Earlier this week I suggested that the COT report might show that hedge funds have started to chase the momentum of the gold market lower by shorting gold contracts, while the bullion bank cartel used the extra selling from hedge fund short-selling to cover their shorts. I suggested this dynamic would likely mark a bottoming of this latest bullion bank paper market takedown of the price of gold. Here's the numbers per the COT report.
Large specs short interest: +6,604
Commercial short interest: -10,738
This shows that not only was my instinct correct, but the cartel actually decreased their net short position by over 12,700 contracts (this includes increasing their long position by a little over 2k contracts).
If you go to the disaggregated COT report - the easiest one I've found to read is found here- we find that the "Producer/Merchant" segment of the Commercial category reduced its net short position by 12,806 contracts and the "Managed Money" segment of the large specs decreased their net long position by 11,624 contracts.
The bullion banks are primarily embedded in the "Producer Merchant" category and the "Managed Money" includes the "black box" hedge funds. Note also that the overall open interest for the week increased 2,156. This is explained by the short-selling of the hedge funds. This report is through last Tuesday's huge price hit. I suspect if it had included Wednesday as well, these numbers would be even more pronounced.
This dynamic of the hedge funds getting net short at the bottom of COT open interest stop-loss liquidation has become a serial pattern over the past couple years. Every single time it has marked the end of a dramatic price decline and the start a significant price rally. From a bull market "cycle" standpoint, if you measure the start of the current cyclical price correction from the late April 2011 overnight price raid on silver at $50, we are now almost a full 19 months into this correction cycle. The average duration of these corrective cycles, which eventually lead to new all-time highs, is anywhere from 18-24 months (three previous).
Bottom line: it is likely that we will see a short-term spike higher as the black boxes start to go into cover mode and then a longer-term price recovery. Time will tell if this marks the next bull market cycle of a move to higher highs.