*** Gene Arensberg's CoT Gold report (3-19-06) ***
COT Gold Report - Gold ETFs, New Music to Gold's Ears
By Gene Arensberg
18 Mar 2006 at 07:08 PM EST
HOUSTON (ResourceInvestor.com) -- Over the years gold investors have been conditioned to expect more down-side volatility and many of the old-school investors may be content to wait for entry or reentry based on their past experiences. Many veteran traders are used to seeing harsh corrections following major, euphoric runs to new bull-to-date highs. The thing is, and it is always dangerous to say this so don’t make book on it just yet, but this time may be a little different.
The February 18, 2006 installment of this report said: “Make no mistake about it, just a couple years since their inception, the new exchange traded funds (ETFs) for gold are fast changing the dynamics of the gold market. ETFs are altering and challenging the once unquestioned dominance of the relatively small market for physical gold bullion by a comparative handful of very large players, bullion banks and futures, or paper gold markets.”
Do those changing dynamics include the possibility of less aggressive corrections?
Previous harsh downside volatility was from a market dominated by the very highly leveraged paper gold markets - from when there was no real counter-influence to chain reaction long liquidations. Many feel that for all practical purposes those paper contract players “played with” and in the process more or less set the price, with the physical bullion market in tow. Instead of a futures market speculating and hedging what the supply and demand of the physical market might do, the physical market more or less reacted to and became dominated by paper traders.
Today we can argue there is a growing counter-influence to the paper contract markets in the form of exchange traded funds.
The last high-volatility gold retrace which was essentially without ETF counter-influence was the April-May, 2004 14.2% dive. If there is any doubt that the paper gold contracts were (at least partly, but more likely directly) responsible for the ruthlessly sharp nature of that selloff, consider that during the five-week period the reported collective net short positions of the COMEX large commercials (LCNS) plunged from 196,307 contracts to just under 49,000 contracts net short during the period. In other words, roughly speaking, short positions representing 14.7 million ounces or about 458 tonnes of gold were covered (and the long counterparties ousted) during that brief period.
Yes, there was a similar retrace after the largest gold ETF began trading (December 2004-February-2005, -10.2%), but the gold ETFs were still in their infancy and had not yet garnered all that much wealth or investor following at the time. The streetTRACKS Gold Trust [NYSE:GLD], had only been trading three weeks or so as that sell-down was getting underway. In that correction, arguably the last plunge for gold still almost totally dominated by the paper gold markets, the LCNS cascaded from about 177,000 to about 38,000 contracts net short in about 9 weeks. The 139,000 net short contracts closed or covered by the large commercial COMEX traders during that period represented paper commitments for 432 tonnes of gold.
Markets and market influences change over time. New sources of demand and liquidity introduce different market dynamics and alter the status quo. As speculators it is our job to recognize and embrace these changes even as their effects are being worked out. It is all at once naïve and arrogant to expect that the market will dance to the same old music when a completely different tune is playing. It’s also fascinating to witness as it unfolds.
An example of that musical metaphor is shown directly in this graph which tracks the maximum and minimum LCNS positions since 2002.
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