Last week gold dropped like a NASA satellite falling from space. What was the driving force of this drop?
Last week December gold opened the week at $1,820 and closed the week at $1,639.80. The weakness in the market was very clear if you were watching the COT report week to week. Before I cover the COT, look at the daily chart below to see the technicals. We see ADX now at 33 reflecting a strengthening downtrend. You can see how the very strong uptrend that started back in early July started weakening mid-August after gold touched $1,900 for the first time. MACD is showing momentum building in the move down with increasing divergence and Stochastics are deeply oversold. Not concerned about this as ADX is at 33 and rising. You also can see the large drop in Open Interest. So who is responsible for this large drop? Let’s have a look.
Proceed to Page 2 for the latest COT Data...
COT Data
Looking at the weekly chart below you can see that back on Aug. 5 Commercials on the old legacy COT report were 287,634. As of this past Friday, Sept. 23 Commercials came in at 197,628 contracts net-short. That shows liquidation at just over 90,000 contracts. As you know from reading Market Pulse, I prefer the newer Disaggregated COT report. And here is why.
On Aug. 5, Producers (true commercials) had a net-short position of -195,940 contracts. On Sept. 23, Producers were net-short -181,944 contracts. Managed money back on Aug. 5 was net-long 228,824 contracts. This past Friday managed money came in at 151,425 net-long. A much larger drop in longs than producers drop in shorts. So who exactly was liquidating on the other side of managed money? You guessed it, our friends the Swap Dealers. Back on Aug. 5 Swap Dealers were -91,693 contracts net-short. This past Friday, Sept. 23 Swaps came in at -15,684 contracts net-short. This is the lowest we have seen since late 2008.
So you want to know when gold will drop it’s free fall? Keep an eye on the Swap Dealers because when they start adding to their net-shorts again, that is when we will see price rise. And if they continue liquidating, we definitely can see gold test $1,500.00.
|
Commodity |
12-mo low |
12-mo hi |
23-Sep |
16-Sep |
|
Cattle (feed) |
-1,290 |
7,100 |
1,767 |
2,536 |
|
Cattle (live) |
-72,185 |
10,437 |
-11,794 |
1,192 |
|
Hogs |
-35,979 |
21,270 |
-3,480 |
-6,094 |
|
Corn |
-413,915 |
-215,125 |
-254,294 |
-274,034 |
|
Oats |
-7,738 |
-3,230 |
-3,230 |
-3,818 |
|
Soybeans |
-203,260 |
-47,513 |
-133,659 |
-174,262 |
|
Soybean meal |
-84,656 |
-12,672 |
-40,221 |
-68,619 |
|
Soybean oil |
-117,444 |
4,362 |
-31,943 |
-48,737 |
|
Wheat |
-32,577 |
65,226 |
63,898 |
53,760 |
|
Orange juice |
-22,341 |
-11,011 |
-12,615 |
-12,090 |
|
Coffee |
-45,699 |
-6,067 |
-23,968 |
-26,372 |
|
Cocoa |
-41,808 |
7,729 |
115 |
-10,854 |
|
Sugar |
-221,694 |
-104,595 |
-135,962 |
-162,419 |
|
Cotton |
-55,687 |
-26,984 |
-32,919 |
-40,143 |
|
British pound |
-66,435 |
75,542 |
75,542 |
33,329 |
|
Canada dollar |
-115,190 |
-8,624 |
-12,984 |
-8,624 |
|
Euro FX |
-124,855 |
102,941 |
102,941 |
79,017 |
|
Japanese yen |
-64,864 |
76,983 |
-47,174 |
-31,561 |
|
Swiss franc |
-42,387 |
-6,332 |
-6,332 |
-9,529 |
|
US dollar index |
-40,841 |
14,003 |
-40,841 |
-16,610 |
|
Mexican Peso |
-140,414 |
19,346 |
19,346 |
3,259 |
|
Australian dollar |
-110,025 |
-26,704 |
-26,704 |
-42,435 |
|
S&P 500 |
-88,893 |
73,398 |
28,121 |
73,398 |
|
T-note -10 yr |
-74,761 |
229,611 |
142,202 |
89,708 |
|
T-bond -30 yr |
-29,204 |
88,803 |
1,220 |
15,417 |
|
Eurodollar |
-1,179,414 |
458,230 |
119,579 |
458,230 |
|
Crude oil |
-319,669 |
-72,356 |
-166,400 |
-169,016 |
|
Heating oil |
-66,097 |
-7,401 |
-26,430 |
-21,389 |
|
RBOB Gasoline |
-85,987 |
-34,452 |
-46,958 |
-53,653 |
|
Natural gas |
108,160 |
228,910 |
161,091 |
149,556 |
|
Copper |
-36,201 |
9,677 |
9,677 |
4,056 |
|
Gold |
-302,740 |
-193,197 |
-197,628 |
-210,468 |
|
Platinum |
-35,249 |
-18,670 |
-30,166 |
-33,462 |
|
Silver |
-65,413 |
-29,166 |
-40,708 |
-45,387 |
Commercial Net Tracker instructions: This form tracks the Commitment of Traders (COT) data for the commodity futures market. This form "looks" at the most recent five weeks of COT data and provides visual indications of the data. A) If the current value is at a 12-month low, the cell will display a red/burgundy background. B) If the current value is at a 12-month high, the cell will display a green background. C) If the current value went from net negative to net positive, the cell will display a blue background (indicating a bullish condition). D) If the current value is both a 12-month high and also went from a net negative to a net positive, the background will be green. You should view the data with green backgrounds to determine if they also went from net negative to net positive.
If you need help understanding how to understand how to use the COT report to your benefit, please email me at Gary@crbtrader.com and put COT report in the subject line. Please include your name and telephone number in the email.
Proceed to Page 3 for this week's detailed fundementals charts...
Fundamentals
Gold prices corrected downward to a four-week low from their recent all-time nearest-futures (October) high of $1,920.80 an ounce. Bearish factors include:
- The surge in the U.S. Dollar Index to a 7-1/4 month high.
- Long liquidation pressures as commodity markets tumbled.
Supporting record high gold prices are:
- Strong demand for gold as an alternative asset after the recent cuts in the credit ratings of the United States, Italy and Japan.
- Safe-haven demand from the European debt crisis.
- The Fed’s pledge to keep interest rates “exceptionally low” through at least 2013, which lifts inflation expectations and boosts gold demand as an inflation hedge.
- Rising global price pressures with U.S. August CPI at a 2-3/4 year high of +3.8% y/y and China July CPI at a 3-year high of +6.5% y/y.
Fundamental outlook — Bull market correction — The long-term trend for gold remains bullish, but the short-term trend is bearish on long liquidation pressure and the dollar’s rally. Supportive factors for gold continue to include safe-haven from Europe’s debt crisis, an alternative to flagging stock prices, and extraordinarily easy G7 monetary policies.
Have a prosperous trading week.
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