Gold & Silver COT Report: A Sentiment Shift By Speculators Is Needed

The latest Commitment of Traders (COT) report reveals a unique situation related to precious metals. The current setting shows some extremes which are comparable to the situation in June, when gold bottomed at $1,180 and silver at $18,50. In this article, we provide the thoughts of Dan Norcini about the gold and silver COT report. He also discusses the short and mid term outlook for gold and silver. Norcini is a professional futures trader for decades but is also a sound money enthusiast.

Mind that the COT report of Friday December 6th reflects the futures positions till Tuesday 3d (which excludes the violent price action of the last days of past week).

Gold Commitment of Traders report

The latest gold report shows that hedge funds have been adding to their short positions while their long positions have been steady in the last few weeks. They clearly play gold from the short side.

Hedge fungs still remain net long the gold market which they have done since mid 2006 (i.e. the inception of precious metals COT reporting). Their overall net long position is the smallest since January 2007. In other words: hedge funds have not been this bearish on the prospects for gold in nearly SEVEN YEARS!

Gold_hedge_funds_June_November_2013

Dan Norcini writes: “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 speculators 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.”

The following chart shows all positions in the overall COT report. Note the area within the ellipse. There is 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.

Gold_COT_2006_November_2013

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.

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. Some of them are probably working hedges against custom made contracts for some mining company hedges.

This is the summary of the picture in gold COT: 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 (the short interest in the market is being held by this group).

Some observers seem to be interested with what the Commercial category is doing. Dan Norcini is far more interested in what the SPECULATORS are doing. He writes:

“Speculators 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.

Silver Commitment of Traders report

In silver, the important position according to Dan Norcini is the yellow ellipse on the following chart. It is the hedge funds’ NET POSITION. Hedge funds now have the largest net short position in the history of the disaggregated COT report.

Silver_COT_2006_November_2013

Norcini says that these big and powerful speculators are what drive our markets. They continue to sell silver rallies. Either they are going to have to be forced out by some concerted buying or the path of least resistance in silver is lower.

From a technical standpoint, an upside violation of key overhead chart resistance levels is required to break the downtrend. According to Norcini’s technical analysis, it is just above the $21 level (extend towards $21.25) where the bears would get concerned. If the bulls can take prices up to those levels, and NOT FALTER, they will spark some serious short covering.

Until then, silver rallies are likely to be sold.

Bottom line: when will the downterm trend be shifting?

The key question is what will change Western speculators’ view vis-à-vis the precious metals. According to Norcini, sentiment in regards to inflation fears / confidence in the Dollar must shift for gold to attract eager Western-based buying. Also the Velocity of Money needs to increase and wages begin to actually rise instead of remaining stagnant. “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.”

Besides, it will take a definite shift in sentiment away from the current “economic growth is steady but slow” sentiment towards one of “economic growth is picking up speed and is increasing” in order to run these hedge funds out of their profitable short positions.

Source: Dan Norcini’s personal blog.

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