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Dan Norcini's comments

Commitments of Traders reveals some significant changes took place this past week in regards to positioning by various players.

Let’s start with the funds - as you will recall, funds had been slowly increasing their shorts and dumping longs since the recent price top near $430 at the beginning of April. All told, since the Commitments report dated April 6 was released, thru today’s release, there has been a reduction from a net long position of 144,253 to the low reached last week of 27,513 net longs or a staggering transfer of some 116,740 long positions. That action took the price of gold nearly $60/ounce from its recent peak as it well should have with that amount of selling taking place.

By the way, let me pause and interject something here. From time to time I see analysis of Commitments data that translates the number of contracts held into number of ounces held. For example, if funds reduced their long positions by 1000 contracts, the commentary runs that they reduced their holdings by 100,000 ounces. As a trader I can tell you that such statements are meaningless. Traders look at the number of positions held when they are attempting to gain insight into markets. It is simple and sweet and requires no further math to obtain the desired picture detailing market action. Analysts love to muddy the waters with further math. Reminds me of the time when grain contracts were still denoted in numbers of bushels. A single contract of corn controls 5000 bushels. Whenever one wanted to buy some corn they had to give the order as,"Buy 5000 December corn at the market." Everyone got sick of the complications and continued need for calculators and finally the members voted to change the contract specif
ications to read as single contracts. Now, anyone who wants to buy 5000 bushels of corn has to simply say that they want to buy ONE December Corn at the market. Easy and sweet. Call me a prude but I do get perturbed at these guys who continue to pass off commentary on the gold market in millions of ounces instead of contracts. Position reporting limits are defined by the exchanges in contracts held, not millions of ounces, pounds of cattle, or bushels of soybeans. So if any of you whiz bang analysts are reading this, do yourself and your paid subscribers a favor and drop the pedantic scribbling and just give the number of contracts please. We will still be impressed with your analysis. There, enough of that. Now back to the fun.

I mentioned in my last week’s commentary that I felt we would have perhaps one more week of reductions in the fund long category and the commercial short category and that we would cement a bottom after that based on the ratio of fund longs to fund shorts. It appears that call was accurate. With today’s release showing the fund long/fund short ratio at 1.41, the lowest going back all the way to October 2002 when front month gold was trading near $310/ounce, it does seem to indicate that the fund long liquidation in gold ended this week. Unfortunately we will have to wait until next Friday’s release to gain some insight into what transpired this week since Wednesday’s spike upward and Thursday’s surge northward is not included in the Commitments Data. My guess is that we witnessed some fairly dramatic short covering on the part of the commodity funds and the small specs as well who unfortunately for them, added nearly 5,000 short contracts in the last week, all of them below $390 and many of which were no
doubt down closer to the $380 region. Those positions were seriously underwater due to yesterday’s price action. That explains the violence of the price spike over the latter part of this week. Fear is a remarkable market mover and as a long term gold bull, it is nice to see FEAR in the eyes of the other guy after the beating gold has taken over the last 6 weeks.

In regards to the commercial action - they did indeed cover more of their shorts and the long commercial category added more new longs as well. Once again, as was the case last week and the week previous to that, the commercial category was responsible for all of the NET buying that took place thru Tuesday, May 25.

My gut tells me that we have now seen the low point in the number of commercial shorts for this episode in the gold market saga. I fully expect the commercial short category, known"affectionately" as the cartel, a.k.a., the goon squad; a.k.a., COT, to have commenced their price capping activity once again beginning yesterday, as they attempt to fight the upward move in gold and play out their usual delay and harassment strategy. What will now happen based on continued strength in gold is that further fund short covering will take place and the fund long category will begin to re-establish their longs with the cartel fighting gold all the way up. Funds are basically followers of moving averages when all is said and done and as those levels come into play and are breached to the upside, we will see them increase their longs and move further to eliminate their shorts widening the ratio back out to levels that are more within the norm.

All in all a terrific week for gold. It does seem that we have moved from the recent"Sell the Rally" mentality to a"Buy the Dip" mentality and that bodes well for gold in the next few weeks ahead. The rampant bearishness of the past few weeks has been vanquished. We now await the breach of $400 although some backing and filling might be necessary first.
Dan Norcini
dnorcini@earthlink.net