As Tracy and Alessandro vigorously prepare for PDAC, the February 24th COT Flash gets dropped on my desk. Gene Arensberg’s title is: ‘Stunning COT Changes’ and the opening line states: “stunning changes in the positioning of very large traders of paper gold futures for gold and silver…”
The most recent Commodity Futures Trading Commission (CFTC) commitments of traders (COT) report (February 22 for data as of the 19th) reveals stunning changes in the positioning of very large traders of paper gold futures for gold and silver. Ordinarily we would not produce a full report on the COT changes in two consecutive weeks, but the changes and imbalances in the positioning of the largest traders in this week’s report are too massive, unusual and potentially important not to. “This ain’t your ordinary COT report, partner.”
As everyone knows by now gold and silver were hammered again this week. Gold was off a net $28.57 or 1.8% for a Friday last trade of $1,581.22 on the Cash Market. Gold tested as low as $1,555.06 on Thursday before bargain hunters and some modest short covering added back about $25. Silver fell a net $1.04 (3.5%) to close Friday at $28.72, but not before testing as low as $28.26 Wednesday.
Media sources blamed an overreaction by many markets to the release of the FOMC minutes, which got reported as though the Fed was actually considering a quick end to the Quantitative Easing (QE) and zero interest rates in place now. However, trading earthquakes were already happening in multiple markets well before the minutes were officially available.
Traders have become nervous and reactive to important news at the same time that the paper futures market for gold and silver has become strangely and hugely out of kilter, out of balance, or if you prefer, out of whack! Whatever the characterization, it is about as interesting a COT report as we are likely to see, so let’s get right to it. As we go down through the charts and descriptions see if you agree that the futures market has become strongly imbalanced. But first, below is an hourly chart of the past two weeks for gold, showing the COT cutoff and the overreaction to the Fed musings about their “potential unintended consequences” and such.
As we go down through the charts and descriptions see if you agree that the futures market has become strongly imbalanced. But first, below is an hourly chart of the past two weeks for gold, showing the COT cutoff and the overreaction to the Fed musings about their “potential unintended consequences” and such.
We sense that the Fed isn’t about to make any abrupt changes to the QE program, but the Fed governors do indeed worry about what they have done (as they certainly should), and that shows up in the minutes. With gold and silver already weak that was all the selling trigger the bears needed this week for a sell raid. Our view is that the trading this week was either a Fund-driven selling climax or else it is a harbinger of an important test of the 2012 major support levels set last summer (about $1,525 for gold and roughly $26 for silver). As the data we are about to cover will show, the vast majority of the selling pressure in the futures market can be directly attributed to an unusual source for that pressure – the Large Specs – traders the CFC classes as Managed Money, aka “The Funds.”
To set up this week’s look into the COT data, we repeat from our report last week:
“As the data will show in just a moment, we have reached a point where the positioning of the largest traders of gold futures is very imbalanced. The setup is practically begging for a massive, very violent reaction just ahead.”
It is even more so this week, in a stunning, even shocking way in some cases as we think you will agree.
First, the Legacy COT graphs and figures. Once again, the “real action” this week comes in the Disaggregated Commitments of Traders Report or DCOT.
Legacy COT data for large commercial traders, the Big Hedgers, including Producer Merchants and Swap Dealers combined into a single category. (Tables overlap.)
With gold down sharply $46.16 or 2.8% Tues/Tues, from $1,651.01 to $1,604.86, the Large Commercials (LCs) combined NET short position (LCNS) drops a big 28,571 contracts or 17.8% from 160,653 to a low 132,082 contracts net short. (Gold -2.8%, LCNS -17.8%; Bullish in a contrary sense by itself.)
Since the LCNS peaked October 2 at a very high 252,047 contracts, to Feb 19, gold had fallen $137.14 or 7.9% and the LCNS has fallen by a huge 119,965 lots or 47.5%. For each dollar lower in the gold price the combined commercials have covered or offset 875 COMEX contracts of their net short position. Another way to say that is that is that the LCs are half as motivated to hedge gold as in Oct.
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