Gold – Commitments of Traders – hedge fund longs liquidate

Fortunately for we traders, the Commitments of Traders report did at least catch the big move lower on Tuesday of this week so we were able to get a peek inside the market to see what happened to those massive hedge fund long positions during this week’s meltdown in the gold price.

Here is the first chart. Hedge fund outright positions.

gold-hedge-fund-outrights

We had a sharp drop in hedge fund long positions ( a bit more than 42,000) in the plunge from $1330 the previous Tuesday to $1269.70 this past Tuesday.

We also had this category of traders begin moving into the short side to the tune of adding 14.6 thousand new short positions.

As is the pattern during these events, Swap Dealers and Commercials were busy covering short positions into the hedge fund selling.

gold-commersgold-swap-dealers

The problem that I see for gold is the size of the net long position of the small traders, or the general public.

gold-cot

By a nearly 2:1 margin, they remain net long even after Tuesday’s sharp drop of some $42.

chart_16-10-07_18-35-50

Those are weak hands. With the gold price now making two consecutive closes below its 200 day moving average, the technical picture has deteriorated significantly.

That June low is going to be the location of the battle for control of the market.

chart_16-10-07_18-40-42

Price pushed down through that level and managed to close right at it for the purpose of the settlement price but I noticed that it did move higher later in the session and rebounded up to reach closer to $1258. Whether this rebound continues Sunday evening and into Monday morning remains to be seen; it could very well have been a round of short covering by shorts ringing the cash register after a very good week.

On the Heikin Ashi chart, you can see the chart remains in a negative posture. These charts are composed slightly different than your standard bar charts or candlestick charts but you can still see the significance of that June low. That low was formed on the day that gold staged an upside breakout above $1320 so you can rest assured all of those longs that bought in on that day near those lows are going to try to either defend those longs if they have the financial wherewithal to do so, or if they do not, hoping that their allies can rescue them.

chart_16-10-07_18-48-00

There is no doubt that a substantial number of margin calls are going out or have already gone out to those small specs.

There is one bright spot in this recent gold and gold-related debacle that I have seen however and that concerns the giant gold ETF, GLD.

It actually witnessed an 11 ton increase in reported gold holdings today. I must admit that I find this extremely odd given the deluge of selling that hit both the Comex gold futures this week and especially the mining shares.

gold-etf

One does not often see the GLD holdings moving in the opposite direction to the gold price and the gold mining shares. That it did should offer some consolation to gold bulls as it shows that Western-based specs were interested in buying the metal over at the ETF even if the hedge funds were busy selling it over at the Comex.

One last chart for now… this is the HUI/Gold ratio.
Close observers of this chart might have noticed that I LOWERED the line I had been watching. The previous level that I was monitoring was the low made in the ratio on September 1. That was crushed this week.

chart_16-10-07_19-02-39

Now I am watching the May low in this ratio, which also cratered this week.

Why is that important? Because in looking at the chart of the HUI, the low made by the index was made that same month.

chart_16-10-07_19-04-45

That low is under serious attack at the moment with the HUI having bounced off of it on Friday. If the ratio of the HUI to Gold could not hold, there is the real possibility that the index will not be able to hold those lows. This, plus the fact that the HUI also has now had two consecutive closes below its 200 moving average paints a rather sour picture technically of the longer term view by investors of the gold sector.

Bulls have their back to the wall and will need to perform next week to at least stabilize the damage and try to stem the bleeding. If they can keep the index above the May low, there is a chance the ratio could reverse higher. Perhaps the addition of those 11 tons to GLD will spur some buying early next week. We will have to wait and see but for now, I will feel much better about the mining share prospects if they can at least push it back above the 200 day.

A climb back above 220 will be needed to provide some glimmer of hope for the bulls.

22 thoughts on “Gold – Commitments of Traders – hedge fund longs liquidate

  1. Hi Dan,
    If I see now bonds, equities and gold going down and under pressure, I derive from it that the majority of traders has fear for an interest increase.
    I am going to take the profit from that, since I do not believe in a structural rate increase. In this panic I like to buy gold.
    After the elections with December in sight, the interesthell will start again. Finally Yellen may increase the baserate with 0,25% (!), but more will really not happen in a “real-economy” that has the status of today. So my advice, do not get confused by others, buy the dips. Fundamentally nothing has changed.
    It is only a matter now of transferring other’s panic into your own profit.

    • Hi Piet,

      Thanks for sharing your thoughts.

      You might be completely right with your assessment of future events but it is still a prediction. I would rather have a look at how the markets react to last week’s events and take it from there than to get caught up in another bout of hedge fund long liquidation.

      • Hi HT,
        I do not want to predict things because the future reality is always different. But besides positioning, based historical facts and TA, I also add logical expected future facts to it. In my opinion the worldwide debtsituation is one of the major facts that determines what will come especially with regard to interests.

  2. I’m kind of with you Piet. I agree with all of Dans concerns regarding these 200 dmas getting breached in gc, but like your big picture sentiment. I think it’s a great spot to buy with right stops, as the major break out of the 3 year downtrend (1200) is only 50 bucks away and should be major support at least initially. I keep thinking back to last year around this time when hike expectations increased and they sold gold from 1180 down to 1050, about 135 bucks… a very similar amount to our current selloff from the highs (1375-1245). Once they raised, gold began its rally. We’ll see what happens, thanks to you guys for the analysis and all the comments, they are definitely helping me formulate and solidify my own approach/ game plan. Enjoy the weekend, -Ben

  3. Dan,
    These were the details I was looking to you for. To me they show what I believe will prove to be the bottom of the correction.You didn’t mention the lack of any action coming out of China because of their week off, and I believe we will see some monster buying Sunday nite as they come in to work.
    I agree with Piet and Ben and am backing up my truck. Even if it isn’t the exact bottom, there are just too many write downs not to take advantage of.
    Let’s hope we are right.
    Jim

  4. Dan,
    I forgot to mention that I live in Florida and we were visited by a hurricane. Fortunately, Delray Beach where we live got just got the extreme edge of the storm and no damage. We were lucky, I just hope we will be as lucky that the gold and silver hurricane is over.
    Jim

  5. eastmon,
    I am a long term investor. If I could buy precious metals stock a little cheaper it really wouldn’t make much difference in the long run. For instance, I originally bought AG at $4 and HL at just under $3. AG went up to $18 and is now around $8. HL went up to $7 and is now around $5. I’m buying my third tranche of both at tomorrows price. Whatever the price is, when they go to wherever they are going over the next 3-5 years I expect them to be 10 times what they are today.
    Piet, hope you understand this too.
    Jim

      • Eastman,
        I agree, trading is positioning and not forecasting.

        And trading is also staying with both feed on the ground.
        For instance regarding tapering by ECB, it is a rumour and forecast of someone of Bloomberg. Is it clever to react on that, certainly as it is afterwards denied by ECB?
        And another even more important conclusion for me is that due to the too high debts in the world, interests can NOT structurally go up further. Still in 2016 all countries except 1 here in Europe keep having budget deficits. ECB will never make it harder for them by increasing the interest.

        So I do not understand the fear. Apparently big fund managers and institutions are also just like people.

        • Eastmon and Piet,
          I doubt if either of you were around in the 1970s and 80s. I was a precious metals specialist for Oppenheimer back then and traveled around the world visiting mines. I also went to all the mining company meetings in Vancouver and New Orleans. I didn’t know much about technical details, but I followed 2 specialists in the field and they helped a lot to make buying AND selling decisions, just like Dan is doing today. You have to take into consideration your gut feelings according to your sense of what is going on.
          Piet, the Deutsche Bank is a disaster, The Brexit is the first break away from the EU. I believe Italy will follow soon and am very concerned for Europe. The US stock market is at a top and is still almost the only place for people to put money. Back in the 70s and 80s the US had inflation. That was the reason that the world turned to gold and silver. In my opinion things are a little difference right now. Piet, you are right about the credit problem. That will be the underlying cause of the gigantic up move we will see over the next 3-5 years in the precious metals.
          Eastman, I am teaching an investment class in my community and I send out an e-mail to over 80 participants covering our meetings each week (at no cost). If you would like to receive a copy send me your e-mail address, and I would be happy to include you. Piet is now on my list. My e-mail address is jebandler@yahoo.com.
          By the way, at 6AM this morning gold is up almost $5 and silver $.20. China is back.
          Jim

          • Hi Jeb – I hear what you say, but still believe one must rely on what the charts are saying, and avoid being influenced by gut feelings. The theme of this site is “just the facts” and my interpretation is that precludes gut feelings, which are not established facts. I’m not criticizing, just trying to center my thinking.

  6. Piet- Those rumors are moving the market, to me it doesn’t matter if they are true or not. What it does say is the fellas with quite large long positions were nervous about holding an over extended position. You could see that from a couple months ago, gold stocks were being offloaded into any strength. Then all it took was a rumour to create the sell off we saw last week. That has to be respected.

    Jeb- If I were a long term orientated investor, the same idea you explained would work for me in reverse. I would take the small increase in price it would cost to see the uptrend confirmation. How often have these markets moved in a totally counterintuitive fashion? I’m not saying the bull is dead, but it is definitely in question. $1270 is the first hurdle, any rejection at that level and I’m reloading the shorts

    • Eastmon,
      Good answer. As I mentioned I am not a trader so I don’t go in and out. I have been long since the end of last year. However, I have learned to buy in tranches. My first tranche bought at close to lows, my second tranche came early this year, and today is my 3rd tranche.
      What I do when Dan sends out a warning of impending doom because of extended owning of long contracts is to take out insurance. I buy DUST and JDST and I sell calls against my ownership. It has served me well. Nobody can be perfect in timing tops or bottoms, and you are right to wait until you see a definite turnaround, but you have to take a stand some time.
      Jim

  7. Hi, and great post again Dan. Must appreciated.

    Gold/Silver and their respective mining stocks have been the biggest winners across most markets this year (someone correct me if I am wrong here but I am going of the fact that some miners are have made several 100% gains). So a retracement of some sort was inevitable. Nothing goes up in straight lines and the out of whack COT needed to be rinsed out.

    Taking Majestic out of the equation, almost all miners on my radar (I am from UK so LSE based) are showing sideways patterns after some powerful moves earlier this year. They have not really broken down, just etching out a sidewades/consolidation pattern.

    I’ll wait for these to breakdown before cashing in my chips.

    The big home runs so to speak have the most volatility or so it seems when they go up many 100% then your P&L can swing around very violently. This can force you out of positions…its done it to me last week…where the stock didn’t really breakdown past its 50 day MA, just dropped circa 30% in two days…I was ill disciplined and jumped. Made good profit but will likely lose out on much more (for some reason I am unable to get back in once out, a physiological issue I guess).

    I guess the point I am trying to make is that ensure your reasoning for exiting positions is sound and technically justifiable.

    thanks all

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