From the Gotgoldreport site
We read all kinds of commentary on the Web about the positioning of the large traders in gold futures on the COMEX bourse. Rather than argue, let’s just point out something we think is pretty darn interesting if not telling.
We tend to focus on the positioning of the largest of the participants in the gold biz. The traders generally known as commercial traders. In the legacy commitments of traders reports (COT) the commercials include the categories now known as the Producers, Merchants, Processors and Users (which we shorten to the “Producer Merchants”) together with the mercenary banks that the CFTC classes as Swap Dealers. So today, in the disaggregated COT reports, there are two classes of traders we consider “commercial,” with perhaps the most important of them being the Producer Merchants because it is this category of trader that uses hedging to protect their natural long positioning. And, it is from their desire or motivation to hedge that we get a decent read on the attitude of the gold trade itself toward, or rather, about its expectation for the price of gold looking ahead.
We read the comments by those on both sides of the battlefield, including the likes of the already very short (with an attitude) Swap Dealer banks such as Jeffrey Currie of the mercenary firm Goldman Sachs, who is already apparently all in on the short side of gold and willing to talk their book – even when it has not “paid” to do so. But we digress… Stop the tape right here. Let’s instead just say what the record shows and have done with it for another week or two or three.
Consider that on March 18, 2014 (a month ago) traders classed by the CFTC as Producer Merchants held a net short position of 60,312 contracts with gold then having tested $1390, but having retreated back to $1355.50. In the month since then as gold continued to decline by $53.09 or 3.9% to $1302.41 the Gold Trade (the Producers, Merchants, Processors and Users) very strongly reduced their combined collective net short stance by a whopping 45,727 lots or 76% from 60,312 to show just 14,585 contracts net short as of April 15.
(Note: When rising the blue line shows the Producer Merchant net short position falling and vice versa. It showed a rare net long stance in November of 2013 to January of 2014.)
At the very least this activity suggests a lack of motivation on the part of the Gold Trade to hedge their natural long position. Looking at it another way it also suggests a bit of urgency on their part to reduce their hedging as gold retreated to near $1300. It the world of watching the largest participants in the gold biz we believe it is more important to watch when and what the participants do as opposed to what they say.
Speaking of the participants who have been vigorously “talking their book” in gold, the Swap Dealer types front and center on that score, notice that in the graph below Swap Dealers have been reducing their net short stance since March 25. To quantify that on March 25, with gold then $1310.81, traders classed as Swap Dealers reported holding 99,602 COMEX contracts net short gold. In the three reporting weeks since then, as gold edged a net $8.40 or (not much) lower to $1302.41 April 15, Swap Dealers got the heck out of an oversized 26,582 contracts of their collective net short positioning (from 99,602 to show 73,020 contracts net short).
So while we have some of the visible and vocal participants out there talking (that’s talking) their book on the short side, we can point to what the participants are actually doing with their collective COMEX futures positioning and it does not exactly follow what their bravado has been. At least it does not appear to us as though it does. What say you?
One last comment for this week. The current Producer Merchant short position – just their collective gross shorts by themselves – is the lowest (smallest) number of PM short contracts in DCOT history, with data back to 2006. In other words, with gold near $1300 the Producer Merchants (the big traders of physical gold bullion, the bullion dealers, the refiners, the producers, the jewelers, the manufacturers, and the bullion trading banks they end up trading through on the COMEX) are currently holding the smallest number of pure short contracts in our records. We believe that is the very same thing as saying that – for whatever reason – the gold trade is not, repeat not motivated to hedge (or protect against a falling price). That means to us that the industry is looking more for higher gold prices, not lower prices.
Chart showing just the Producer Merchant short contracts. As of April 15 the lowest PM short position in DCOT history. Source CFTC for COT, Cash Market for gold, GGR.