Huge Rally Fuel in Place for Gold Futures

Long story not so short:  the big commercials, normally permanently short COMEX gold, have reduced their net short positions to below record levels.

The momentum-trading hedge funds, have reduced their normally net long positions below record levels.  But that's not due to them reducing their aggregate long positions--it's from hedgies piling on aggregate short positions.

Since the big commercials (gold mining producers, refineries, jewelers, bullion banks) represent the biggest money as well as usually being the most informed, we can deduce the current slide in gold prices is close to being exhausted.  Meanwhile, the "hot" money hedge funds are betting on further declines.

Should a reversal occur, this sets up as a possible short squeeze scenario, where longs and short-covering sellers will bid up prices in a "buy first, ask questions later" competition.

When an asset is hated by the consensus, it's a contrarian indicator that a bottom reversal is imminent--much like when an asset is universally loved, the bursting of the bubble looms.  Anybody remember the 1999 internet bubble or the subprime real estate bubble in 2006--when everybody and their brothers were pounding the table on NASDAQ stocks and flipping properties, respectively?  How did that turn out?  That's because the wrong people were giving the wrong advice at exactly the wrong time.  The consensus was that you couldn't lose following what everybody else was already doing.  Oops...

With gold and silver, it's hated by 99% of the population right now, pundits and laymen alike.  To a contrarian, it's a dream set up for a huge short-covering rally.  It's a lonely trade, but it's the right one--because it is lonely.

http://www.gotgoldreport.com/2013/05/huge-rally-fuel-in-place-for-gold-futures.html

Gold and Silver Disaggregated COT Report (DCOT) for April 5

The takeaway message of this Commitments of Traders report is the speculators are short silver and the bullion banks (the smartest guys in the room) are way less short gold than they normally are.  In other words, the dumb money believes precious metals prices will continue to fall, while the smart money believes a bottom is in place.

http://www.gotgoldreport.com/2013/04/gold-and-silver-disaggregated-cot-report-dcot-for-april-5.html

Absolutely Stunning Development In The Gold & Silver Markets

Time will tell how this will play out.  Tread carefully--the ride is about to get awfully wild.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/25_Absolutely_Stunning_Development_In_The_Gold_%26_Silver_Markets.html

Concentration of traders in the COMEX

Click on chart to enlarge.

I wasn't aware that investment banks were in the gold and silver mining business. If not, then why are they selling so many futures contracts? Do they even have any physical inventory? Farmers hedge their crops, selling forward contracts. Miners hedge against falling metals prices. Why are the eight largest bullion banks selling 160 and 120 days of worldwide production for silver and gold, respectively? Most contracts are settled with cash. What if buyers demanded physical delivery?

See disclaimers in the side bar.

Disclosure: long gold and silver, long precious metals mining shares, and thankful the bullion banks keep pushing prices down.

Where is the USDollar headed?

If this chart by http://edegrootinsights.blogspot.com/ is to be believed, the USDollar will continue to trend lower, despite occasional countertrends. Click on the chart to enlarge.

Silver futures

Ed Steer's comments on manipulation of silver futures at the COMEX, as shown in September's Bank Participation Report:

In silver, as of Tuesday, two U.S. bullion banks were long 13 contracts and short a whopping 29,888 contracts... 28.0% of the entire silver open interest of 106,761 contracts! This sort of concentration is a prima facie case of manipulation. Any judge could see it... but obviously not anyone at the CFTC.

COMEX gold contracts are equally lopsided: three US bullion banks were long 509 contracts and short 75,550 contracts.

http://www.cftc.gov/dea/bank/deasep09f.htm

Despite the huge number of short contracts relative to long contracts, this represents a net decrease of 30,350 short contracts from August's 105,900 contracts. This explains gold's huge run up in price this past week. It may also be an attempt by the bullion banks to balance out their positions for the following week's Commitment of Traders (COT) report, which has a 10-day lag.

Or it could simply mean these bullion banks can no longer support these increasingly losing short positions. If this scenario is the case, expect another run up in gold prices in the near-term future. On the other hand, if JP Morgan and HSBC are able to slap on more naked short positions, they will again be successful in temporarily knocking back down gold and silver prices. But they may be running out of dry powder.

Things are getting interesting: foreign sovereign funds--including China's central bank--are accumulating gold and silver to shield themselves from a deteriorating dollar, as they hold vast sums of dollar-denominated US securities, including long-term US Treasury bonds. This puts upward buying pressure on gold and silver prices. With a handful of commercial bullion banks taking the opposite side of that trade, something has to give. With declining supplies of physical gold and silver above ground, it will be very apparent who the winners will be.