Is the Silver Price Trying to Break Out?

A "quiet breakout" for the Silver Price...?

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Gold ETFs See Inflow as Prices Fall

Gold ETFs see gains – but net outflows hit Silver ETFs...

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Hold Onto Your Butts

Gold Futures trading just saw the most dramatic drop in open interest ever...

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Hold Onto Your Butts

Gold Futures trading just saw the most dramatic drop in open interest ever...

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Silver “Manipulation” NOT Driving Prices

Short-term...temporarily even...an effort to suppress prices could succeed. But forever?

ISN'T THAT interesting? asks Gene Arensberg in his GotGoldReport.

Silver Prices have challenged new 30-year nominal highs, yet the largest commercial traders in silver futures are apparently not willing to take on much higher net short positioning.

Why aren't the largest futures hedgers and short sellers willing to really pile on the short side of silver futures? What signals do they see...and what is keeping them from selling the heck out of this $5.00-plus rally since the August consolidation breakout?

Perhaps not coincidentally, this week saw Bart Chilton of the Commodity Futures Trading Commission (CFTC) issue a statement regarding the silver market. Commissioner Chilton said:

"I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted."

The CFTC regulator's full statement is available here. And has Commissioner Chilton opened a window for us? Could it be that silver is not being hammered in the futures markets on the short side because traders that have used their ability to game the system in the past are now under a CFTC microscope?

In which case, the futures game may have changed. But...

1. Is this a case of a regulator stepping in to alter the trading habits of futures market makers operating on the short side of the market, thus causing their opponents to take advantage of that possibly temporary influence to press their own long positioning?
2. Is this merely a case of a US regulator taking advantage of a historic rise in the silver market to grandstand – posturing to take credit for "action" that is responsible for the now apparent absence of concerted heavy short selling of silver futures by an elite few traders which have historically had access to unfair size exemptions as "bona fide hedgers"?
3. Or is silver rising purely on the basis on stepped up demand from outside investors meeting static and quite limited supply in a smallish, highly volatile market dominated by a small number of firms in the physical markets in London?

In truth we do not know with certainty which (if any) of the scenarios above are in play, but we do know that silver has not been trading anything like it "normally" does since at least the end of September.

Just below is our own chart, which we shared with subscribers in our COT Flash Report on Sunday, October 24. It shows the relative net short positioning for silver for the traders the CFTC classes as "commercial" in the legacy commitments of traders (COT) reports.

Notice that the relative net short positioning (the commercial net short positioning compared to the total open interest) actually fell as silver has been rising sharply in price.

In the three reporting weeks since September 28, the traders the CFTC classes as commercial collectively reduced their net short positioning from 65,413 to some 58,150 contracts net short silver.

In other words, the industry-side of the market went from being net short 327 million ounces to net short of 290.8 million ounces – a reduction in net short positioning of 11%.

Why is that not "normal" comparatively speaking? Because it occurred as the price of silver advanced from $21.74 to as high as $24.90, then settled Tuesday, October 19 at $23.36. So all told, over the past seven trading weeks, the relative net short positioning of the largest commercial hedgers and short sellers has actually declined from 45.4% of all contracts open to 38.5%.

The unusual part is that the commercial hedgers and short sellers reduced their net short positioning on a material increase in the price of silver. In the past that would be considered strongly unusual. Hedgers in retreat? Hedgers NOT selling into a 30-year price high? A historic change is underway in the futures markets, friends. We are witness to it right now.

But the idea that silver is now rising merely because of increased scrutiny by regulators on the short sellers is neither comforting, nor appealing, but we sincerely doubt that is solely the reason that silver has found a bid of late.

We are of the firm opinion that silver is not rising merely because of regulator's newly found desire to promote "fair" futures markets. Indeed we believe that if there is any influence from the CFTC investigation into the silver futures markets, or increased scrutiny, or whatever, that influence is at best minimal, and more likely coincident to what is happening in the much larger and much less regulated physical markets.

To be sure, we here at GotGoldReport lament the unfair advantage in the futures markets enjoyed by traders to whom the CFTC grants "bona fide hedger" status. This allows a few elite traders access to larger positioning than their long-side opponents. Nor does it take ownership of a tin-foil hat to have noticed multiple bone-crunching sell raids by those "usual suspects" in the past. All long-time traders are certainly aware of them. All long-timers have learned to survive them using one or another money management method (stops, options, nimble trading, etc.).

However, as we have said so many times in the past, one can manipulate the price of something temporarily for short periods of time – if given enough firepower, and given the "right" execution of the trading, But nothing and no one can manipulate the global market price of something – not bullion banks, nor even central banks can argue with the supply/demand/liquidity equilibrium of a global market for any length of time and certainly not indefinitely.

Our view: We believe there is a tectonic shift underway for silver. A shift of historic and generational proportions that is only just now starting to surface in a material way. We believe that global public demand for precious silver is once again returning the metal to its historic role as money – alongside its rarer cousin gold. We believe that the recent absence of concerted short selling is more likely a logical market reaction by hedgers and short sellers to the reality of much higher demand and the realization that existing and available supplies may not be sufficient to satisfy that burgeoning demand at current pricing.

If our view is correct, then it really doesn't matter if the CFTC or any other regulator is looking harder at the positioning of futures traders. If our view is correct, then the market price of silver will find its own supply/demand/liquidity equilibrium, whether or not hedgers and short sellers sell a few hundred million more ounces of the stuff in paper contracts in New York.

Would it be better if the futures markets were played on a more level playing field? One where both sides of the battlefield had the exact same rules and size limits? Where one side of the action didn't have access to many times the number of contracts – access to more "ammunition" than the other side does? Sure, certainly it would. No question about it. It might cut down on the short-term blood lettings from time to time. Maybe. But, will that make any difference in the long-term Silver Price...?

No, not really. Futures contracts answer to real demand by the population for silver, not the opposite.

We believe the story has been considerably different for gold, which is held by governments as a reserve-asset and thus has been subject to an unseen hand of "currency management" from time to time in the past, but that is another story for another time. Governments no longer hold silver – and they have all but stopped dishoarding the silver they did have. Governments have stopped supplying the silver that artificially kept the price unreasonably low for decades – and the markets are discovering that now.

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Gold Futures Trading: Only One Signal

The outstanding total of Gold Futures contracts is but one signal. Albeit, a cautious one...

IT TOOK a little longer than we thought it might, but gold finally balked as the third quarter got underway, writes Gene Arensberg from Atlanta, Georgia in his Got Gold Report.

There were actually a number of harsh reversals happening simultaneously, however. So gold investors shouldn't feel alone.

The US Dollar index repelled lower as the Euro index popped and popped big. The TED spread, which is a measure of bank confidence, dropped for a second week, falling below 38 basis points, down more than 10 points or more than 20% inside two weeks, and thus suggesting that Eurozone systemic banking fears are easing.

The Big Sellers of gold and silver seem to have prevailed, finally, perhaps sending us into a summer correction. So far the sell-down hasn't yet made it into our expected zones of support and there is no guarantee they will. But, until this pullback got underway, we feared a runaway breakout might take off without our short-term trades on. Now, we are hopeful this pullback will take both gold and silver into our "wheelhouse", which is where we are more comfortable attempting a reentry with our short-term trading cash.

Longer term, we still see nothing which undermines the secular bull market thesis for gold metal. Over the coming weeks, however, if the Big Sellers (or fearful late longs now running for the exits) drive precious metals not all that much lower from last Friday's close, and down into our expected zones of potential support, we are very likely to rejoin the short-term battle, too. That's our Simple Simon game plan for summer trading. And if we do get the chance for re-entry just ahead, it will only ever be with appropriate trading stops in place for peace of mind and protection.

Just after our last report for Got Gold readers, the Gold Price went on to print a marginally higher high at $1265 the ounce. But as it did so, the open interest on New York's Comex Gold Futures exchange exploded by more than 33,000 contracts – meaning that a tremendous amount of bull firepower was expended on just a few measly Dollars of gold gain.

Another way to say that is that as gold advanced to a little higher high it encountered very stiff opposition – at least in the New York futures pit. And with a record (or near-record) Comex open interest, gold then consolidated for most of the next two-week period in a range bounded roughly and nervously by the $1220s and the $1250s. Then, on Thursday, July 1st – the start of a new quarter and of the second half of the year – it was as if switch was thrown.

Lots of markets suddenly and violently corrected. Thursday saw gold thumped for more than $40, silver thwacked for more than 80 cents, the US buck was gutted for 150 basis points, the Euro index popped more than 270 ticks(!)...and on down the screen it was a day of remarkable and frankly unsettling harsh corrections to the recent trends.

Violence and chaos, yes. Stability and certainty? No.

There are no guarantees in this business, only indications. Nothing at all says that a record-sized Comex open interest of over 600,000 contracts is a "speed limit" or "stop sign", much less a guarantee that gold is about to correct. Nothing says that the open interest couldn't go much higher. It probably will someday – and maybe soon.

However, record high open interest is not among the bullish signals we prefer to see. Indeed, extremely high open interest often (but not always) occurs near gold-market pullbacks and corrections with some very unusual and spectacular exceptions when the Big Sellers of gold were overrun by overwhelming demand – twice in 2007 for example.

High open interest is but one signal though. There are others equally important to our impressions of the market. As we said two weeks ago, gold could suffer a fast $100 pullback from this level and not even threaten its very bullish uptrend technically. With confidence weakening in all fiat currencies – plus downright disdain for the current cast and crew in Washington – we find it easy to imagine that the Gold Price will be well-supported on most any significant pullback.

Therefore we believe that significant to strong dips for gold may be bought with confidence, but we do not think significant advances should be sold. We cannot conceive of an acceptable reason to short gold metal, except to hedge.

One of our trading brethren, who because of his affiliation with a big firm has to remain nameless, argues that we have our support zone "way too high". He sees gold trading to well below the 200-day moving average by end-August, and "probably to the $1040s again."

His reasoning is that most everyone who is apt to be involved with gold has already invested and therefore it is now time for what he calls a "major-major correction". Not just a garden variety pullback.

We argue that in May gold bounced smartly at the very top of the zone we thought might be former resistance morphing into current support, and that we find it difficult (but not impossible) to imagine gold being driven down 18% from its June 21st highs. Not with so high a short interest in place, so much demand for physical metal, and so much uncertainty out there.

If my friend turns out to be right, and if gold does plough on down a total of 18% or more, then the Got Gold's short-term trading position will have likely entered and been stopped out at least once! But we plan to continue to tentatively mark the high $1150s as potential support for gold with resistance now marked at $1265 – until proven otherwise on both counts.

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Gold Futures: Wronger & Righter

Something potentially explosive is unfolding in the Gold Futures' data...

IF, LIKE US, you blinked last Monday (June 7), then you missed the short-term trading opportunity of the week for silver, writes Gene Arensberg in his Got Gold Report from Houston, Texas.

We personally missed it by just a few ticks, and then decided the Gods were giving us a sign that this was not yet our entry point in the $17.50s. (Silver turned northward from around $17.20, depending on which screen was in view, near-futures or the cash market.)

Our notes that day remarked on the sudden surge of buying pressure with three question marks. Silver blasted higher nearly 80-cents on quite high volume only to turn more or less sideways for the rest of the week.

Other than physical "take-down" rumors, which are questionable – although not at all impossible – we cannot account for the sudden surge higher for both gold and silver, but especially silver that trading day. Perhaps more will come to light shortly.

On Friday, June 11, a second surge attempt was turned on its ear, as silver first broke above the $18.40s resistance, touching $18.53 in early New York trade before it encountered stiff and determined selling opposition, driving it swiftly back down to around $18.10 just before 10:00 ET.

From there until the New York close it appeared to us that the Big Sellers probably used the rest of the day to cover the firepower they expended in the sell-down, as silver managed to crawl back to near even, closing the day at $18.23 on the cash market – red by a penny for the day and up 80-cents on the week.

Such is life for a trader, especially in the somewhat less liquid early summer. Sometimes we have the trade right but get too cute with the entry order. It happens. There will be lots of other opportunities. That's the great thing about commodity trading, there are always opportunities – always.

So, friends, we remain on the sidelines with our short-term gold-silver ammunition, but, as always, we remain thankful we hold physical metal in our longer-term arsenal.

As a second reminder of why we follow the COT report, or rather why we think our focus on the changes in positioning of the Big Sellers (BS) of gold and silver futures is important, the reason we track them closely is because the very large, well-funded and presumably well-informed professional traders' positioning has the very real potential to move the gold and silver markets on a short-term basis.

Think not? Just take a look at the Friday trading of this week for silver if you doubt that statement!

With that intro, why don't we see what the BS of precious metals have been up to, starting with gold. The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET on Friday, June 11, 2010. The report is for the close of trading as of Tuesday, June 8. Remember that GotGoldReport.com is focused on the changes in positioning of the largest Gold Futures traders in that report – the traders the CFTC classes as "commercial," including the bullion banks, large dealers and Swap Dealers combined. We refer to those commercial traders as "LCs" for "Large Commercials".

And as gold added $14.37 or 1.2% to $1,239.99 per ounce, Comex commercial traders increased their combined collective net short positioning (LCNS) by 5,954 contracts or 2.2% from 267,623 to 273,577 contracts net short. The open interest overall increased by 10,842 contracts from 553,950 to 564,792 contracts open.

Thus the open interest is still quite high, some 29,161 contracts less than the highest open interest in our records, which occurred January 15, 2008 at 593,953 contracts open. However, last week's open interest is not quite as high as two weeks ago, when it was less than 3,000 contracts from the record.

That suggests at least some bull-side firepower has retreated, but it also suggests, with gold having touched a new all time high last week ($1,252.10) that there could be considerable ammunition yet to be thrown into the gold market. Of course there is nothing that prevents the open interest from going to a new record if additional demand is there at this price.

Having said that, extremely high open interest in the futures markets are a double edged sword. Extremely high open interest underscores that the demand is there, but it also can mean that the "normal" amount of "horsepower" which can be deployed on the long side in that market has already been expended.

As we have said before, and speaking on a short-term basis, at extremely high open interest levels, such as right now in Gold Futures, if one is to be bullish, then it has to be under the assumption that extraordinarily strong demand is coming on the heels of all the demand which has already been deployed.

There are such times, of course, and with all the uncertainty over sovereign debt, both European and US, and with a growing mistrust of both fiat currencies and the political "leadership" currently in charge – mistrust of the people who are supposed to be stewards of the public treasury – this could very well be one of "such times."

However, as traders we look to history for guidance. Extremely high open interest levels have historically been a time for caution and for tighter stops for the short-term traders among us. It is not about what we think gold or silver "ought" to be doing, it is more about what the largest traders in the futures pits think the metals ought to be doing, because, after all, it is they who drive the market bus – we are merely passengers. It is best not to ever forget that.

Now, with the Producer/Merchant commercials very close to an all time high net short position, the one thing we can count on is that they will almost certainly take advantage of most any selling opportunity – another thing we should not forget.

Remember that the blue line in the graph above is expressed as a negative number, so when the commercial net short position rises, the blue line falls and vice versa.

As of Tuesday the Producer/Merchant commercials – the category in which we believe the bullion banks mostly reside – held net short gold positions of 216,371 contracts. That is just a hair below their record 219,097 contract net short position set May 18 of this year with gold in the $1,220s.

Now would be a good time to note an interesting divergence between the Producer/Merchant commercials and the "other commercials", the traders the CFTC classes as Swap Dealers.

Notice, please, that as the Producer/Merchant commercial traders have near record net short positioning on gold, meaning they have sold this market nearly as much as they ever have, that the Swap Dealer commercials have been gradually moving in the opposite direction. The Swap Dealer commercials are nowhere near a record net short position.

Indeed, the Swap Dealers reported net short positions of 57,206 contracts as of Tuesday, which is about half their record net short position of 117,366 contracts set December 1, 2009 with gold then in the $1,190s. We think it interesting and instructive that just following that very high net short stand by the Swap Dealers gold corrected materially. Just below is the Swap Dealer no-spread net position graph (Graph 3).

Notice that as gold has continued on to new highs, the Swap Dealers have not been keen to take the short side – yet!

We point out the divergence as a matter of interest, but also as a warning, both to long and short traders. We sense that the Swap Dealers are now in a position of strength should they decide that gold has come too far too fast. Should they throw their considerable weight to the sell side, as they have in the past (not always successfully), it could cause a run or even a forced run to the sidelines from complacent longs. Thus, our call for tight stops and no-nonsense attitudes toward this current market for the trading portion of our gold-silver capital/

The argument, of course, is that there might be a reason, a very good reason why the Producer/Merchant commercials have not thus far been joined by the Swap Dealers on the heavy short side of gold. We cannot find a time in the entire four year data set of disaggregated COT data when the Swap Dealer's net short positioning was so divergent from that of the Producer/Merchants. That in itself is enormously interesting, if perhaps not necessarily predictive.

Since last Tuesday, when gold printed a new USD all time high of $1252 on the cash market, gold has more or less consolidated between roughly $1215 and $1240. We noted aggressive selling in New York near $1,240 Wednesday and at progressively lower marks Thursday and somewhat lower on Friday. The buy-side seemed strongest near $1216 on Friday, but was probably assisted by late short covering.

Clearly the Producer/Merchant commercials are positioned as if they are confident in lower Gold Prices, being near record net short gold as of Tuesday. Equally clearly, they are not now joined by the commercials classed as Swap Dealers, who seem to be reducing their net short exposure opportunistically. On balance we cannot point to excessive "hedging" by all commercials combined in this report. Nor can we point to excessive short covering, however we once again call attention to the interesting divergence between the Producer/Merchants and the Swap Dealers. One of them is getting "wronger" and one of them is getting "righter". Our instinct under the circumstances is to be cautious just now, leaning slightly toward the bullish side. (We use the term "hedging" loosely because the CFTC does.)

When compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO – the most important graph we track) barely changed this extraordinary week from 48.3% to 48.4% of all COMEX contracts open.

Now hear this: With gold over $1200 the ounce, and having just cut a marginally higher new all-time high in Dollars, we have – instead of an LCNS:TO near 60%...instead of an LCNS:TO which screams to us that the largest gold sellers are supremely confident in lower Gold Prices just ahead – a relative commercial net short positioning more than 13 percentage points below the all-time high LCNS:TO of 61.6% set September 22, 2009 with gold then around $1010. And this coming with the open interest not all that far from an all time high.

We can point to the Swap Dealer commercials directly for the cause of this apparent divergence from what we have normally come to expect from the Big Sellers (BS) of gold. Something potentially explosive, or perhaps historic is unfolding right before our eyes in this COT data. Our antennae are raised, and our defenses are also up, with a sharp eye on what the "swing vote" in commercial futures, the commercials classed as Swap Dealers, do next.

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Gold Outperforming Silver

Gold-Silver Ratio rises to 70 as gold outperforms silver amid the "fiat currency" crisis...

WE HAULED OUT the "caution" flags in our Got Gold Report four weeks ago, writes Gene Arensberg in Houston, Texas, because of the ominous signals then showing in the data, charts and ratios we follow closely here at GotGoldReport.com.

The subtitle of that subscriber report said, "Rig for heavy weather and hope we don't get it!" We then wondered whether "we [were] about to enter the eye of the storm or the eye wall itself..."

Since then the world has given us all a heavy dose of anxiety, precious little to be bullish about, and we all have seen even less from our political "leadership" which might cause even the hint of increased confidence in them.

About the only thing we have seen enough to be bullish about is Gold – because it is now so darn easy to be bearish of most all fiat currencies longer term and even more bearish of the poorly chosen elitist, vote-pandering, freedom-stealing, Big Government-loving narcissist cast and crew currently in charge in Washington.

As bad as that seems, we sense it is patently good for Gold Investment longer term, but everyone already knows what is in the news. Let's look at what some of the indicators are telling us.

Looking at last week's price action – and with the HUI index of gold and silver mining stocks running red – we have to note the extremely high Gold/Silver Ratio, now standing near 70. While gold turned in both a higher high and high low last week, silver could not answer. Short-term the table sends us a confused and more mixed up message than we like, but long-time readers know we view a GSR over 70 as an opportunity to Buy Silver (More about that below...)

Longer term, we still see nothing which undermines the secular bull market thesis for gold metal. With the short-term trading portion of our money, we plan to stay opportunistic for gold, waiting like patient vultures for a juicy opportunity to redeploy our short-term trading ammo, glad that we hold long-term physical metal in our arsenal.

We will have more about our positioning in the linked charts below and likely on the web log later this coming week. As we like to say, we are like a bird dog on point waiting for a re-entry sign.

Gold bounced at the very top of the zone we thought might be former resistance morphing into current support, but it has so far not managed to get into our "wheelhouse" (the purple box target). Demand has just been too strong, even in US Dollar terms. As strong as it has been in greenbacks, it has been even stronger in terms of Euros.

We will continue to tentatively mark the high $1150s as potential support for gold – with resistance now near $1250 – until proven otherwise on both counts.

Silver is a little different as far as we are concerned. Commitment of Traders data, released by US regulator the CFTC on Friday, does not suggest that the Big Sellers (BS) have been aggressive on the short side of the second most popular precious metal. Despite some modest negative money flow from the largest silver ETF, we sense that demand for physical silver in bar form has ramped up considerably over the past two weeks. We are privy to rumblings in the rumor mill of plans by "major players" to accumulate substantial amounts of the white metal – most likely through the Comex in New York, but probably also in the London physical camp.

This is not the first time such rumors have circulated. We heard similar stories in April and again in May. It is not the silver accumulation story that we are interested in so much as its longevity. Rumors that don't die are usually not just rumors.

As for Gold Futures, while gold added $21.59 or 1.8% per ounce to $1,225.62 as of last Tuesday's reporting day, Comex commercial traders – meaning "gold industry" players who are typically bearish on prices, since they are in the business of selling it – actually reduced their combined collective net short positioning (LCNS) by a small 756 contracts or 0.3% from 268,379 to a still high 267,623 contracts net short.

The overall open interest in US Gold Futures meantime plunged by 37,410 contracts from a very high, near record 591,360 to 553,950 contracts open.

So, as the number of open contracts was dropping largely and quickly, the LC's were not really the ones doing the dropping, so to speak. Nevertheless, when we see a decrease in the LCNS on a substantial increase for the price of the metal, we don't normally view that as a bearish signal. Had we seen an increase in the LCNS with the increase in the price of gold, it would have "seemed" normal. What we got instead was the opposite – a little.

Here's the nominal LCNS graph for Gold Futures:

Since last Tuesday, gold met with dogged resistance in the upper $1220s, but a very determined sell-down attempt on Friday, June 4 during the post non-farm payroll disappointment rush to liquidity – one which drove gold below $1200 briefly – was met with equally determined bidding.

Gold actually closed at $1,219.83, well above the Friday open near $1207 an ounce, despite briefly trading to $1,197.15 thanks to the short covering.

Remember that the LC's net short positioning barely changed even though the open interest plunged. When compared to all contracts open, the relative commercial net short positioning (LCNS:TO - the most important graph we track) therefore rose sharply from 45.4% to 48.3% of all Comex Gold Futures contracts open.

Here's the LCNS:TO graph for gold:

Since last week's report gold is $21 higher, the LCNS is a little lower, but the open interest dropped considerably.

As of Thursday the open interest had fallen a bit more to around 548,000 contracts, meaning there is more bull-side "horsepower" potentially than there was a week ago. The flip side of that Gold Coin is that it also means some of the buy-side has pulled in their bets.

We don't like being on the sidelines with our short-term ammo on gold, but since we believe gold is in a long-term secular bull market and more likely to surprise to the upside than the opposite, we have but three possible positions. Long, leveraged long or flat – never short in a bull market (except to hedge). Thus, our current stance at the GotGoldReport of waiting patiently for opportunity with gold for our short-term ammunition.

Ready to buy gold today...?

Gold Futures: Swap Dealers vs. Bullion Banks

Swap dealers in Gold Futures just covered their shorts, unlike the big bullion banks...

SOME OF THE most important data we gather and analyze each week is buried deep inside tedious lists of numbers, writes Gene Arensberg in his Got Gold Report.

These data, compiled by seldom-thanked dedicated public servants and distributed via the web to anyone with a computer, can be an astonishing wealth of information for traders and analysts – if they know what to look for. Taking that data, following it and producing meaningful graphs is part of what we do here at Got Gold Report.

Once in a while something extraordinary jumps out at us and this is one of those times. The following may be tedious to follow for some, but we hope we have made the fascinating and potentially exciting divergence we just discovered come to life for you in the graphs as it has for us in the data. Hopefully it turns tedious into interesting.

In the traditional Commitments of Traders Reports (COT) issued each week by the Commodities Futures Trading Commission (CFTC), swap dealers are included in the "commercial" category. They are combined with the bullion banks and other large dealers. The commercial traders are primarily on the sell side of the gold market. In the newer, "disaggregated" COT reports the CFTC segregates swap dealers into a separate class.

Interestingly, in the most recent disaggregated COT reports, the largest commercial hedgers and short sellers, the much maligned bullion banks and largest dealers, certainly did take on a quite a large amount of new net short positioning for gold futures (read paper gold selling or what the CFTC defines as "hedging") as shown in the graph just below.

Remember these are just one class of the former category known collectively as "commercial". But the Producer/Merchant/Processor/Users are considered the biggest dogs in the Comex Gold Future and silver "pound" and we believe they operate under the largest of the exemptions to position size and accountability limits.

The exemptions to trading size limits are currently granted by the futures exchanges under rules promulgated by the US regulators, including the CFTC.

To put numbers with the graph above, in the May 4 COT report (one reporting week ago), the Producer/Merchant category showed a net short position of 187,619 contracts. In this most recent May 11 report, they reported a net short position of 216,753 contracts, an increase of 29,134 contracts.

Contrast that with the positioning of the "other commercials," the Swap Dealer category, which reported a net short position on May 4 of 83,670 contracts (net of spreads) and now of 65,891 contracts net short, a reduction of 17,779 contracts of their collective net short positioning.

So as the biggest of the big paper-gold selling dogs were increasing their net short positioning on the COMEX gold futures market, as of this past Tuesday, the swap dealers, the somewhat less big dogs, opted to decrease their net short positioning (net of spreads) – and by a fair amount too, by 17,779 contracts.

While the Producer/Merchant commercials are now at an all time high net short position for gold (as a distinct group) the Swap Dealers are now, believe it or not, 51,475 contracts LESS net short than they were on December 1, 2009 when they reported being net short 117,366 contracts with the open interest then 521,433 open, and gold trading then at $1,196.36. Incidentally the Producer/Merchants (PMs) were 190,865 contracts net short on December 1. The PMs previous record high net short position was on November 24, 2009 at 203,078 contracts.

The December 1st report was a key period because it was just prior to the most recent gold correction.

December 1, 2009 was also when the swap dealers were at their highest net short positioning in our records. During that period – and just before that gold correction – both the Producer/Merchant and Swap Dealer categories of commercial traders held very high, near-record net short positions. Indeed from our observation point of view one could say they "agreed" in their expectations for lower Gold Prices if we can make such an assumption based on their respective positioning.

Yet at new all-time highs for the Gold Price in US Dollars once again, the producer/merchants added roughly 29,000 new net short positions last week, while the swap dealers actually covered or offset just under 18,000 contracts. So the latest COT report ends up showing a net "commercial" addition overall of about 11,000 contracts net short.

Below is the pertinent graph from that report showing the collective combined net short positioning of all the Comex commercial traders for reference.

Since gold had just printed a new all time high close ($1,232.66) with this May 11th COT report, many analysts expected the collective combined commercial net short positioning (the LCNS) to be at or near a record nominal high.

Indeed it was a bit of a shocker for some that it didn't. But now, perhaps, we understand why it didn't. This past week, the swap dealer commercials seem to have broken ranks from the producer/merchants doing pretty much the opposite of them on a net basis.

Take another look at the first two graphs and one can easily see that contrary to the way these two distinct groups of commercial traders acted in November/December of 2009 (just before the gold correction then), as of Tuesday their expectations for lower Gold Prices seem to have diverged, at least somewhat.

In Texas English: The big, exemption-wielding bullion banks were still selling lots of paper Gold Futures this past COT reporting week, but the "other commercials" were doing the opposite on a net basis. In short, they are NOT in agreement this time. At least not yet.

The CFTC also reports spreading positions (basically offsetting long and short positions) for the swap dealers, but not for the producer/merchants. Take a look at the apparently large change in the swap dealer spreading positions in the most recent disaggregated COT report in the graph just below.

Just over the past reporting week, swap dealers increased their spreading positions by 3,708 contracts, reporting 25,368 offsetting contracts. Notice, please, two things about that. First the swap dealers now have the second largest spreading position since the disaggregated data begins in 2006. (The largest was on January 15, 2008 at 26,903 spreads). Over the past two weeks they have increased their spreading positions by 7,203 contracts. We believe that swap dealers increase their spreading positioning in proportion to their own uncertainty in the very near term market direction. The more confident they are, the more likely the spreading positioning will be lower and vice versa.

We think that it is now apparent that – at least on the Comex bourse in New York – the very largest of the Gold Futures sellers have now become more isolated as "the sellers of last resort" for gold futures. n particular, we are interested to learn that the big exemption-using bullion banks are not being joined by the "other commercials" – meaning the swap dealers – when they were indeed joined by them just ahead of the last really good correction for gold at the tail-end of 2009.

That doesn't mean that gold can't correct right here and right now; it certainly can. But if gold does drop, the swap dealers are now less well positioned for it. And it also means that at least as of Tuesday, there was apparently quite a bit less "horsepower" on the sell side for gold, with the big bullion banks operating as "sellers of last resort" amid the latest surge in prices...

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Big Market Meltdown

Typically heavy sellers of Gold Futures lost their appetite as Thursday's crash drew nigh...

ONE BIZARRE OUTCOME of last Thursday's 15-minute Big Market meltdown is that it gave traders a scapegoat to forget the problems which had boiled to the surface in Europe and held all markets under pressure at the time of the "glitch", writes Gene Arensberg in his Got Gold Report from Atlanta.

"Oh, it was just a computer thing. Guess we can go play golf now..."

Wrong! The last thing an already nervous market needs is a confidence puncture, no matter where it hails from. Make no mistake, Thursday was a colossal confidence puncture for the NYSE and the NASDAQ. With red all over everyone's trading screens and a nearly constant bombardment in televised financial media of "sovereign default contagion risk", we can easily imagine that the panic plunge was a last-straw event – for some. Especially if Joe-Average-Investor was watching the events in real time, following the botched placement of a crude car bomb in Times Square.

We can imagine thousands of thoughts by ordinary, non-high-speed-computer traders out in the heartland thinking along the lines of, "Yikes. It's getting crazy again, I'm outta here! Martha, where's our broker's business card?"

We here at GotGoldReport.com are not normally swayed very much by conspiracy and "black helicopter" theories. Some of the wild "talk" out there on the web today regarding the computer trading in financial markets is so farfetched it is patently ridiculous.

Having said that, Thursday did bring to the fore the issue of just how fragile the amazingly complex computer-driven trading world might be. We don't think it is too much to worry that a cyber attack could trigger an even more disastrous market plunge – or a lot worse. All we can say is that we sure do hope that the honchos at the Big Markets are smart enough to hire the very best in the cyber-counter-intelligence department.

Over at the regulators of those markets on Friday, the Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders report. Bottom line? The Commitment of Traders report says those Gold Futures traders acting for gold-industry "commercial" players have little confidence in lower gold and silver prices.

GotGoldReport.com is focused on the changes in positioning of the largest futures traders in that report – the traders the CFTC classes as "commercial". We refer to those commercial traders as "LCs" for "Large Commercials". And for gold, as gold edged a net $2.94 or 0.25% higher to $1171.09 by the report's Tuesday cut-off, Comex commercial traders increased their combined collective net short positioning in gold (LCNS) by 6,064 contracts or 2.3%.

Remember that is as of the Tuesday close, and on that day gold traded to a low of $1,167.43 before recovering slightly into the close. Gold printed its Dollar-low for the week the next day, Wednesday, at $1157.55, but has seen extraordinarily strong bidding action since.

Indeed, we noted what we think is significant short covering style activity on both Thursday (in the $1170s) and again on Friday from the noon hour into the close (beginning in the $1190s). Recall also that the Wednesday attempted sell-down for gold (to $1157) was summarily stuffed and reversed back nearly $20 higher by the close.

Significantly, both Gold and silver ended the week in moderate backwardation. That means further-out contracts were slightly less expensive than near-dated metal.

We are frankly surprised that there was not more of an increase to the LCNS in this report. Even though the net change in the price of gold was tiny, with gold nearing $1200 one might think that the big industry-side players would be more than willing to take the short side of new long gold positions.

Our take away from this non-aggressive "large commercial" behavior is that the largest hedgers and short sellers of gold were just not all that inspired to take the short side of gold at the $1171 level. Once again, note that the increase in the LCNS is less than half the increase in the open interest – a very short term bullish signal.

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