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
Sunday, September 20, 2009
What If Everyone in the World Wanted a 1-ounce Gold Coin? By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report If we’re right about where the price of gold is headed, the general public will someday clamor to buy all things gold. While gold stocks will be where the real leverage is, the rush will start with gold itself. As a gold editor, I have a very natural question: is there enough to go around? According to the U.S. Census Bureau, there are 6.783 billion earthlings. Meanwhile, CPM Group, a highly respected industry organization, estimates there are 4.8 billion ounces of above-ground gold in the world. And this includes jewelry, electronics, and dental. So, even if everyone around the world volunteered to have their chain, cross, or tooth melted into a coin, we’re already short. Those towards the end of the line are out of luck. However, it’s worse than that. Of all the physical metal ever mined... 2.1 billion ounces, or 43%, is found in jewelry, decorative, and religious items. Private stock – gold already held by various private parties – accounts for 1.1 billion ounces. Official reserves (central banks, IMF, etc.) stand at 1 billion ounces. Industrial use accounts for 530 million ounces. Very little of this is likely to come available for purchase in coin form. After all, you’re not selling any of your gold, and neither are many banks or institutions. Most everyone is buying. So for those who don’t yet have a gold coin (or you greedy investors who want more than one), this pretty much leaves us with mine production and scrap sources. CPM forecasts that total new supply in 2009 will be around 122 million ounces. Only a small percentage of this is made into gold coins and bars, but if all of it were, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth this year. A product of this dimension is about half the size of that small button on your shirt collar. Since this supply is only available annually, it means 0.018% of the global population – one in every 55 people – could buy a one-ounce gold coin this year. Or, said differently, it would take 55 years before everybody had one, assuming the population never increased (it is) and supply never decreased (it is). But it’s worse than that. Actual 2009 coin production will be around 5 million ounces (excluding medallions or “rounds”), leaving two one-hundredths of a gram of gold (or 0.3 of a grain) available this year for each of the planet’s inhabitants. This is about half the size of the sesame seed that fell off your hamburger bun at dinner last night. It means that only 0.0007% of earth’s citizens – or one in 1,356 – can buy a one-ounce gold coin this year, and it would take 1,356 years for everyone to get one. How’s that for a supply squeeze? But it’s worse than that. Demand continues rising. Gold is more frequently in the news, attracting more customers every day. Hedge funds, which never before considered gold, are now buying physical metal (Greenlight Capital actually sold $500 million of GLD and bought physical gold). Central banks are net buyers of gold for the first time in 22 years. China is running TV ads encouraging its citizens to buy gold and silver. Last month Russia bought more gold than they actually produced. In a recent survey, 20 out of 22 fund managers bought physical gold for their personal investments. In other words, some investors are already scrambling to get it… and in big quantities. But it’s worse than that. Most of the ramifications of the money printing and dollar debasement haven’t even surfaced yet. How will the general public react when the dollar is crashing and standards of living are threatened? What will they do when milk and gas prices surge to twice what they are now? How will the greater collective respond when they lose faith in government interventions? Where will they invest when they see gold and silver prices screaming upward and don’t want to be left behind? The panic into gold by the general public hasn’t begun yet. Available supply is scarce and will get smaller. There won’t be enough. Better get your speck while you can.