| | | Following up to Message 32483455 Armstrong, H had commented per below ...
On Thursday, January 2, 2020, 9:27:20 AM CST, H wrote:
Actually, lateral resistance is at 1525-1530, i.e., where it is right now. If that gives way, I think it runs to 1700 with little hesitation (fibo-derived target). In the post 1976 run it did correct back to the high 130s after exceeding 150 (multiply by 10 to arrive at today's equivalent figures), and then resumed its run. See attached charts...
I should add, although we have tracked the 70s template fairly closely so far (only about 2.1 times more slowly), there are always small differences in the patterns, so one should not expect exactly the same to happen again, but a close analogy seems likely to continue. It is likely because the psychological drivers of the market are always very similar, even if they are based on different rationalizations.
Below is a comment (and charts) I sent to a friend (a hedge fund manager in Europe) regarding this article (read the article first - and regarding my comment, I should stress that despite my critical remarks, it is definitely true that a large net speculative long position makes the market vulnerable to a large correction. But the rules are slightly different in bull markets and bear markets): mcoscillator.com
Here is another article that takes issue with the positioning question (read that last): news.goldseek.com
My comment on the first article by McClellan:
...slowly but surely my conviction is growing that the stretched net spec long position is a "bear hook" - so far all it is doing is that it keeps lots of people on the sidelines, waiting for the "inevitable" decline. Just visit gold-centric web sites, every other article is discussing this, for weeks already. I would say the action in precious metal shares contradicts these concerns - and it has left many waiting in the train station while the train is getting away. Let me also comment on McClellan's semantics: the commercial hedgers are not the "smart money". That is simply not a good way of looking at this. The hedgers express no directional view at all, they are liquidity providers and 95% their actual net positions are market neutral (i.e., their shorts in the futures market are offset with otc forwards, physical bullion holdings, swaps, etc.). These guys have been net short gold futures since it crossed above $270 in late 2000. If that were a directional bet, it wouldn't be "smart", it would be the dumbest bet ever. Actually, the fact that no commercial hedger in gold futures has gone bankrupt yet is proof that these are not directional positions. So the proper way of looking at it is: how excited are speculators, and how much buying power remains on their part? One way of gauging this is to look at their net position as a percentage of open interest. Currently it stands at 39.9% for large specs, which is high, but down from a recent peak of 50.4% (per experience, values close to 50% are a warning sign). It is also not unusual to see such a figure during bull markets - it tends to oscillate between 20% to just over 50% in bull markets, and -45% and 5% in bear markets (yes, the "smart" commercials are always net long in bear markets...:)).
Anyway, I would certainly agree that the relatively large spec net long position is a bit of a concern, but it is not a bearish datum per se. It makes the market vulnerable and will tend to exacerbate corrections, but there is actually no telling what figure should be regarded as an "extreme" these days. Always keep in mind, for decades the most extreme spec net long position in crude oil futures (until 2008) was in a range of 100-120K contracts. This has in the meantime shifted to 850K contracts (!). These days a 300K contract net long position is considered "low". It is definitely possible that an analogous shift is occurring in gold futures as well - simply because a lot more money is invested in CTAs and other funds that trade futures (note that family offices have also stepped up their futures trading). CoT reports are just one input when analyzing the gold market. To me the action in precious metals stocks relative to gold is actually more important and so are market-based real interest rates (as expressed by TIPS yields) - see attached charts. Also, note that m&a activity in the gold sector has only just begun to pick up - this often happens early in new bull markets.
A few more words regarding McClellan's comments: he writes "A lot of the commercial traders in the gold futures market are gold mining companies, using the futures market to fix a price for their future production." - this is actually incorrect. Almost no gold mining companies use the US futures market to hedge production. Most of the "commercials" are swap traders, i.e., bullion banks and merchants/processors (refineries) hedging their inventory. Gold mining companies as a rule do all their hedging in the form of bespoke otc forward deals with bullion banks, they are not playing around with futures. And most of these forward deals are not outright short sales either, they usually involve price ranges, with downside protection partially funded by agreeing to upside caps. He states further: "So when they move to a big net short position as a group like this, it is a pretty strong statement that the people who are in the gold business think this is a good price at which to sell."
This is completely wrong. The people "in the gold business" have no special insight into what the gold price will do. Most of them probably know less about that than you and I. They are miners, processors, swap dealers, but not macro-economists. The largest gold demand component is reservation demand, which is not measurable and has to be inferred by means of analysis of the main macro-economic drivers of the gold price. A miner may look at his margin and think "this is a good price to sell", but that has absolutely nothing to do with what the price will do in the future. He then says: "The commercial traders went to this big net short position back in September 2019, when gold prices were topping out at $1540/oz. Even though gold prices have fallen since then, the commercials have not pared their big net short position. That says they really believe that gold prices have a lot further to fall."
Again, this is just the wrong-way around. The commercial hedgers didn't do anything actively - they simply provided liquidity to speculators, who were actively buying. And it didn't just happen in September, the net positions expanded gradually into this peak. The fact that the commercial net short position has not been pared much since then is admittedly a bit concerning, but it does not say anything like "they believe gold prices have a lot further to fall" ("further" is quite an odd way of putting it actually). They believe nothing one way or the other... as I said, at most 5% of the commercial position consists of directional bets, the rest is market neutral. However, it does mean speculators expect the price to rise. It is also telling us that in the initial correction phase, speculators that were selling sold to other speculators who were waiting to buy the first dip (hence little change in their net positioning). And that is actually the first hint that speculative buying power may be stronger in the aggregate than widely believed.
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