Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Decoding the Gold COTs: Myth vs Reality

Commodities / Gold and Silver 2015 Jan 26, 2015 - 10:17 AM GMT

By: Dan_Norcini

Commodities

Over the many years that I have been writing about the commodity futures markets, I have tried to make a point of homing in on the fact that it is the presence of high-powered speculative money flows that drive market action.

Whenever commentators speak of fundamental factors that should go into determining the price of any commodity, they tend to generally speak in terms of demand for the physical product versus the amount of supply for that same product. More often than not, omitted from the discussion is the role that speculators play.


Now some may find that odd, but nonetheless, it is a fact, that a failure to understand the role of speculative money flows, leads to a failure in understanding their role in the price discovery process.

Take gold for example - most of the time, the fevered gold bugs are usually ranting about the "corrupt Comex paper market" or "the Crimex" as they delight in calling it. One rarely hears a peep out of this crowd whenever gold is storming higher for it is as if "The Crimex" has suddenly become virtuous and a place overabounding in pristine purity. Let the price of gold fall for any reason, and the place once more suddenly morphs into a "den of thieves", "a cesspool of iniquity" which must one day get its comeuppance from one of the many new gold futures market that appear outside of the US.

What these dense-minded nitwits seem incapable of understanding however, is that speculative demand in the PAPER markets greatly influences the physical markets. We see this all the time in the livestock markets where the cattle or hog markets will break lower or rally higher BEFORE THE CASH MARKET responds. Once the Board moves, the cash then follows. The reason for that is simple - those entities which do business in the physical market will establish HEDGES prior to action they take in the cash markets. That allows them to get the hedges on at advantageous prices. After their buying or selling moves the Board far enough, speculators then pile on as the initial buying or selling of the commercials triggers the movement in price that in turns moves the technical indicators which determines the buying or selling of the specs.

This is an important thing to understand because the very purpose of the futures markets coming into being was to serve as a place where commercial entities, producers, end users, etc., that deal with the actual underlying commodity, could offload RISK to speculators who were willing to assume that risk in the hope of making a profit by so doing.

HEDGERS count on this speculative activity - at least good hedgers do! (Poor hedgers forget that they are HEDGERS and morph into speculators too often - that is when they usually end up wrecking themselves). Wise specs understand that signs of commercial hedging are clues to the DEMAND or SUPPLY coming into the market. They then react accordingly.

That being said, following the speculator activity, gives one the sense of SENTIMENT and it is sentiment that drives markets. This brings me to the current sentiment in the gold market.

Following will be two charts that portray this for us. The First is the NET POSITION of the largest group of speculative forces in the markets today and that is the Hedge Funds. Overlaid upon that graph is the price of gold.

Hedge Funds Net Positions in Gols versus Gold Price

Notice how precise the movement of the speculative Hedge Fund category is in relation to the gold price. As their net long position increases, the price of gold rises. As that same position falls, so too does the price of gold. The relationship is absolutely perfect. It does not matter what some "evil gold cartel" might or might not be doing. As long as these hedge funds are buying, the price rises. Once they stop, the price falls.

As you can currently see by the sharp rise in the BLUE LINE, sentiment in favor of gold has been rising recently among the hedge fund contingent. Look at how the gold price has responded. Again - it is all about money flows.

There is something however that I have also noted when studying the charts. That is what this next chart illustrates.

This is the TOTAL OUTRIGHT LONG positions held by ALL THREE CLASSES of speculators - (1.) the hedge funds, (2.) other large reportable traders such as floor traders, non-registered CTA's and CPO's and large private traders, and (3.)the small traders or general public. By looking at this number, ita true sense of speculative demand or the lack thereof can be determined.

Total Spec Longs and Shorts Chart 1

Are you noticing anything about this chart? You might have seen the ENORMOUS SPIKE in the total long positions being held by the speculators. Clearly speculators have come rushing back into gold here to start off the new year (they did the same exact thing to start of last year as well). As a matter of fact, the amount of new long positions has catapulted sharply higher leaping a whopping 70,000 new long positions in the last 4 weeks!

Total Spec Longs versus Gold Price

Look at the gold price however and compare where it is currently trading ( remember this is through Tuesday of last week) and to the level where it was formerly trading the last time the total long position of the speculative category was up at these lofty levels. Do you see that? Gold was trading near $1700 back in late 2012 when the combined number of speculative long positions was near its current level. (I have sketched a rectangle across the chart to show the level of long positions).

That is rather disconcerting if one is inclined to be bullish the metal. What it tells us is that a very large number of market participants are eager to sell gold. How else to explain the inability of the bulls to take the gold price anywhere near $1700 when the same level of buying was able to do so back in late 2012.

Total Spec Longs and Shorts versus Gold Price

Here is the reason for this: This is the same chart but this time it includes the TOTAL OF OUTRIGHT SHORT positions held by all three speculative categories comparing that to the price of gold.

Total Spec Longs and Shorts Chart 2

Digging in a bit further and actually comparing the outright spec long positions against the number of outright spec short positions yields further insight. Run your eye across the chart and look at those lines I have drawn in. The upper line notes the last time that the specs were holding a combined total number of long positions near the current level - that was back in Late November 2012/early December 2012 when gold was nearer $1700.

Now drop down the line vertically and note the number of combined short positions of the specs at that time. It was near the LOWEST LEVELS in some time. That tells me that relatively few speculators were bearishly inclined towards gold back when it was trading near $1700.

Now move your eye back to the right to the current week and look at how many more speculators are bearishly inclined towards gold than at that previous period. It is a bit difficult to tell the exact number from the chart but there are approximately 50,000 more short positions being held by speculators at the current time than when the comparable number of outright longs was last held by this same group.

Hedge Funds Net Positions in Gols versus Gold Price Chart 2

The last chart is merely a repetition of the first one shown but which can now be viewed with perhaps a bit more understanding/perspective. You can see the sharp surge in the NET LONG position of the hedge funds only. Run your eye across to the left and note the last time it was near this level. Again, same time frame as above, late November 2012-early December 2012. You can clearly see the significantly higher gold price at that time.

I ran through this entire exercise not to bore the reader with minutiae but rather to illustrate the internals in this market. While there are clearly a revived number of bulls at work in the gold market of late, it is also equally clear that there is a growing number of speculators who are bearish on gold. That tells me it is going to take significantly more buying to drive the price of gold higher this time around than it took several years ago. They face much more resistance from a much more skeptical crowd of speculators within their midst than those who opposed them previously.

Just keep this in mind whenever you read the wild and outlandish claims that are coming out of the gold bug community and its gurus. Once more at the risk of repeating myself - stay objective and keep your emotions in check and use your head. If you listen to the market you will not go wrong. If you choose to listen to the sensationalists who have been wrong time after time after time, you will once more be setting yourself up for heartache.

Dan Norcini

http://traderdan.com

Dan Norcini is a professional off-the-floor commodities trader bringing more than 25 years experience in the markets to provide a trader's insight and commentary on the day's price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world including the grain and livestock markets. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal's commodities section. Trader Dan has also been a regular contributor in the past at Jim Sinclair's JS Mineset and King News World as well as may other Precious Metals oriented websites.

Copyright © 2015 Dan Norcini - All Rights Reserved

All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The information on this site has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any information on this site without obtaining specific advice from their financial advisor. Past performance is no guarantee of future results.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules