Power, Coal & Inflation

The "large commercials" are reducing their short position so fast, they'll soon be bullish...!


CLEARLY,
and as reported in the Commodities Futures Trading Commission's weekly commitments of traders report, the largest "industry insiders" commercial traders are reducing their collective net-short positioning at an accelerated pace, writes Gene Arensberg from Atlanta, Georgia in his Got Gold Report.

Not so clear are the reasons why.

Here's the nominal Large Commercial Net Short graph (bullish minus bearish contracts) for US Gold Futures...

Over the past three reporting weeks – and as the Gold Price corrected $48.53 or 3.9%, down from $1240.50 to $1191.97 an ounce – the biggest "hedgers" and short sellers of gold have reduced their net short positioning by a remarkable 74,292 Comex 100-ounce contracts. That is a reduction in LCNS of 25.6% – a brisk pace.

Over that three-reporting week period, and for each $1 lower in Spot Gold, the "Big Sellers" have covered or offset 1,531 contracts of their net short positioning. At just that pace, with no further acceleration factored in, the LCs would become net long gold in $1050 neighborhood.

Since gold slipped from $1240, in short, the Large Commercials have reduced their net short bets by the equivalent of 7.4 million ounces – about 231 metric tonnes. We can point to only three periods of faster reduction in the LCNS over a three-week period in the last 7 years of data.

  • August 5-19, 2008 (as the world fell into the 2008 crash) with gold then in the $870s. The LCNS plunged from 219,671 to 130,154 contracts, a reduction of 89,517 contracts or 40.8%;
  • July 5-19, 2005 with gold then in the $420s. The LCNS declined from 165,574 to 84,048 contracts, a drop of 81,526 contracts or 49.2%;
  • May 3-17, 2005 with gold then in the $420s. The LCNS fell from 169,289 to 79,681 contracts, a 3-week drop of 89,608 contracts or 53%.

We should also compare the nominal gold LCNS to the total open interest. That gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category – on the Comex Gold Futures exchange.

And when compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO – the most important graph we track here at Got Gold) fell sharply from 43.7% to 38.6% of all contracts open.

Here's the LCNS:TO graph for Gold Futures...

Notice, once again, that the LCNS dropped a good deal more than the open interest (LCNS down 32,684; Open Interest down 8,605).

The drop in LCNS outpaced the drop in open interest at a roughly 4:1 pace in the week ending last Tuesday. And when we see that, it suggests that the largest "paper gold" sellers are aggressively closing out their "hedging".

As gold sold down from the $1260s to the $1170s, please note that the LCNS:TO has fallen to its low of the year, and this is the first time the LCNS:TO has fallen below 39% since December 9, 2008 – back amid the post-Lehmans panic.

The fact that the LCNS:TO has fallen so far on what is essentially only a modest, roughly 7% pullback for Gold Prices suggests a major shift is underway in the futures market. We view the current LCNS:TO of 38.6% as considerably more bullish than bearish. The largest commercial traders, as a group, seem to be rushing to cover or offset their net short positioning as gold consolidates in the $1170-1210 range.

That doesn't necessarily mean that gold won't continue to sell off even more. It can and it might. But these date certainly do mean that the largest "hedgers" and short sellers of paper gold have closed out a substantial amount of their collective net short positioning on what amounts to a net $50 drop in the Gold Price, as measured on Commitment of Traders reporting Tuesdays.

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Formerly editor of Strategic Investment with Lord William Rees-Mogg, Dan Denning is an independent investment analyst now based in Melbourne, from where he edits the Australian edition of The Daily Reckoning. He is also author of the best-selling The Bull Hunter (Wiley & Sons).

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