Monday, July 26, 2010

Large Commercial Net Shorts Plunge

That's what an analysis of recent Commitment of Traders reports shows to Gene Arensberg of GotGoldReport. His tracking of large net commercial short positions shows a large drop of 25.6% over the past three weeks. The last three-week period with a larger drop was in August of 2008, just before the financial crisis. Long commercial net short positions as a percentage of total open interest also dropped quite briskly in the last week.
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.
The neat thing about this finding is, it works as a contrarian indicator whether or not the big commercial shorters are manipulating the market. If not, if the large net short position on Comex is hedged elsewhere, then it signifies a lull in demand that might reverse later.

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