In a continuation of our analysis of the Gold market and the head scratching disjoint between the fundamental backdrop and the paper price of the precious metal, we update with the latest COT data release per below.
The first chart is a pictorial representation of the actual gold producers/industry participants (merchants) positioning overlaid with the gold price.
I have highlighted with a green circle the previous occasion where they were the least short (remember that 90% of the time they are net sellers as they are selling their production forward). In fact, now they are actually net long and as relayed in this blog here – http://www.spreadbetmagazine.com/blog/just-what-is-behind-the-continuing-disjoint-between-paper-an.html. The data out yesterday shows them moving even further net long over the last week…
What is this telling us I hear you ask and what is the signifcance?
Well, to us, what it is telling us is one of the following –
1. They are unprepared to sell new stocks at the current price
2. They do not have the actual production to sell or
3. They are collectively fighting back against the paper price manipulation that many industry participants believe is occurring.
Any of these scenarios is massively bullish for gold, in particular scenario (2) – this would imply that there is a supply constriction very shortly coming down the pipe and, as we have seen on previous bouts of price weakness this year, when the gold price gets hit, the Asians, principally China, get busy with the buying.
Where will the stock come from on another smackdown that sparks physical buying however given that stocks are so low?
Well, the simple answer would be for the sellers of physical that cannot deliver to go and buy Comex futures and then take delivery at expiry. With a v large short position out there (the seller of the future of course taking on the obligation to deliver gold if ran to expiry) that is far larger than physical availability, what would be the end result? I’ll let you figure that one out but lets just say for the shorts that an elephant sitting on a mouse spring to mind, and they don’t have the role of the elephant in this story!!!
Take a look at chart 2 below which is also updated to the 6 Dec.
This is part of the other side of the producers trade, the managed money positioning. Of course if the producers are net long then this means these guys are net short. They are now collectively more short than they were in the summer of this year and at the nadirs of the rout in 2008 – right before a near 130% rally in the price.
Bear in mind that the strong labour figures out yesterday failed to knock the gold price and in fact it actually closed up on the day when tapering at the Dec 17-18 meeting now seems a dead cert, and its time to start asking is it in the price and just how much more juice is left on the downside in this bottoming process?
One more chart for you (an SBM blog these days would not be complete without a gold miners chart now would it?!)…
Gold Miners (producers) spectrum 6 year monthly chart
What this is telling me is 3 fold – firstly we are as oversold as we were on the 2 prior rally occasions (red circles), secondly the disconnect between the actual price of gold (orange line) and the mining companies stock prices is at unprecedented, I repeat that word, unprecedented proportions and thirdly, the volume going into this has been phenomenal and, looking closer, in recent weeks dimimishing in size on further price slides. Throw into the mix the record short position, negative sentiment and total despondency amongst bulls with the cheapest valuations in a generation and all that is left is the cue music and the start of a new bull market…
We continue to remain resolutely long.