Gold Market Behavior
Have the Commercials thrown in the towel or is another sucker punch heading towards the Trend Chasers?
On May 12, (one day before gold prices began to decline) I was asked if the Commercial positions in the oil market might help to put a floor under falling prices as they do in the gold market. In part, my reply was as follows; "I can tell you this, Speculators hold about 50% of the long positions in the crude oil market while about 85% of the long positions in the gold market are held by speculators.
Also when I say the Gold Commercials can and have held prices from falling too much in a correction, (by covering shorts and buying into the falling price) I do not mean to suggest they can hold it every time nor would they want too. There will come a time when they stand aside and watch the speculators destroy one another."
The above scenario did in fact play out but rather than simply standing aside to watch Speculators slaughter one another, the Commercials played along and sold out as well. In my last report, Safe Haven | COMEX Gold Liquidation explained that the Commercial Traders at COMEX were buying long contracts while closing short positions and how such a move would help to put a floor under falling prices. The Commercials did this for a few days halting the declining price near $636 and causing a bounce to $665 intra-day. This action was met by further selling and by the time June 6 rolled around, the Commercials had unloaded 27,504 long contracts of their own while taking profits on an additional 37,443 short contracts. This follow up selling (into a falling price) by the Commercials is a first since the bull market began back in 2001. The decline from this selling caused the price to fall down to $619. The rest is history as all Traders became sellers driving the price down to $542 in the cash market.
Certainly the gold manipulation Theorists will consider this action by the Commercials as more fuel for their cause to convince Investors that the market is rigged but keep in mind that the Commercials did not start the selling from $732 nor did they sell any significant long positions until the price had fallen almost $100 an ounce.
The practice of buying long and covering shorts to halt a decline has been a play of the Commercials for a very long time. If one were to visit Historical Commitments of Traders Reports and study the behavior of market participants in the gold market, this fact would become clear, Commercial Traders desire higher prices, not lower ones. As stated earlier, the Commercials did move into the market on the long side while covering shorts but in this case it did not entice buying among the Trend Chasers (Non-Commercial and Non-Reportable Traders).
In the most recent COT report of 6/13/06, we see a return to normal operations by all traders as a near term bottom has been apparently found. The Trend Chasers are buying and the Commercials are selling into the rebounding price from $542. It also happens that $542 is within a band of support that is critical for the overall trend so needless to say a decent bounce from this area is highly likely with first resistance at $600.
Let's take a look at a couple of long term charts of gold to gain some perspective as to pattern.
How many times have you seen a pattern like the one beginning in 2001 finish any other way than the one below that began in 1970?
The second chart shows the entire bull market and decline for gold from the 1970's and 1980's.
A close look at both patterns reveals that they are almost exactly alike in the bull stage and nearly indistinguishable in pattern during the first wave down from the top.
So have the Commercials thrown in the towel and given up on this market? No way my friend, they will try and trap you at every near-term top from here on out regardless as to overall trend direction.
At dowtheoryproject.com we not only watch the pattern of price behavior for many commodities, we keep close watch on who is responsible for that behavior.