Gold COT: on the cusp of a short-covering extraveganza?

Alasdair Macleod – 02 October 2012

With QE to infinity everywhere, it is not surprising that gold and silver prices have been performing strongly recently. Buyers from hedge funds to central banks to ultra-high net worth individuals abound. In the past the limitation has always been the ability of those categorised as Commercials at the Comex to put a lid on things. So the big question has to be, can they do it again this time?

The chart below gives us some context. It shows all categories of Comex traders, plus open interest, in 100-ounce gold contracts.

Note the sharp rise in open interest (black line) from historically low levels. Note also the principal driver, Money managers (blue line), being met by increased shorts among Producers and Merchants (red) and Swaps (green). Since August 7:

  • Open interest has increased sharply by 315 tonnes ($18.025bn)
  • Money managers have added 275.3 tonnes ($15.8bn) from historically minimal net long positions. These positions in the past have been capped at about 220,000 contracts (a further 200 tonnes) before infinite QE and when the prospect of a eurozone collapse was less likely. There should be more where this demand comes from
  • Swaps have gone net short, indicating they have increased their physical position in London, perhaps to benefit from the spread between minimal earnings on excess reserves at the Fed and the gold forward rate in London
  • Producers and Merchants, the largest Commercial category, is maxed out with their shorts reaching near record levels at minus 212,572 contracts (661 tonnes)

The question arises: can money managers this time break the Producers and Merchants? If they do, the short-covering will be spectacular.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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