close to 200,000 shorts between them).

Neither class of traders holds huge amounts of precious metals that could be delivered into these short sales (like bullion banks or central banks are supposed to, for example). Thus, as we have said before, it’s a lead pipe cinch that all of these shorts will be covered at some point. At issue, importantly, is the price.

Bottom Line

Arensberg Gene CaptainThe bottom line for this offering? While Managed Money traders ramped up their “insurance shorts” as they kept pressure on gold since at least August 12, mercenary Swap Dealers got out of some of their collective shorts, but not all that many. (Keeping in mind that we cannot know whom the SDs are acting for (themselves or their firms, bullion banks, large producers, soveriegn funds, a certain central bank for other central banks, etc. ... or what their net book might be - we can only see their reported COMEX FUTURES positioning, which is like looking through the window into one room of what could be a very large house -- three days ago.)

Having said that, I think we can assume that once the traders sense that the downward price impulse is over, both groups may be in a hurry to “get flat.”

That could cause quite a violent bump to the upside as some of the other traders are likely to exploit that imbalance.

Of course, it should be obvious, but we are working today with nearly two week old data, with a new COT report due out later this afternoon at 15:30 ET. We hope to have our usual recap available shortly thereafter (usually 25 minutes or so after). At that time we will get an idea if our estimates above were close.

Either way, close or not, a ranks-breaking reversal looms for gold (and silver), almost certainly. Watch for it to develop slowly at first, then with lightning speed.

Kind of like the one in June did…

20140911 gold graph


At 06:51 CT Friday COMEX Dec Gold shows about $1237, silver about $18.51, according to our data provider.

"A great time to be building (or rebuilding) a meaningful position in silver (and gold) in our, admittedly biased, opinion. We are adding $3 of silver for every $1 in gold as we do..."

That is all...

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