Putting the Cart Before the Horse: Gold Hype

The commercial short positions in metal futures are decreasing. But what's really going on?

Here's a link to the story: MAJOR ALERT: Bullion Banks Covered Massive Number Of Gold & Silver Shorts, But Here Is The Real Shocker! by King World News.

Bullion Banks Not Leading the Charge

The title implies or at least reads as if the bullion banks are leading the charge.

We frequently see opposite headlines as well, things like "Commercials increased their shorts". Many of those articles take a blame the shorts attitude charging "manipulation".

Manipulation is rampant everywhere, but it's not one-sided. It happens on the way up, down, and sideways. King did not make manipulation charges in the above article, but the title is misleading for two reasons.

  1. The bullion banks (commercial traders or market makers are arguably a better terms), simply take the other side of trades taken by big and small speculators. It is the big and small specs that are the driving force, not the bullion banks.
  2. The bullion banks are hedged. They are short futures but long gold by some other means. In simple terms, the bullion banks are not really short gold. They will not get blown out of the water on on a rise in the price of gold because they are not net short in the first place.

The speculators may or may not be hedged, but typically they aren't.

The commercial traders also include the producers who are always net short. Selling futures and delivering the gold is a means of selling their gold production.

In the futures market, for every long there is a short. The market makers take the other side of the trade. CotPriceCharts provides an accurate representation of what's happening.

GOLD Futures July 2017 Through July 2018

Voluntary vs Involuntary Actions

The market makers simply take the other side of the trade out of necessity. That is a requirement of being a market maker.

  1. Since January 16, 2018, the big speculators massively reduced the number of net-long contracts. On net, the speculators are less long than they were, assuming most of those positions are not hedged.
  2. Perforce, the market makers (bullion banks if you prefer), reduced the number of futures short contracts. But as I said, the market makers are hedged. The market makers are not "less short" in a real sense. They are neutral.

In regards to point number one, there are two ways that speculators' net-long positions can decline.

1A: Long Liquidation (booking profits or losses).

1B: Speculative shorting rises faster than speculative buying.

Point 1B best explains recent action.

Spec Long Positioning Since June 19, 2018

On June 19, the big specs were long 202,915 contracts. The small specs were long 47,073 contracts.

On July 18, the big specs were long 218,427 contracts. The small specs were long 51,491 contracts.

Combined, the specs increased long positions by 19,930 contracts.

Spec Short Positioning Since June 19, 2018

On June 19, the big specs were short 106,403 contracts. The small specs were short 29,461 contracts.

On July 18, the big specs were short 160,586 contracts. The small specs were short 35,697 contracts.

Combined, the specs increased short positions by 60,419 contracts.

What Happened?

The net speculative long position since June 19 fell by 49,489 contracts (60,419 - 19,930).

Speculative open interest rose by 80,349 contracts (60,419 + 19,930).

Sentiment

Bearish sentiment by speculators is on the rise. Bullion bank positions have absolutely nothing to do with it!

Is that a "major alert"?

Sentiment is not a timing mechanism. With gold, one might easily have made the same claim on May 1 and numerous other occasions over the past few years.

The Horse and the Cart

It is important to put the horse in front of the cart. The commercial market makers (the cart) react to the horse (the specs).

Speculative sentiment rests with the horse, not the cart.

Platinum

Sentiment-wise, King's shocker was "commercials long platinum for the first time in a decade". That is indeed interesting.

But as with gold, the proper way of viewing this is as follows: Specs are net short platinum for the first time in a decade.

Platinum peaked at $1918 in June of 2011. It is now $829. That's a 57 percent decline.

Is platinum a good buy? I think so, but unlike gold, platinum and silver are also industrial commodities.

Will they industrial metals do well in a global slowdown? Will gold? I don't know. We are all guessing.

One thing is not a guess: Platinum isn't going to zero. Thus, platinum is closer to a major bottom than a major top.

The advantage to gold is it is primarily a monetary asset not an industrial asset.

Seasonally Favorable Period Coming Up

We are coming into a seasonally favorable period in gold that typically lasts from sometime in August through sometime in January.

If it plays out that way again, the gold spec shorts will cover. The more recent shorts, sitting on no profits, may get hammered with moves as large as $40.

The same can play out in platinum and silver.

Increased Risk

For whatever reason speculators are currently adding both short and long positions.

Commercials, because the are hedged, do not fear a short squeeze. In contrast, that net increase in speculative shorting, represents shorts that will cover with unknown at this time profits or losses.

I believe adding to shorts here is a big mistake, especially given the fundamental macro backdrop coupled with seasonal favors, but only time will tell.

Conclusion

It's the speculative shorting that's the story, not the reduction of commercial shorts.

Mike "Mish" Shedlock

Comments (5)
No. 1-5
GiT
GiT

Thank you for this very clear post.

Carl_R
Carl_R

You nailed it, Mish, but don't expect anyone to listen. People have been believing that bullion banks would be wiped out with the next rise for as long as I can remember.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

I really hate bullshit hype even when it is in favor of my postion - long gold

Stuki
Stuki

Until Gold regains enough practical usefulness to again become interesting to anyone besides pathological conspiracy nuts, exactly what it happens to cost at any given time, is about as relevant to the economy as a whole, as the price of a penny stock or some random crypto coin.

RobinBanks
RobinBanks

If you think there is going to be a major deflationary event due to asset price declines and then further QE as central banks get desperate then go long gold. If not, buy Tesla and Netflix stock.