Gold - Commitment of Traders

Hedgies continue selling across the gold market ( at least they did before Wednesday this week - after that they were doing some short covering). In a near repeat of last week's behavior, they did not liquidate all that many existing long positions. They continue to gradually rid themselves of those, which is a bit surprising to me. What they are doing is adding more short positions as they maneuver to play gold from the short side.

I want to emphasize that for all this, this group still remains net long the gold market and has been since the inception of this particular reporting data going back to the summer of 2006. One thing to point out however, is that their overall net long position is the smallest since January 2007. Translation - hedge funds have not been this bearish on the prospects for gold in nearly SEVEN YEARS!

One could perhaps make a contrarian argument based on that fact but even contrarian arguments need a fundamental spark to turn sentiment. Unless sentiment towards gold changes for some reason, these specs will continue to sell the metal into rallies as they play more for the gains in equities that can be had versus tying up investor capital in an asset that is not throwing off any gains whatsoever right now.

Here is the overall COT Chart. Note the area within the ellipse.

Once again we see a continuation of the recent trend of overall net buying by the Commercials who have decidedly moved into a net long exposure to the gold market.

Swap Dealers are also buying on a net basis as they continue to reduce their overall net short position but they remain rather sizeable on the short side of the market. My thinking on this is that some of them are working hedges against custom made contracts for some mining company hedges.

The interesting thing is the little guys or small specs. They are net long, but ever so slightly! this report shows them with a combined futures and option position of 16 contracts on the net long basis! The last time they were actually net short this market was back during the same time frame that the spike low at $1180 occurred this past summer.

So what do we have? Speculators overall remain net long the gold market but continue to abandon the metal in favor of stocks. The Producer/User/Merchant/Processor category is now net long with Swap dealers still net short. Basically the short interest in the market is being held by this group.

After this week's wild gyrations and theatrics, there no doubt have been some consequential changes in the composition of the various groups of traders. I have my suspicions as to what took place but that is just an informed guess on my part. We will need to see next week's data for a better look inside this market.

Unlike some others who seem more obsessed with what the Commercial category is going, I am frankly far more interested in what the SPECULATORS are doing. They drive markets, not commercials. The fact that they are still net long overall concerns me in the sense that while bullishness towards gold is certainly on the wane, we have not yet seen a DISGUST with the metal that tends to make capitulation phases. Too many speak of capitulation in gold. How can that be when speculators remain as NET LONGS???

It may not seem probable right now, given the backdrop of massive QE, but I wonder whether or not we will actually see the hedge fund category move to a net short position in gold as they did in silver. I certainly hope not as a long term proponent of honest money but I rule out nothing in this environment.

Sentiment in regards to inflation fears/confidence in the Dollar must shift for gold to attract eager Western-based buying. Also we need to see Velocity of Money to increase and wages begin to actually rise instead of remaining stagnant. I am not sure that one or even two payrolls reports are going to get that for us.

I think we will see when Western-based demand for gold resurfaces when/if the reported gold holdings in those gold ETF's stop declining and start rising.