Gold: Who's Left to Buy?

By Brad Zigler

The active December COMEX gold contract stumbled Thursday and Friday last week in its attempt to better its March 2008 record high of $1,060 an ounce. Sellers lurked at $1,025 Thursday only to ratchet down to a $1,020 perch Friday. Spot gold, trading about $1.10 under futures, failed to rise above its high watermark as well.

That gold should take a pause to catch its breath after its breakaway move above $1,000 shouldn't surprise anyone. But the recent hand-over-fist buying by investors has got some traders concerned about further weakening.

The latest data from the U.S. Commodity Futures Trading Commission showed the net long position held by reporting speculators stood at a record-high 255,183 lots. Proportionally, 93.6% of open contract positions held by these traders were purchases.

Among speculators, money managers have turned almost universally bullish. Fully 99.6% of the contracts held by buy-and-roll index funds, together with trend-following managed accounts and institutional funds, are on the long side.

Money managers represent the largest contingent of traders obliged to report their positions to the CFTC; the net exposure of these funds makes up more than a third of gold futures' current open interest. The movements of these traders influence the gold market in more than one way.

For one thing, lots of professional traders take the current lopsided investment fund exposure as a symptom of toppiness. The question in their minds is, "Who's left to sell to when the funds' buying interest is exhausted?"

For now, there seems plenty of contracts on offer by others in the gold trading ring as commercials and swap dealers got even shorter last week. Even large noninstitutional traders and small speculators lightened up their net long exposure by taking some money off the table.

Open interest is still building in gold futures, so new traders are entering the fray. But, with every trader category getting shorter, and only money managers as net buyers, you've gotta ask yourself: "What do these guys know ... or think they know?"

Tread cautiously.

COMEX/NYMEX Gold (Dec. '09)

Comments

[roy piper:]

Outside of people on this site, what percent of the average portfolio is in gold. 1%? Probably near zero. I do not know of a single 401(k) which has a gold investment within it. Who is left to buy gold? How about everyone! The amount that all gold ETFs trade in a day, is less that half what Microsoft does in a day. Think of this....all the ETF volume combined is less than just one stock. If there was ever a REAL push into gold and if the average portfolio were to be just 3-5% gold, the volume would push gold to 10,000 within weeks. It does not take much to move gold a lot. And unlike the NASDAQ boom when new issuers sopped up the new demand, there is only so much gold to go around.

Sep 21 03:58 PM

[Ad Orientem:]

Q. "Gold: Who's Left to Buy?"

A. 1 billion+ Chinese who are being actively encouraged to invest in precious metals by their government.

Sep 21 04:42 PM

[buddhabill:]

Roy caught my initial sentiment too - the retail investor (me) is barely getting started.

Brad's point is that there may be short-term downside risk, in the absense of a catalyst that brings fresh money into PMs.

If you listen to the news, everything is coming up roses. And until there is a currency crisis, one of the other several shoes drops in the global bankinig mess, or Israel finally up and bombs Iran, the retail investor will by and large stay blissfully unaware of Gold and PMs.

Infinitely frustrating for the 'bugs as the global fiat-based fundamentals scream at college football stadium decibels (only a stadium with several tens of trillions of voices), but the only gold in the portfolio of Joe the Plumber is the pinstriping on his '02 Camaro.

As a budding bug I'd welcome a nasty pull-back, even a revisitation of November. Silver for $10? Hecla for a buck? Beep, beep, beep, that's me backing up the truck.

Sep 21 04:45 PM

[roy piper:]

I think he might be right over the short/intermediate term. I don't think the major upswing will happen until we see inflation "surprise" numbers. Given the difficulty in credit, this may be even 2+ years off. The government can hide BS for years and years, but it has never been so clear that the dollar's days are numbered.

Sep 21 05:15 PM

[KIT:]

I Billion people at $400 dollars per year gross income ... dont get in front of this stamped!


On Sep 21 04:42 PM Ad Orientem wrote:

> Q. "Gold: Who's Left to Buy?"
>
> A. 1 billion+ Chinese who are being actively encouraged to invest
> in precious metals by their government.

Sep 21 06:19 PM

[Ad Orientem:]

Actually per capita income in China as of 2008 was appx $6000. China also has one of the highest rates of personal savings and investment in the world along with a much lower cost of living and standard of living. I would take a very deep breath before dismissing those people as irrelevant.


On Sep 21 06:19 PM KIT wrote:

> I Billion people at $400 dollars per year gross income ... dont get
> in front of this stamped!

Sep 21 08:12 PM

[pdtor:]

As for the billion of Chinese, even at low income who says they have to buy in 1 oz increments. You can buy wafers and some coins at less than 1 oz, opening up a whole new market.

Sep 21 11:21 PM

[Mad Hedge F...:]

ned Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of the eighth gold ETF this yesterday, the ETFS Gold Trust (SGOL), total ETF holdings of the barbaric relic reached 54 million ounces worth $55 billion, more than total world production in 2008. Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $980. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could last year’s downturn be a blip in the eight year bull market? Now that we are solidly over $1,000, kissing $1,025 last night, the match could hit the fuel dump at any time.

Sep 21 11:36 PM

[LR European:]

Who's left to buy? You give the answer yourself when you say that 'every trader category is getting shorter'. Sooner or later investor allocations to gold will increase/ broaden and sooner or later there will be a short squeeze in gold as 'every trader category' scrambles to buy. Here's hoping! :-)

Sep 22 03:16 PM

[Albertarocks:]

On Sep 21 06:19 PM KIT wrote:

> I Billion people at $400 dollars per year gross income ... dont get
> in front of this stamped!

Let me get this straight. You think 1 billion Chinese have no buying power? If 1% of them buy 1 oz. of gold in the next 12 months, they would buy up more gold than the entire gold mining industry in the United States and Canada combined.

You're argument is that "they can't afford it", right? Think again!

Sep 22 07:53 PM

[Albertarocks:]

Sorry, I meant to say "more than the entire gold mining industry in the United States and Canada combined, can produce".

Sep 22 07:56 PM

[Laurence Hunt:]

No argument with the technicals, it's certainly overbought. But gold did the same thing at $700 in September 2007, and it didn't stop until it was 50% higher in March 2008 (with only a few weeks' breather in November 07). This is what bull markets do. There is no shortage of buyers. That's why the price is up from $250. Gold can do what it wants to do, pardon my anthropomorphism!

Sep 22 08:43 PM

[mlonz:]

I would welcome a pullback in Gold, Silver and Junior Miners so I can get some more, With an emphasis on the latter 2.

Sep 22 08:50 PM

[KIT:]

$6000 is GDP / population remember the Government converted 2 -3 trillion USD of this into BONDs and returned the money to the USA. The peasents are still peasents


On Sep 21 08:12 PM Ad Orientem wrote:

> Actually per capita income in China as of 2008 was appx $6000. China
> also has one of the highest rates of personal savings and investment
> in the world along with a much lower cost of living and standard
> of living. I would take a very deep breath before dismissing those
> people as irrelevant.

Sep 22 08:58 PM

[Albertarocks:]

On Sep 22 08:58 PM KIT wrote:

> $6000 is GDP / population remember the Government converted 2 -3
> trillion USD of this into BONDs and returned the money to the USA.
> The peasents are still peasents

True, the majority of the Chinese population are poor. But the Chinese government has shown brilliance considering the pickle they're in. They're owed hundreds of billions of USD because they've (in good faith) helped support the US economy by buying US government bonds... bonds that are in serious jeopardy of becoming worthless due to the printing of trillions of dollars. True enough, they also did that partially in their own self interest because they didn't want to see their biggest buyer go out of business.

The Chinese would love to stop buying this paper, but if they did that in a sudden fashion, they'd only hasten the demise of the US dollar, thereby shooting themselves in the ass. So what do they do with the excess US dollars they have without selling them onto the market? They convert their US cash into commodities.

That's partially why commodities like copper have had such a good run when the world's economies are staggering... because the Chinese have been patiently buying and buying and buying... buying every industrial metal they can get their hands on. They've been spending the US dollars that they don't want to be caught holding when the SHTF, without selling them onto the currency markets. Brilliant!

And now... it's gold's turn. They've already announced they (the Chinese gov't as well as the Chinese pheasants) will be buying gold and silver... effectively putting a floor under both. So although the dark lords will do their damnedest to drive gold back to $500, I don't think they're going to win that battle this time. I'm not worried about gold falling very far from here on. Once gold hits $1200, we'll never see $1,000 gold again... ever.

Sep 22 10:10 PM

[User 357705:]

China is eying all of the 400 + tons the IMF is about to 'sell'! $13b transaction. Plenty of buyers out there.

Sep 23 02:31 AM

[TheSlowLane:]

There are still many, many investors that have zero allocation to precious metals...

Pictet Plans Physical Gold Fund in October on Inflation Concern

By Chanyaporn Chanjaroen

Sept. 23 (Bloomberg) -- Pictet & Cie., Switzerland’s biggest closely held private bank, will start a fund backed by physical gold on Oct. 1, expecting demand from investors looking to protect their wealth against inflation.

Sep 23 07:47 AM