Dear Friends,

This past week’s Commitment of Traders report shows what pretty much can be expected when it comes to gold although with one minor exception.

The Producers/Merchants/Processors/Users category continues to increase their net short position to a record level while the managed money and the other large reportables, along with the general public, continue to pile onto the long side. None of these categories has exceeded the peak levels of the past.

The exception noted above is the Swap Dealers category, which, in a continuance of their actions the previous week before this, went the other way of the Producer/User class and actually decreased their net short exposure. This bears watching although it is too early to make any definitive analysis yet but they generally march in lock step with the big Producer/users category when it comes to gold as a quick examination of the chart reveals. This divergence might be signaling and end to that pattern. If it does, there are a substantial number of these short positions among the swap dealers that are vulnerable to further covering if the longs push hard and refuse to run on any setbacks in price.

In the past, both the Producer/user category and the Swap Dealers have relied on speculative long liquidation to provide the selling necessary for them to cover their shorts and capture paper profits. We have long here at the site stated that all that was necessary for the longs to force a “Commercial Signal Failure” was to simply stand their ground and refuse to run and buy every dip in price and especially to stand for physical delivery of the metal. That would basically leave the trapped shorts with no one to buy from (no sellers) when they were attempting to buy back their massive short position and would result in a huge spike in price.

It could be that the action in the gold market the past week ( I am speaking mainly of the physical gold market) where demand, particularly out of Europe, is causing dips in price to be rapidly bought. This is thwarting the shorts’ attempt to induce a significant bout of long side liquidation that would enable these shorts to get out of their positions at much lower prices. That is how they have played the paper gold market for the last decade.

Again, it is too early to say but the potential is definitely there as long as the speculative long side does not surrender their advantage.

I have witnessed more than a few “Commercial Signal Failures” over my trading career and let me assure you that they are spectacular to behold. The only drawback to them is that when they end, generally prices collapse rather swiftly after the parabolic spike to the heavens occurs.

It will not occur with gold ( a collapse in price ) however mainly because unlike Minneapolis Wheat or Live Cattle, you cannot rapidly increase the supply of gold to meet the increase in demand. Generally when the market sees prices spike to extreme levels, substitution occurs. In the case of cattle, consumers switch to pork or to chicken. In the case of wheat, hard red might be substituted for soft winter, or wheat can perhaps be secured from another country, etc. But what is the substitute for gold when the monetary system appears to be convulsing? There is none; neither can the supply be increased in a short matter of time. Sure there are always supplies of scrap available at higher prices but we have never seen an occurrence where so many paper currencies are simultaneously undergoing a crisis of confidence. Do you really think that when the citizens of a country are watching their respective currencies headed down the toilet that the first thing they are going to do is to rush out and sell momma’s wedding ring so that they can get more slips of paper? On the contrary, gold is unique in the sense that the price could rise to levels once unthought of and yet there still not be enough willing sellers to meet the demand.

Either way, whether the Swap Dealers’ reversal is a two-week only aberration or the start of a trend, the stress in the current global monetary system, is not going to go away anytime soon. IT would seem that the only solution to the problem that the Western monetary authorities are capable of coming up with, is their hopeless addiction to more and more Quantitative Easing – more new debt to stave off the problems associated with the old debt. Just keep buying time in the hope that somehow, someway, the market will cooperate with their plans and eventually all of this will take care of itself, if only given enough time. Time however, is not a luxury that we can afford anymore as they are reaching an end to the limits of the debt based system.

Click chart to enlarge in PDF format

^[1]