Saturday, May 15, 2010

COMEX Large Commercials Break Ranks

Swap dealers cover some shorts in gold.  Bullion banks seen as “sellers of last resort.” 

Some of the most important data we gather and analyze each week is buried deep inside tedious lists of numbers.  These data, complied by seldom-thanked dedicated public servants and distributed via the Web to anyone with a computer, can be an astonishing wealth of information for traders and analysts - if they know what to look for.  Taking that data, following it and producing meaningful graphs is part of what we do here at Got Gold Report. 

Once in a while something extraordinary jumps out at us and this is one of those times.  The following may be tedious to follow for some, but we hope we have made the fascinating and potentially exciting divergence we just discovered come to life for you in the graphs as it has for us in the data.  Hopefully the tedious just became interesting for our valued readers.     

In the traditional Commitments of Traders Reports (COT) issued each week by the Commodities Futures Trading Commission (CFTC), swap dealers are included in the “commercial” category.  They are combined with the bullion banks and other large dealers.  The commercial traders are primarily on the sell side of the gold market.   In the newer, “disaggregated” COT reports the CFTC segregates swap dealers into a separate class. 

Interestingly, in the most recent disaggregated COT reports, the largest commercial hedgers and short sellers, the much maligned bullion banks and largest dealers, certainly did take on a quite a large amount of new net short positioning for gold futures (read paper gold selling or what the CFTC defines as “hedging”) as shown in the graph just below.


Remember these are just one class of the former or traditional category known collectively as “commercial,” but the Producer/Merchant/Processor/Users are considered the biggest dogs in the COMEX gold and silver “pound” and we believe they operate under the largest of the exemptions to position size and accountability limits.  The exemptions to trading size limits are currently granted by the futures exchanges under rules promulgated by the U.S. regulators, including the CFTC.    

To put numbers with the graph above, in the May 4 COT report (one reporting week ago), the Producer/Merchant category showed a net short position of 187,619 contracts.  In this most recent May 11 report, they reported a net short position of 216,753 contracts, an increase of 29,134 contracts.

Contrast that with the positioning of the “other commercials,” the Swap Dealer category, which reported a net short position on May 4 of 83,670 contracts (net of spreads) and now of 65,891 contracts net short, a reduction of 17,779 contracts of their collective net short positioning. See the graph just below.


So as the biggest of the big paper-gold selling dogs were increasing their net short positioning on the COMEX gold futures market, as of this past Tuesday, the swap dealers, the somewhat less big dogs, opted to decrease their net short positioning (net of spreads) – and by a fair amount too, by 17,779 contracts.  

While the Producer/Merchant commercials are now at an all time high net short position for gold (as a distinct group) the Swap Dealers are now, believe it or not, 51,475 contracts LESS net short than they were on December 1, 2009 when they reported being net short 117,366 contracts with the open interest then 521,433 open, and gold trading then at $1,196.36.  Incidentally the Producer/Merchants (PMs) were 190,865 contracts net short on December 1.  The PMs previous record high net short position was on November 24, 2009 at 203,078 contracts. 

The December 1 report is a key period because it was just prior to the most recent gold correction.  December 1, 2009 was also when the swap dealers were at their highest net short positioning in our records.    During that period, (and just before that gold correction), both the Producer/Merchant and Swap Dealer categories of commercial traders held very high, near record net short positions.  Indeed from our observation point of view one could say they “agreed” in their expectations for lower gold prices if we can make such an assumption based on their respective positioning.

Yesterday we posted our Got Gold Report - COT Flash for May 14, which uses the traditional COT reporting – the report which combines the producer/merchant and swap dealers into a single category.  With the producer/merchants adding roughly 29,000 new net short positions and the swap dealers actually covering or offsetting just under  18,000 contracts, the traditional COT report ends up showing a net commercial addition of about 11,000 contracts net short.

Below is the pertinent graph from that report showing the collective combined net short positioning of all the COMEX commercial traders for reference. 


Since gold had just printed a new all time high close ($1,232.66) with this May 11 report, many analysts expected the collective combined commercial net short positioning (the LCNS) to be at or near a record nominal high.  Indeed it was a bit of a shocker for some that it didn’t.  Now, perhaps, we understand why it didn’t.  This past week the swap dealer commercials seem to have broken ranks from the producer/merchants doing pretty much the opposite of them on a net basis.

Take another look at the first two graphs and one can easily see that contrary to the way these two distinct groups of commercial traders acted in November/December of 2009 (just before the gold correction then), as of Tuesday their expectations for lower gold prices seem to have diverged, at least somewhat.  

In Texas English:  The big, exemption-wielding bullion banks were still selling lots of paper gold futures this past COT reporting week, but the “other commercials” were doing the opposite on a net basis.  In short, they are NOT in agreement this time.  At least not yet.

The CFTC also reports spreading positions (basically offsetting long and short positions) for the swap dealers, but not for the producer/merchants.  Take  a look at the apparently large change in the swap dealer spreading positions in the most recent disaggregated COT report in the graph just below.


Just over the past reporting week, swap dealers increased their spreading positions by 3,708 contracts, reporting 25,368 offsetting contracts.  Notice, please, two things about that.  First the swap dealers now have the second largest spreading position since the disaggregated data begins in 2006.  (The largest was on January 15, 2008 at 26,903 spreads).   Over the past two weeks they have increased their spreading positions by 7,203 contracts.  We believe that swap dealers increase their spreading positioning in proportion to their own uncertainty in the very near term market direction.  The more confident they are, the more likely the spreading positioning will be lower and vice versa. 

To conclude this first section of this special Got Gold Report for gold futures, we think that it is now apparent that at least on the COMEX bourse in New York,  the very largest of the paper gold sellers – the exemption-using bullion banks among them -  have now become more isolated as “the sellers of last resort” for gold futures.  We are interested to learn that at this particular moment in time the big bank sellers are not joined by the “other commercials,” the swap dealers, when they were indeed joined by them just ahead of the last really good correction for gold. 

That doesn’t mean that gold can’t correct right here and right now, it certainly can, but if it does the swap dealers are now less well positioned for it.  And, it also means that at least as of Tuesday, there was apparently quite a bit less “horsepower” on the sell side for gold. 

On another note, we thought it might be interesting to take a quick look at the same graphs for the COMEX silver market.  Very quickly and as a reminder, we learned in yesterday’s COT report that as silver zoomed up $1.46 in the May 11 report, the collective combined commercial net short positioning for all traders classed as commercial actually fell by 2,870 contracts!

It was an astonishing, very rare event,  as we mentioned.  A reduction in commercial net short positioning on a big rise for the metal suggests that the largest paper silver sellers were not confident in lower silver prices at that time.  Because if they were, they would have been willing to take on all long comers. 

So what about the positioning for the big bullion banks on silver?  Notice that in the graph just below it was actually the Producer/Merchant category that was decreasing its net short positioning.


From the May 4 to the May 11 report, as silver ROSE $1.46 the Producer/Merchant category on silver actually REDUCED  their collective net short positioning by 4,579 contracts from 56,344 to 51,765 contracts net short. 

And what about the COMEX swap dealers on silver? 


The swap dealers, the “other commercials,” barely changed their stance on the big jump higher.  From the May 4 report to the May 11 report, the swap dealers reported going from a miniscule 946 contracts net long to a tiny 753 contracts net short.  They were and are nearly flat in exposure in other words.  

Bottom line:  This past COT report is more than just interesting; it is downright fascinating to those of us who study the positioning of the largest traders in futures as reported to us by the CFTC.  As of this past report we have the Producer/Merchants, the largest sellers of gold futures, more isolated than ever before, apparently still willing to fade new long contracts with gold blasting higher while their usual comrades in arms, the swap dealers are breaking ranks and covering.  On silver, those same Producer/Merchants are doing some covering themselves! 

Does that sound like they were confident of lower gold and silver prices as of Tuesday, May 11? 

That is all from Atlanta today, but there is more to come shortly (no pun intended).  

For the record:  According to the CFTC, a “producer/merchant/processor/user” is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities.”  The CFTC says that a swap dealer, “is an entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swaps transactions. The swap dealer’s counterparties may be speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity.”


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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