A quick note over at the ever-sensational King World News has an excerpt from Dan Norcini that details the current state of the gold Commitment of Traders Report. I've been following Dan's work for years now and believe him to be both highly insightful as well as very conservative in his calls on the gold and silver markets. So, when Dan states something is unique in his experience trading gold I stand up and listen.
"Today the hedge funds are short a staggering 68,700 contracts. What makes this number even more amazing is that it represents an astounding 10+% of the entire open interest in the gold market of 667,000 contracts. [emphasis mine] So this is by far the hedge funds' largest short position in percentage terms in history."
The bottom line is I don't recall seeing anything like this since this bull market began 12 years ago. The hedge funds are now essentially battling against Middle East and Far East central banks and commercial banks. The problem is these central banks are behemoths compared to the hedge funds.
If you want trading signals then here is a big one.
Let's break down some of the implications of Dan's observations here. One of the primary tenants of gold bears is, in essence, the omnipotence and infallibility of the world's most powerful central banks. So, when hedge funds are playing against eastern central banks for one to remain structurally and long-term bearish on the price of gold is to believe that the Federal Reserve and its proxies can crush ad infinitum those on the other side of the trade.
That works so long as the demand for physical gold remains tepid relative to the supply entering the market per unit time. For years guys like Dan and others, like the folks at GATA, have been saying that the key to ending the continued suppression of the price of gold was simply a large batch of longs standing for delivery and calling the bluff of the paper gold market.
This appears to be what is happening. We saw more than 40 tons stand for delivery in February and the delivery numbers for the non-active March contract stand at nearly 10 tons with another ton still outstanding. As of today's close we are 8 trading days away from the expiration of the April contract and 7 days until options expiration and open interest volume as of March 14th was still 204,000+ contracts, or nearly 64 tons of metal. Of course, we expect to see a lot of rollover into June between now and then but the longer those numbers stay up the greater the likelihood of a serious supply issue forming throughout the summer in gold.
The current hedge fund short position in gold Dan mentioned is more than 208 tons. The COMEX only reports having 80 tons on hand has me wondering just where or how they expect to cover all of that metal. This is why the situation is not only unprecedented but potentially very ugly for those short. The current price capping action below $1600 per ounce is an obvious delaying tactic but the energy needed to do so is creating a net short position that is unsustainable.
As Dave Kranzler pointed out yesterday the SPDR Gold Trust ETF GLD redemptions have turned out to be a very bullish contrarian indicator in the past along with hedge fund short interest numbers. Couple that with high levels of physical demand and the willingness of the market to absorb the supply without a significant drop in price and you are creating a very bullish reversal setup in the price.
The $156.80 peak which corresponds to the spike post FOMC testimony is the hurdle that will send gold higher, but even a weekly close above $1600 (or $155 on the GLD) will begin the short covering rally as the shorts have set up a triple-top at $1598 which can best be seen on an intraday chart (courtesy of Netdania.com).
I'm writing this before the equity market close on March 15th and it's clear that there is not quite enough demand to push through $1600. Nevertheless, this is a very positive weekly close and the longer March goes on without violating February's low at $1550 ($150.84 on GLD) the bolder buyers will become.
The current trading signals I'm watching for in gold continue to be a daily close above $1600 and then a weekly close above $1620 for a bullish breakout and a violation of the February low at $1550. At this point the futures market is set up for a big reversal but we still have to wait for confirmation of it.