Gold Slaughter, Dead Ahead
Most traders that are long gold will soon experience what I have often referred to as a slaughter at COMEX. As usual, it will be at their hands, and their fault that it occurs. To understand how the longs accomplish this self defeat, it will be necessary to analyze specific data contained in several Commitment of Traders (COT) reports and two open interest reports.
Over the past 20 years, the CFTC has provided data that reflects the positions held by various types of traders involved in all gold futures contracts. Those traders include: Non-Commercial, Commercial, and Non-Reportable. Due to the negligible amount of contracts held, and their tendency to mimic the positions held by the Non-Commercial traders, the Non-Reportable traders' data is of no interest to this study.
I will begin with an occurrence that is of great historic interest when looking at the COT data. This week's COT report reveals that 43,351 contracts were added to overall open interest. Wednesday saw another 2,153 added and Thursday 23,290. That is a total of 68,794 contracts added in the past 7 trading days. This may not seem very important right now but as I take you back in time, the significance will become clear.
A few weeks ago on 6/25/05, I issued a challenge of sorts on the bulletin board of Richard Russell's site, Dow Theory Letters. I was interested as to why I had not read anything from the gold gurus of the world about that week's COT report. At the time, the Non-commercial traders had jumped onto an upward trend established by the Commercial traders from a prior gold bottom of $413 (intra-day) seen on 5/3105. In trimming their short positions by 8,869 contracts and increasing their longs by 42,780 the Non-Commercials had swung long by 51,649 contracts in just 4 days. This incredible move resulted in a mere $9.37 increase in the price of gold. Over the next two days, the Non-Commercials continued adding to their long positions while pushing the price of gold up another $3.10 by the end of trading on 6/23. After all was said and done, this extreme swing in positions held by the Non-Commercials was a complete failure when the price action revealed a paltry $12.47 gain in the price of gold. After having realized that their massive jump to long had failed, (they likely still do not know they were trapped) the Non-Commercials began selling in a near panic and 15 trading days later, gold found support at $418.25. Though support was found, the Non-Commercials continued to close out their long positions and increase their short positions for another four weeks. It was the Commercial traders that not only used their positions to stop the downtrend, but also to counter the continued selling of the Non-Commercials and establish a new upward trend that began on 7/15/05. The price increases from $418.25 through $433.87 were accomplished by the Commercial traders through not only covering their short positions, but by increasing their long positions as well.
This brings us to the COT report released on 8/2/05 which confirms the fact that the Non-Commercials did not begin buying the established trend until that week when they began increasing their long positions and decreasing their short positions. As mentioned earlier, we now have the COT report from 8/9/05 and open interest reports for 8/10 and 8/11 declaring yet another historic increase in open interest, 68,794 contracts added in just 7 days. The COT report confirms that the Non-Commercial traders jumped hugely long in yet another extreme move. The accumulation of these particular positions began on 8/3/05 when gold was trading on a cash basis of $432.45. On 8/11 gold closed at $445.83. After having increased open interest by nearly 69,000 contracts in 7 days, gold rose in price by just $13.38.
I realize that these are just two examples of extreme behavior in open interest and wild jumps in positions held by the Non-Commercial traders. I know as well that only one of the examples ended in a sell-off since the other is an ongoing event. However, you can bet that these very same scenarios have occurred many times over the past 20 years. I think it would be a waste of time to tell every boring story one by one, but think back to April 2004, the same thing occurred. In February 1996, on a percentage basis, same old story, just a different day. Take Zorro's word for it, every time the Non-Commercial traders have behaved in this manner, a significant sell off occurred shortly after. In some cases, like that of 1996, it was terminal for the upward trend. Watch out traders, and stay tuned.