Monday, September 21, 2009


Trader Dan Comments On The Condition Of The Gold And US Dollar Markets Posted: Sep 20 2009 Dear Friends, Please review the following two charts to give a brief technical look at both gold and the US Dollar. (GT sez: Go to JSMINESET.COM to see this post and the charts) Speculative long positions continue to grow as they look to drive gold higher in the face of concerted opposition by the bullion banks with swap dealers also favoring the short side. The latter category can be difficult to decipher since they can be representing both speculators as well as hedging long side exposure due to over the counter positions that they have taken on with other clients. I happen to believe that when it comes to gold, that these swap dealers include both Goldman and Morgan. Some of you might be wondering what in the world we are now talking about “swap dealers” when it comes to analyzing the Commitment of Traders report. In a nutshell, the CFTC is responding to requests from the industry to provide more transparency into the nature of those constituting the “commercial” side of the reports. Formerly, these reports were used by traders to see what the firms who buy and sell the actual physical product behind the futures markets were doing in an attempt to glean the view of that particular market being taken by those whose business dealings include buying and selling of the actual commodity on a daily basis. The idea has been that when that group was leaning heavily to one side or the other, that the market was ripe for a reversal. What has happened however is that the CFTC gave commercial hedging status to swap dealers not all that long ago and as their activity began to grow off the exchanges, they began to seek out the regulated exchanges in order to offload risk from their transactions with their clients, who were looking for exposure to the commodity markets, but wished to trade off the exchange for various reasons. In the case of some, it was the inability to buy or sell contracts that were perfectly suited to their business needs. For others it is the desirability of remaining a bit more anonymous. Either way, these swap dealers provide products meeting the needs of these firms or funds and in the process of so doing, take on financial risk which comes with being effectively long or short a particular commodity market. They began to migrate to the regulated futures exchanges in an attempt to hedge that risk. The CFTC then gave them hedger status which is of great benefit because it allows them basically unlimited position size as well as lower margin requirements. All of this is currently under review but for now, the CFTC has issued a newer, more transparent report of the COT which details the positions of these swap dealers. When it comes to gold, not a lot has really actually changed for us when it comes to analyzing these reports. We can look at the old familiar report with the simple breakdown between commercials and large reportables (mainly the funds) and see the same exact setup that we see under the newer COT reports. In the case of the newer reports, these swap dealers are heavily short alongside of what the CFTC considers to be the actual “Producer/Merchant/Processor/User” category. In effect, the PMPU category is a large net short and the Swap Dealers are also large net shorts. The Managed Money side of the equation are hugely and lopsidedly net longs with the other reportables (large specs) strongly net long as well. Basically we still have the same setup when it comes to gold – the specs are long and the commercials are still short, only with this distinction – that the swap dealers are on the same side of the market as the commercials. There is nothing to say that these swap dealers are any better judge of market fundamentals than any other well studied and informed speculative interest. What I might add however is that the managed money of today is no longer managed in the same sense that it once was where managers were experts on the supply/demand factors behind the various markets that they chose to invest in for their clients. Today’s managed money funds are algorithm driven and momentum chasers which is why anytime we see a build of large size on one side of a market that we need to be alert for any signs that momentum might be changing, either up or down. In the case of gold we are talking about upward momentum of course. As I mentioned in a previous post, just because the speculative community is pushing a market higher and has built a large position of size, does not imply that a reversal is ripe for happening. IT takes speculative power to drive markets higher and as long as the specs have an appetite for a market, that is healthy for a bull market. They can keep pushing and pushing and pushing for far longer than many shorts can sustain their trading accounts. What is important however is that when the specs have amassed a large position on one side of the market, a trigger event or a slowdown in upward momentum (more so in these days of momentum driven market madness), can send this crowd packing in a real hurry so a wise trader will take notice and be careful to observe any warning signs. My analysis of the current report shows these commercials with the largest outright short position that they have ever held with the specs holding the largest outright long position that is on record. What this means is that the bullion banks will be looking to scare the longs out in order to induce further liquidation and cause a setback in price. However, what they have working against them right now is that the Dollar is not cooperating and has not yet reached into oversold levels on the longer term charts. Additionally, China’s recent announcement related to gold and silver means that there will be buyers beneath the market who will strongly welcome any setbacks in price. The key in furthering gold’s advance is completely in the hands of the managed money or momentum funds who must not succumb to their usual habit of snatching defeat out of the jaws of victory . Keep an eye on the Dollar because that market is simply too large for the same players who infest the Comex to dominate it. The Forex markets are gargantuan in comparison to the tiny Comex market. The Dollar’s fundamentals are simply horrific and too many governments are looking for ways to cut their exposure to the US due to its profligate ways for any bull market in the Dollar to commence. All rallies in the Dollar are merely bear market blips that will not be sustained as willing sellers will most assuredly use rallies to unload or diversify. That is the dilemma faced by the price riggers at the Comex. For now, I would want to see gold find support above $1,000 on any price setbacks to avoid any deeper retracement in price. More specifically, any retreat down to that area, needs to find buyers to push it back up and away prior to the close of the pit session, since that is the mark that the technical analysis programs and algorithms still tend to key in on. Seasonally gold’s strongest period is ahead of it so that is working in its favor right now as opposed to the usual summer doldrums. Trader Dan

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