Gold Is Not There Yet

In his latest gold market analysis, professional commodities futures trader Dan Norcini explains his view on the latest Commitment of Traders report (COT). The report covers the futures positions till Tuesday 10th of December (included). As readers might recall, that particular reporting week included the sharp gold price drop of Thursday 5th and Tuesday 10th of December; it also includes the usual spike low / high on Friday 6th of December. The latter action resulted in a significant number of speculative short positions being squeezed out. 

The following comes from Norcini’s personal blog (source). He concludes that “gold is not there yet” because, lately, price rallies tend to come from short covering rather than fresh new long positions.

The action was caught for us by the CFTC in today’s report and reveals the reason behind the sharp moves – hedge funds were doing a good bit of short covering. Some in that camp were also fishing for a bottom and moved back onto the long side of the market. The result of that was net buying by this group to the tune of approximately 6600 contracts.

Interestingly enough, the entirety of that , and then some more, was offset by Swap Dealer selling. They were net sellers to the tune of some 8,200 contracts.

The Producer/User/Merchant category were also net sellers for the week to the tune of some 2400 contracts.

The Small Specs were bottom picking this past week as they rushed back onto the long side to the tune of about 2270 contracts. Ditto for the Other Large Reportables who were net buyers of some 1700 contracts. These are approximate numbers.

Here is the takeaway. Specs were squeezed in the push back down to $1210 and subsequent inability to break through that support zone. Then as prices moved higher on Tuesday, more buy stops were run. The BULK of the buying done by speculators this past week was therefore not fresh new longs but rather short covering.

This is hugely significant as it confirms my views held for some time now. Rallies in gold are occurring that have been quite fierce but which have not tended to last because they consist almost entirely of short covering. At this point in time, these rallies DO NOT reflect a wholesale shift in sentiment among this important segment of traders. Until sentiment changes and we see eager NEW BUYING across the speculative categories, gold remains under the control of bearish forces.

I should note that all market bottoms are first generally reflected by strong waves of short covering but that gives way to fresh buying that begins to outnumber the short covering.

Gold is not there yet. Keep this in mind before getting too bulled up.

Also, I wish to note the following:

  • Those who keep speaking of capitulation when it comes to the selling in gold are doing so in spite of the fact that the speculative community generally remains as net longs and has been for many years now.
  • The Small Specs were net short this gold market only in July of this year ( and that was for only one week)  but have remained as net longs even as their overall positioning on the long side has indeed decreased. They have not gotten short.
  • The Hedge fund community has not been net short this market for the entire 7 1/2 years of this data set. Only the Other Large Reportables camp had been net short for more than one week and that was back in July of this year. During that month they remained as net shorts in gold before moving back to net long the first week of August where they have remained since.

With speculators continuing to play gold from the long side of the market, the risk remains that we could yet have one more good downside flush before killing the bullishness that stubbornly remains among the speculators. I can see that happening only if chart support gives way, first at $1210 but more importantly at $1180 – $1178.

In this present case, we might be better served by closely scrutinizing the action of the gold mining shares for clues of a solid bottom in this market. They led the price of the metal lower and will more than likely, although not guaranteed, lead the way higher. I for one would feel a whole lot better about a solid bottom if we could see the hedge funds on the net short side of this market with the entire speculative community all effectively as net shorts as well.

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