Gold CoT Discussion

Excerpted from NFTRH 394’s 20 page review of the precious metals sector, which included the following segments… Part 2: Gold Miner Weekly Charts (AEM, GG, HL, ABX, KLDX, NGD, NEM, PAAS, PG.TO, PVG and SSRI), Part 3: Sector Indicators, Part 4: GDX, GDXJ, SIL, Gold & Silver Charts and Part 5: Sentiment/Seasonality.

Detailed Gold Sector Update, Part 1: Commitments of Traders

Beautifully presented Commitments of Traders (CoT) graphic (mark-ups mine) courtesy of  http://freecotdata.com/. Thanks to subscriber Joe F. for the link.

cotgold

The elephant in the room is and has been the march of the bearish trend in both gold and silver’s CoT structures. I would be lying if I did not acknowledge that every time I feel full of bull about the gold sector this pops into my head, as I am sure it is doing for a large segment of precious metals players.

The graph above shows how indeed speculative interests have driven gold higher by being net long to a greater degree than at any point during the majority of the bear market. Why emphasize “bear market”? Because as noted, beginning in NFTRH 384 ten weeks ago, bear market rules are different from bull market rules and there is precedent for the current situation – especially with silver – in the bull market’s launch 15 or so years ago. We speculated that the bull market in silver was birthed in short covering and I see no reason that cannot be in play today.

Speaking of a launch, when articles started coming out calling the current situation a “blow off” in gold, we noted that a blow off ends a bull market. Considering the depths from which this rally started, it was a launch off a bottom, not a blow off.

Back on the graph, speculative interests (orange line) [who are the trend] are providing the thrust for the bull while commercial hedgers (green line) are doing what they not only always do, but often should do or need to do, hedging exposure.

I am not an expert on the CFTC or its mix of gold producers, gold industry entities, bullion banks and flat out manipulative interests, but I do believe that certain people make careers out of telling us ghost stories about these manipulative interests; almost turning a complex system like the CoT into a cartoonish summation of ‘us against them’. Let me ask you, how many commercial hedgers are actually gold mining companies or related entities simply in disbelief about their own bull market? Gold miners as a group are not known for their overall business acumen, and that includes market timing.

For example, last week the Producer/Merchant segment increased its net shorting in a similar fashion to the Swap Dealer segment, where I would think much of the conspiracy theorizing is aimed.  The disaggregated view…

goldcotdisag

I am aware that there is a counter argument calling the Producer/Merchants a shell for manipulative interests. It sounds like a good ghost story. In any market you will find examples of poor market timing by the entities intimately involved; airlines dropping their oil price hedging right into a low (as a certain newsletter guru unwittingly calls the bottom on CNBC by abandoning his bull stance and declaring oil is going to 25), the Bank of England famously dishoarding its gold into the lows of 1999 and 2001, and myriad other examples. We are all human after all, especially gold mining execs.

Again, just maybe gold miners are as a group the ‘Wrong Way Corrigans’ they always have been (Commercial “smart money”? Really?). Aside from that, hedging is a necessary thing for certain entities in volatile markets. It is like a regulator on risk. In other words, there should be hedging [by certain entities] and it is normal in a bull market, especially early on when those with the most to gain from a rising gold price do not fully believe in the bull.

The bottom line is that the CoT will hit extremes and with that the market will turn because speculators cannot simply keep pressing longs with no risk of reversal. It’s what markets do. But on the big picture the structure continues to look like it is playing by ‘bull market rules’.

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