Gold Investing: Something Afoot

Latest data says there's something very different about this current surge in Gold Investing...

HERE AT THE GotGoldReport, we're now nervously on the sidelines with our short-term gold-silver ammunition, writes Gene Arensberg in Houston, Texas.

As always, we remain thankful we hold physical metal in our longer-term investing arsenal. But while the activity shown in last week's trader positioning report didn't cause us to take a short-term bullish bet with our trading ammo, we certainly considered doing so in the afterhours session on Friday.

Lest we forget why the Commitment of Traders report – released by regulator the Commodity Futures Trading Commission – is important, the reason we track them closely is because the very large, well-funded and presumably well-informed professional traders have the very real potential to move the gold and silver investing markets on a short-term basis.

Our focus, therefore, is on the changes in positioning of the Big Sellers (BS) of gold and silver futures. GotGoldReport is focused on the changes in positioning of the largest futures traders in the Commodities Futures Trading Commission (CFTC) weekly Commitments of Traders report (COT). The traders the CFTC classes as "commercial", including the bullion banks, large dealers and swap dealers combined, we refer to as "LCs" for "Large Commercials".

Usually, we regard a decrease in the LC's net short position – their overall bearish stance, measured as the number of bullish contracts they hold minus the number of bearish bets – as leaning more bullish than bearish. Yet last week, and as gold dropped $20.87 or 1.7% to $1204.03 an ounce by end-Tuesday, the large commercial traders reduced their combined collective net short positioning (LCNS) by 11,365 contracts or 4.1% from 279,744 to 268,379 contracts net short.

Overall, in contrast, the total open interest in Gold Futures INCREASED by 11,602 contracts from a very high 579,758 to an even higher 591,360 contracts open.

That was within 2,593 contracts of the highest open interest in our records, which occurred January 15, 2008 at 593,953 contracts open. Extremely high open interest in the futures markets are a double edged sword. It underscores that Gold Investment demand is there, but it also can mean that the "normal" amount of "horsepower" available on the bullish side of the market has already been deployed.

At extremely high open interest levels, such as right now in gold, if one is to be bullish, then it has to be under the assumption that extraordinarily strong demand is coming on the heels of all the demand which has already been deployed.

Either way, the largest commercial sellers of gold (as a group) were reducing some, but not a huge amount of their net short "hedging" as gold pulled back about $20 last week. But as that occurred, the open interest on the Comex was actually expanding to almost a new record.

Clearly, more than normal demand was coming into the market, otherwise the open interest would have fallen on that decrease in the LCNS.

Indeed, the LCs actually reduced their net short positioning by almost as much as the increase in the open interest last week!

What that means is that the LCs were not – repeat, that's NOT – aggressively "hedging" Gold Futures as of last Tuesday. Had they been aggressively on the sell side then, we would not have seen a reduction in the LCNS. (We use the term "hedging" loosely because the CFTC does.)

When compared to all contracts open, the relative commercial net short positioning (LCNS:TO – the most important graph we track) actually dipped down to 45.4% from last week's 48.3% of all COMEX contracts open.

Ordinarily, if we were to see this kind of action in the LCNS:TO near where we sense strong resistance to new investing, we would quickly change our mind about that resistance, because this is not the kind of action we expect from the Big Sellers (BS) if they are in full defense mode – if they were very confident of lower Gold Prices in the near future.

We are used to seeing the largest commercial traders strongly increasing their collective net short positioning when they think gold has reached upper resistance – when they are confident in lower Gold Prices just ahead.

The reason is as simple as it seems. At much higher Gold Prices there is usually more of an incentive for holders and traders to hedge future deliverables, future production, on-hand or promised inventory or their existing long-term long positions in other markets.

So when gold reaches up to near old highs or up above them to new highs we fully expect to see the BS guys in there taking all the short action they can book. And in years past when we saw that, it sent those of us watching the big dogs a short-term signal to be a little more careful, to tighten up stops, to get ready for the next smack down...

Lately, however, big increases in the gold LCNS (the nominal commercial net short positioning) have been losing some of their downside "punch". In essence, the big stands by the commercials on the short side have had somewhat lesser effects than we had grown accustomed to prior to 2009.

Such as when they jumped all over the short side of gold on April 6 of this year, adding a staggering 37,215 contracts net short that week as the open interest jumped 30,710 contracts with gold then at $1134...

Or like they did on November 24, 2009, when the LCs added a big 24,558 contracts net short as the open interest actually declined 11,866 contracts with gold then trading at $1168...

Or like they did back on September 8, 2009, when the big commercials absolutely hammered the short side of gold to the tune of a whopping 54,089 more contracts net short as the open interest ballooned 67,010 contracts with gold then at $995. On that particular occasion, the LCNS:TO soared up to 60% of all open contracts!

The LCNS:TO is currently near 45%, much lower. Something is different this time. Here we are with gold over $1200 the ounce, within one or two day's volatility of a new all-time Dollar high for the metal, and instead of an LCNS:TO near 60%...screaming that the largest gold sellers are supremely confident in lower Gold Prices just ahead...the relative commercial net short positioning comes in this week almost 15 percentage points below that – with the open interest near an all time high.

We no longer associate an LCNS:TO of 45% as overtly bearish for gold and haven't since 2007. That doesn't mean that gold can't fall from here, it certainly can and it might, but what this number is telling us is that some goodly portion of the short positioning on the Comex Gold Futures market is now held by other traders than the "BS usual suspects".

Yes, we see this as a completely new development. One we have not seen since the first inkling of it in September of 2009. Our antennae are up, we are on the sidelines with our short-term bullets and we are anxious. Not because of our long-term physical holdings. Those give us comfort. We are anxious because we sense something extraordinary is afoot, something potentially historic...and while we do not want to miss out on a potential major move, our instinct is to be cautious when our indicators perform in unusual ways.

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