COMEX Large Trader Positioning for Gold Holds Surprises in July 15 Data

HOUSTON — On July 15 we posted the net positioning of the COMEX large trader particpants in these pages, saying at the time:  “We pretty much have to conclude that the Swap Dealer commercials and perhaps the Producer/Merchants together decided the time had come to run the table on the Managed Money traders, so they sold a ton of new paper to get the ball rolling down hill in a period of light activity and volume, probably covering much of the starter sales by the end of each trading day.” 

The sell blitz which is commonly used on the COMEX is designed to trigger sell stops and new shorting by trend following traders.  We have to presume these overly large selling attacks are initiated by entities who stand to benefit from the action, otherwise why have them at all?  Ergo, if one were to look at which class of trader holds a large short position … they would intuitively be the likely instigator.  Let’s just go with the obvious for now and see what the data suggests (on the surface). Based on current net positions, the actors with the most to gain from a sell raid remain the way-overly short Swap Dealers, but we are getting ahead of the story a little…

When the dust settled on Tuesday, July 15, as it turns out the largest net seller of gold futures for this COT week ending July 15, was indeed the Managed Money traders, but what is somewhat remarkable, at least in our view, is that the overall total number of contracts sold by The Funds really wasn’t all that much (net sellers of 11,689 COMEX contracts to show 122,087 remaining net long).   Not very dang much in other words relative to the furious, rapid, panicky action on the electronic markets. 

The sell-down for gold is clearly visible in this hourly tracking graph courtesy of Finviz.com. 

www.Finviz.com

See for yourself how the participants reported their positioning changes following the sell raid.

We are going to borrow our data for July 8 from our previous post and just drop the July 15 positioning and revised charts in underneath each net position for a direct comparison.   

(Source for all graphs  CFTC for COT, Cash Market for gold prices, GGR.)

July 8 Producer/Merchants   57,735 contracts net short. 

July 15 Producer/Merchants   55,127 contracts net short, PMs covered or offset 2,608 contracts only of their net short positioning (not very much).  

 July 8  Swap Dealers  108,268 contracts net short.

July 15  Swap Dealers  101,779 contracts net short, so Swap Dealers covered or offset 6,489 contracts of their overly large and vulnerable net short positioning (not as much as we expected to see).

July 8  Managed Money  133,776 contracts net long.

July 15  Managed Money  122,087 contracts net long, so Managed Money reduced their net long stance by a smallish 11,689 lots. 

July 8  Other Reportables   16,245 contracts net long.

July 15  Other Reportables   20,371 contracts net long, so the ORs joined the commercial traders (PMs and SDs) on the net buying side for 4,126 lots. 

July 8  Non Reportables  15,982 contracts net long.

July 15  Non Reportables  14,488 contracts net long, so the smaller NRs tracked right with their larger brethren (the MMs) net sellers of a small 1,534 contracts. 

We said back on July 15 near the end of the post:  “It will be interesting to see where the participants were positioned when the dust settles today.   This post might come in handy when we get a look at the COT report on Friday afternoon. 

For reference, in after-hours trade at 16:00 gold is bid $1294 and silver $20.74 late Tuesday, July 15.”

What we find pretty darn interesting is that so little has changed since July 8.  The harsh sell-down that looked like it triggered a massive selling event for Managed Money just wasn’t one apparently.  Put another way, Managed Money is still in for the fight on the long side of gold futures. 

Rather than run for the hills, The Funds pared down their long positions a teeny bit, but then, apparently decided they would rather hold ‘em than fold ‘em. 

We can verify that another way, by looking just at the short positioning of the major combatants in the COMEX theater of battle – the Producer/Merchants and Swap Dealers (the commercials) and Managed Money (the other participants having too small a position to matter for this exercise). 

Looking now at just the gross shorts: 

July 15 Producer/Merchants 91,384  gross shorts, down 1,441 from the previous week.  Remember these are primarily hedges and currenlty they are at a very, very low level, signifying that the Gold Trade must feel that gold has little downside risk at the moment.  Just look at the graph below to verify the low level of PM hedging – currently about where it was during the 2008 panic – LOW! 

July 15 Swap Dealers a huge 160,798 gross shorts, also down 5,129 lots (not that many). 

On the surface it is clear that Swap Dealers have the most to gain from a downward move in COMEX gold, and thus we can guess that they were at the very least involved as an instigator of the sell raid, if not most of it.  (One caveat.  We cannot know what the actual net position of the Swap Dealers is because we don’t know what these COMEX shorts are hedging in their overall books.  For all we know they – the 19 Swap Dealers reporting gold shorts this week - could actually be net neutral overall.)  Having said that the SD gross short position is very high and therefore should be considered imbalanced and vulnerable.

July 15 Managed Money 27,173 gross shorts, up 6,230 shorts for the COT week. 

Large Trader Short Positioning and Vulnerability to a Squeeze

Describing the gross short positioning of the major participants in a single paragraph, we would say that the Producer/Merchants hold a near record and historically low number of shorts as hedges and are thus not particularly at risk for a squeeze in our view.  The Swap Dealer commercials hold an extremely high number of gross shorts (apparently with a point of view and probably working the floor and the wires as best they can to influence such an imbalanced and dangerously vulnerable position).  Finally, Managed Money traders, the trend following Funds, have reduced their “insurance” shorts back down to a relatively low number, indicative of their apparent view that the recent downtrend for gold has ended, replaced by a budding new uptrend.  No risk there of a sustainable squeeze. 

Under the circumstances, and judging now, after the dust has settled on Tuesday’s trade.  We judge that the attempted sell raid was full of sound and fury, but signified nothing in the longer run. 

One has to conclude that the risk of a short squeeze is pretty close to what it was prior to the sell raid, almost entirely a risk for the Swap Dealers and the mercenary banks that paint targets on their counterparties and often profit at their client’s expense.  Should a short squeeze develop, and should it happen to coincide with more than one catalyst, geopolitical, business or otherwise, their aggressive buying of long offsets and short covering could, that’s could result in an oversized, high percentage jump for gold, virtually out of the blue, similar to the huge $112.00,  14.4 percent spike higher the COT week of September 23, 2008 (when the markets were coming unglued worldwide).  Incidentally gold traded for $891 then. 

For the record, such a short squeeze is not unprecedented for Swap Dealers as we have mentioned in the past.  Just look at the Swap Dealer short position graph above in the late 2010 and 2011 time frame for the most glaringly obvious case of massive, sustained Swap Dealer short covering into a runaway rising gold price.

Just to quantify it briefly as our parting shot for this week’s offering, the squeeze got underway in, call it September of 2010 when the Swap Dealers had built up an extremely high and imbalanced 207,245 gold shorts as gold was testing the $1300 level for the first time ever.  One could say the long short squeeze pretty much ended a year later with the September 6, 2011 COT report.  The Swap Dealers had been forced to cover all but 90,803 of their shorts as gold had gained and gained and gained a net $566 to close then at $1874 the ounce, right after then testing as high as $1923. 

With the Gold Trade (Producer/Merchants) having so few hedges now, and the mercenary Swap selling banks so overly short … and now with Managed Money showing us all they were not running for the hills last Monday and Tuesday, but instead more or less held their ground for a fight.  Would anyone actually feel comfortable on the short side with all the geopolitical smoke in the air and with gold equities showing some spunk recently?*

Just asking. 

A squeeze remains possible, if not even more likely than last time in our view.   

That is all.   

* See the graph below of the GDX sporting a possible inverted head and shoulders breakout, universally seen as very bullish by the technical analysis community.