The Producer/Merchants include the largest bullion dealers, refiners, manufacturers, fabricators, jewelry makers and the bullion trading banks they end up trading through on the New York and London bourses. In short, PM’s include much of the “gold trade” who use futures to hedge.
This week’s huge reduction in commercial traders
net short positioning almost equals a March 6, 2012 reduction of 32,677 lots when gold was then trading for $1675. The previous example of an extremely large reduction occurred in August of 2008, during the heat of the financial crisis, when the PMs closed or offset a whopping 42,638 contracts with gold then $813.
As for what it means, we can point to the fact that it is really pretty rare to see the Producer/Merchants reducing their hedges in anomalously high amounts. We can check that notion through one half of the reporting – the gross short interest held by the Producer/Merchants which is shown in the graph below.
(Chart showing gross short futures positions by traders the CFTC classes as Producers, Merchants, Processors and Users. Source: CFTC for COT data, Cash Market for gold, GGR.)
First the obvious. With gold having touched as high as $1390 earlier in the trading week, but by then, on Tuesday, having sold back down to the $1310 level (as shown in the graph below) apparently the largest, best funded and presumably the best informed traders of gold futures on the planet thought that gold had already moved lower enough to motivate them to reduce their hedges in a very big way.
Now for the not so obvious. In fact, it’s pretty much off the radar screen if you try to go looking for commentary about it on the Web.
Refer again to the PM gross short position graph above for this point. Just the Producer/Merchant shorts are shown in isolation.
Anything jump out at you right off the bat? Go ahead, take a close look, but what I am talking about is about as simple as it gets…
Simply stated, with gold near $1300 in March of 2014 (now), the amount of gold hedged by the gold trade – the gold business players/operators - on the COMEX division of the CME -- is at an extremely LOW level. Simply stated the gold trade is not at all motivated to hedge gold with a $1300 handle, so says the graph.
To quantify that, and looking at the chart we see that the previous low in gross shorts was during the financial crisis in 2008 when the PMs got all the way down to just 91,693 gross shorts (not much for an entire market). Moving up to more recently, we see that on December 10, 2013 the PMs reported holding a miniscule 75,406 gross short gold contracts (with gold then $1261).
And this past week? Nearly the largest reduction in PM shorts in our records as the Producer/Merchants reduced their gross shorts by an enormous 34,721 contracts in one COT reporting week (from 121,662 down to just 86,941 shorts). Hello.
In more general terms just look at where the blue Producer/Merchant shorts line is “living” in a $1300 gold world at the moment. Isn’t it at or near the very bottom of the graph? And, doesn’t that mean that there is less, repeat less, motivation on the part of the gold trade to protect their natural long positioning with hedges?
Yeah, we think so too here at Got Gold Report, regardless of what the bank analysts have been saying of late. We all recognize they are merely talking their already short gold book and have more than one dog in the hunt. Perhaps by looking at and interpreting what the industry is doing – with their own positioning over time – we can get a sense of their actual expectations, not just their talk.
So who has been pressing the down side – the short side of gold one might reasonably ask? Well, take a look at the graph below, a snapshot of the traders the CFTC calls Swap Dealers – the cutthroat, mercenary banks that we happen to believe are led by the Goldmans of the trading world.
(Chart showing short futures positions by traders the CFTC classes as Swap Dealers. Source: CFTC for COT data, Cash Market for gold, GGR.)
Swap Dealer commercials increased their shorts by 14,172 contracts this past week, taking them up to a relatively quite high 144,546 short bets on gold futures, the highest since August of 2011.
From what we see here and in the positioning of the U.S. banks in futures from last month we here at Got Gold Report have to believe that the gold trade now expects and is positioning for a higher, not a lower gold price in 2014. The sudden, overly large reduction in the Producer/Merchant gross shorts this COT week is kind of an earthquake in that regard.
Any way one wants to look at it, the gold trade got the heck out of a very large number of hedges on a not-all-that-big move lower for gold this week. Sure does seem like they were in a hurry in that regard.
Before we forget the Swap Dealer "punchline," recall that it was in no small part due to Swap Dealer short covering that the gold price skied up to $1900 in 2011, as the graph shows above. The pink line (the gold price) hurtling higher while the blue line (the SD gross shorts) plunged off a vertical cliff. It could be just a coincidence, of course, but today's level of SD gross shorts is about where it was back then when the short covering party got started.
That is all for now.
Gene Arensberg for Got Gold Report