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The love affair by default with the US Dollar has reached an all time high in terms of sentiment and speculative positions (chart 1). Of course any thinking person would come to the correct conclusion that the USD is merely in first place in the Ms. Ugly currency war contest, and not because of any fundamental reason. I haven't post the US debt clock for awhile, but while all this Dollar bullish has been going on, $17 trillion isn't that far away. Currently the US is at 105.7% debt to GDP and counting.

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Throughout these currency hysterics some have determined that they don't need gold. I emphasize the word "some", because I find it powerful that even though the price the GLD ETF is trading exactly where is was on Feb. 19, there were 3,173,000 ounces liquidated out of the fund since the 19th. So "someone else" stepped into the breach to grab that gold and with only brief weakness in the price.

A glance at the CoT position reveals part of the answer. Producers of gold have reduced their gold short hedges steadily. They are currently the least hedged in gold since 2008. As importantly, the managed money Boyz, who are holding the lowest long positions since 2008, have only moved away from liquidation mode in the last week. The larger question is just how much physical gold moved (or will move) to Asia from the fund and ETF liquidation. Considering seasonality factors, that may just be getting started.

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Seasonality is probably something I should pay closer attention to. I consider it as a tertiary factor. Nonetheless, given my belief that the specs have pushed their bets and their luck hoping to break POG during the weak late-Jan- mid-March seasonal period, it should be noted that gold could get a nice boost out of Asia here. Adam Hamilton wrote an explanation of seasonality, and produced this seasonality calendar, showing a surge period commencing in March running into mid-May.

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source: Adam Hamilton

Correspondingly, the specs have gone to even more extreme positions in the S&P futures. The first chart shows the e-minis, and the second the standard S&P futures. This week the pile on took place in the later. Although the spec longs in the standard S&P is not extreme on it's face, when you combine this with the e-minis, you will see that spec positions are in fact extremely long. The sand box for large speculators to play in tends to be the e-minis.

It is when you look at the open interest in the S&P that something critical jumps out. Open interest has suddenly and mysteriously evaporated. In fact the commercials have pulled out to such a degree that their overall S&P futures positions are down a whopping 42% from 356,000 to 208,000 contracts. That leaves speculators very long, vulnerable and sitting atop a very thin market.

Apparently there is total faith that Cyprus results in some kind of slash and burn "favorable" bailout outcome. Even though the market traded unchanged during an ominous week in Europe, I have heard more than one commentator refer to the brief drops this week as "panics" and "buying opportunities". Panic? They ain't seen nothing yet. Applying significant haircuts to large depositors in Cyprus, and imposing capital controls (i.e making it difficult to access one's money), will not engender confidence throughout Europe. In fact the impending real panic may be a gleam in your dad's eye, and judging from the positioning, the funds and specs may have some scrambling to do.

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Source: Ominous Positioning In The S&P 500 Futures, Gold And The Dollar