As is the case with Jim, my email inbox runneth over these days. Time constraints prevent me from responding to all of them (some require no response anyway… “You are the hell spawn of Satan”).
Let me be brief therefore.
The only traders who consistently make big money ( I am not talking about the penny and nickel guys who scalp markets for a living) are the ones who understand the fundamentals of the market that they trade. The reason – they are the only ones who can relatively safely judge where “value” lies and can tell when markets are cheap or expensive. That being said – today’s markets have changed dramatically from those that I cut my teeth on more than 2 decades ago now. They have become almost totally dominated by technicians. Any trader looking to profit therefore must respect the technicals in a market. Ignore them at your own peril, i.e. unless you have extremely deep pockets and are in a position of being able to sit on substantial drawdowns in your trading account without losing the least bit of sleep. I know of very few guys that are in this latter category.
The guys who manage funds today have little to nothing in common with the guys who ran the funds when I got into this business. They were fewer then but their brokers stood in the pit and everyone knew who they were and when they were buying or selling. Even at that, they were very good at camouflaging what they were doing. Today they hide behind a computer and trade the screen. Very few of them have what I would consider a working knowledge of the fundamentals behind the markets they ply their craft in. They do not finesse trades but dump entire positions in huge blocks or enter markets in huge blocks. Gone are the days when the fund operators scaled in and scaled out in such a fashion that they were able to hide to a certain extent what they were up to. Today, they really do not care who knows what they are doing because they know that once the computer enters their orders, nearly all the rest of the computers of the fund world will do the same thing. The big “skill” set in trading today is who can get in or get out FIRST. Do it in large enough size, and you are guaranteed that the rest of the crowd will follow your lead without asking questions.
That brings me to the Commitment of Traders reports – please stop using this report to trade in and out of markets or attempt to pick market top or bottoms. It was never meant for that purpose alone. It can only safely be used in conjunction with other technical indicators because of the nature of today’s markets. When I first began using this data (many years ago), it was easier to gauge an overbought or overextended market because we did not have the huge sloshing ocean of liquidity crashing into and out of our markets back then. That has all changed. These markets of today can run far higher or drop much lower than many expect in spite of their regular prognostications on the COT reports. It may sound trite, but a market will stop moving lower when it is sold out and will stop moving higher when it is bought out. You cannot tell when this will occur based on merely looking at the COT numbers. If it were that easy, the planet would be full of traders running around looking to buy islands in the South Pacific.
I have written a fair number of comments on these COT reports over the last 7 years. Review some of those if you get a chance. But note also that I use these reports only as informative insights into the internals of a market; never as a trading signal to get long or get short. They can alert you to the POSSIBILITY of a market bottom or market top, but are only VERIFIED when a technical signal confirms it. There are too many egos out there which need stroking apparently who are constantly claiming that they can nail tops and bottoms based on these reports. That is just bunk.
Lastly, I want to reemphasize what I noted in my chart comments yesterday; markets need the sponsorship of the speculative community in order to trend. No market on the planet can sustain a viable rally without the active participation of speculators on the long side. As long as a market is hemorrhaging open interest as it declines, the speculators are deserting it for the time being. Jumping in on the long side merely because that open interest is decreasing is a sure fire way to lose your rear end. How do you know that the funds are through dumping their longs?
Neither Jim or I nor Monty have ever stated that a trader or investor should blindly buy or take a long position in gold futures merely because price is declining or open interest is decreasing. What we have said is that you make your buy ins at technically significant levels and then employ good money management techniques or that you eliminate margin of any kind so that you can hold the positions in solid stocks your convictions have told you to take without being forced to cough them up due to constraints in your trading or investing account. No one should ever be on a first name basis with the margin clerk or you are an accident waiting to happen. That is what it means to “buy weakness and sell strength in gold”.
Those who purchase the actual metal in bullion form can simply take the gift provided to them when prices get nailed and add to their holdings. After all, you have no margin clerk involved here but are diversifying your wealth and buying a form of insurance against what the politicians and monetary masters have done to our country and our currency. What does it matter in the long run if you pay $20/ounce higher for gold considering where it is going to eventually trade? After all, you can always buy more coins if prices move lower and get more bang for your buck.
Until the morons who run the funds and have all the funny money at their disposal wise up and start standing for delivery at the Comex, they will get their asses handed to them courtesy of the bullion banks. I cannot help it that these guys are too damn lazy to take the necessary steps to acquire the physical metal, warehouse and insure it. After all, some of these same funds have been known to hoard copper and warehouse the stuff in order to squeeze the shorts. Remember when some of these same players were renting up all the available oil tanker space to store crude oil offshore and keep it off the market back when crude was making its run towards $150. Why they refuse to do the same with gold is really difficult to grasp unless of course they are fearful of government regulators sniffing around their business. Maybe the word has gotten out that this will be the case with any hedge fund manager who dares to try to force the shorts to delivery the gold. One thing along this line – China or Russia nor mid-Eastern interests are under no such constraints and could break the back of the bullion banks tomorrow if they chose to do so. That they have not signifies that they are not through acquiring cheap gold yet. Those folks, along with India, will be the ones who put the floor in for gold and cause the technical indicators to bottom and then turn up. The funds will then buy high and buy even higher and chase prices up once again. It has happened over and over and over again for nearly 10 years now. It will continue to occur until at such time the gold price levels off at a permanent higher plateau and remains there.