We’ll take a big picture look at the gold market this week and the interplay between the market’s players and price before finishing with an option play that could capitalize on multiple factors leading to increased volatility in the December gold futures contract. Finally, this piece will be short on words and long on charts as we distill the action from monthly down to daily resolution.

Beginning with the monthly chart and the broadest of brushstrokes, we want to note the downward sloping trendline starting at the high made in 2011, near $2,000 per ounce. That trendline stands at $1,360 for the month of October and drops to $1,340 for the month of November. Also, make a note of the total position sizes in the bottom pane. This reflects the sum of long and short positions of speculative and commercial trader categories.

Total position serves as a proxy for capacity, especially on the commercial side as it reflects the actions of both the miner and the processing industries. Thus, we know that the total capacity for the gold industries’ hedging activities in the futures markets is around 673,000 contracts.

Meanwhile, the large speculators’ total position can theoretically grow to infinite proportions. Occasionally, like in 2010, the speculative herd mentality overruns the value-based actions of the commercial traders. In times of, “mania,” it’s much harder to create new gold mines or spur end line demand to increase total industrial capacity than it is to attract another speculator to the market. This is why we combine net and total position data into the COT ratio filter applied to our mechanical Commitments of Traders futures programs.