Nearly two months ago I published a video in which I discussed conventional CoT analysis and the mistake many investors might make assuming Gold and gold stocks would undergo a big correction. The fact is a bull market that follows a nasty bear usually stays very overbought throughout its first year and therefore sentiment indicators remain in bullish territory. As a result of the primary trend change, conventional CoT analysis fails and requires an adjustment. Today we look at the Gold and Silver CoT’s while harping on a few of the mistakes people are making. 

The first mistake people are making (and I’ve seen this quite a bit recently) is painting the commercial traders as smart money. This completely mischaracterizes that group. Commercial hedgers are the users, producers or consumers of the commodity. They are using the futures market to hedge in some way. As Steve Saville writes in his explanation of the CoTs, the commercials usually do not bet on price direction. Generally speaking they tend to fade the trend while speculators drive or follow the trend. Risk certainly rises for bulls when speculators increase long positions aggressively and we should be aware of that. However, we should look beyond nominal figures to get a better reading of the degree of speculation. 

The second mistake is looking at the CoT’s in only nominal terms and not as a percentage of open interest. The nominal net speculative position in Silver is at an all time high, which sounds scary. However, as a percentage of open interest the net speculative position is nowhere close to an all time high. 

In the chart below we plot Silver and its speculative position as a percentage of open interest. The current position is 45.7%, which is nowhere near the all-time highs seen in 2002 and 2004 of nearly 75%. Also note how the net speculative position does not tell us anything about the primary or long-term trend. Speculators were most bullish in 2002 and 2004 just after the start of a secular bull market. Speculators were least bullish in 2013. Silver bounced but continued to make new lows for a few more years!

Silver & Silver CoT

When considering open interest, Gold’s primary trend change has been confirmed yet the net speculative position in Gold is much closer to extremes than Silver’s. Take a look at the chart below and note the huge increases in open interest that immediately followed the lows in 2001, late 2008 and late 2015. A rise in open interest confirmed the trend change at those points. As of Tuesday, the net speculative position in Gold was 52.1%. Note that from 2003 to 2012 the net speculative position often peaked at 55% to 60%. Keep in mind, we do not know if Gold’s next peak will be at 55% or even 70%.  

Overall, the CoT is one of a handful of tools we use and we learned how to interpret and analyze it the hard way. Remember, the speculators drive the trend and it’s best to judge their position in terms of open interest. I do not see anything in the CoTs or price action of the metals or the miners that says they are about to endure a large correction. That will change at somepoint but for now weakness or consolidation is a buying opportunity.

Jordan Roy-Byrne, CMT

go to Jordan@TheDailyGold.com for an offer from Jordan

related

Today’s videos and charts (double click to enlarge):

US Bonds, Dollar, & Stock Market Video Analysis

Gold & Silver Bullion Big Picture Video Analysis

Precious Metal ETFs Video Analysis

Trader Time Swing Trades Video Analysis

SFJ & SF60 Key Stocks Video Analysis

Thanks,

Morris

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May 6, 2016
Morris Hubbartt

Global silver demand totaled a record 36,407 mt in 2015, up 3.4% from 35,206 mt in 2014, the Silver Institute said Thursday.

Total supply declined 1.2% to 3,276 mt in 2015, resulting in a third consecutive annual physical deficit of 4,040 mt, up 65% from a 2,445 mt deficit a year earlier.

Although mine production was higher on the year, up 2.1% to 27,579 mt in 2015, it was not enough to offset a 13.2% decline in scrap supply to 4,544 mt.

Demand for coins and bars was up 24% to 9,092 mt, while silverware was 3.6% higher at 1,956 mt.

Draw-downs in silver-backed exchange-traded products totaled 550.5 mt in 2015, while exchange inventory gained 9.3 mt.

This took the total net balance of the silver market to a deficit of 3,499 mt, up from a 2,717.7 mt deficit in 2014, according to the SI.

…related:

by Morris Hubbart: Gold & Silver Breakout Consolidates

also:

Gold is Superior Asset in Present Part of Cycle

Saxo Bank CIO and chief economist Steen Jakobsen pinged me via email with some of his thoughts on who to believe and which assets to hold.

Steen says “gold long, weak US growth, FED is lost, and negative interest rates make no sense”.

Email from Steen

I have been doing this job for close to 30 years now. Through that time I have worked with some of the best talents in trading in the world, I have also had the pleasure of meeting many great business people, but in my world there is two or three people who I:

• ALWAYS listen to
• ALWAYS respect
• ALWAYS need to check my world view against

Some of these are private, but the most public one, and the only person I am a “fan” of is Stanley Druckenmiller.

He is not only is he one of modern history’s best fund managers, but he analysis is crisp, clear and open minded. He is far more diplomatic than me – and better – in expressing those views, but tonight’s speech by Druckenmiller at Sohn Conference confirms to me long held view:

• Gold is the superior asset in present part of cycle
• Fed is lost – totally lost and nothing they say match their action
• Negative interest is worst policy mistake ever
• Debt is and remains the elephant in the room

Here is quick note from Druckenmiller’s speech:

Stanley Druckenmiller warned on Wednesday that the Federal Reserve’s low-rate policy is creating vast long-run risks for the US economy.

Mr Druckenmiller, a billionaire former hedge fund manager, said at the Sohn Conference in New York that Fed policymakers are “raising the odds of the economic tail risk they are trying to avoid”, such as spurring credit bubbles, by keeping interest rates near historic lows.

Mr Druckenmiller reckons current economic conditions suggest the Fed’s benchmark interest rate should be closer to 3 per cent. “This is the least data-dependent Fed in history,” he said.

Mr Druckenmiller said the “longest period ever of easy monetary policies” has caused groups to borrow at a quick clip and then use the funds in ways that are not economically productive. For instance, he noted that “most of the debt today has been used for financial engineering,” in the form of stock buybacks and other methods that provide a boon to corporate profits and are often cheered by investors.

He said that contrasts with other periods, such as the 1990s when debt was used to craft the building blocks of the Internet.

Stanley Druckenmiller: Corporate America, China And The Fed Are Stuck – Buy Gold

“I have argued that the myopic policy makers have no endgame,” billionaire Stanley Druckenmiller said towards the end of a scathing twenty minute romp through all of the world’s economic problems.

The U.S. debt is out of control, China is even worse and the worst offender is the Federal Reserve, Druckenmiller said. Corporations in the United States are stuck in the mud, forelorn of growth, unwilling to invest and addicted to share buybacks to gin up their stocks. It is a sentiment Druckenmiller has had for years, but at the Sohn conference the famed hedge fund manager indicated he means it this time.

Eleven years ago, Druckenmiller warned the Sohn audience of then Federal Reserve chair Alan Greenspan’s blunders in inflating an epic mortgage bubble that was sure to crash. On Wednesday, he said the bubble inflated by former chair Ben Bernanke and current chairwoman Janet Yellen is many magnitudes worse. The Fed, Druckenmiller said, is using low interest rates to ease borrowing costs and smooth over problems in the global economy.

This radical Central Bank accommodation is leading to unproductive investment, and is an issue that is even worse in China, an engine of global demand. Whether it is S&P 500 Index corporations, U.S. households or the state-managed economy in China, Druckenmiller believes cheap money is borrowing from future growth, and will backfire spectacularly.

“While policy makers have no endgame, markets do,” he said. Druckenmiller is increasingly nervous about risk assets and recommended investors take refuge in gold.

Bull Market Exhausting Itself

Larger Image

Reckless Behavior

ZeroHedge offers this commentary A Very Bearish Stanley Druckenmiller Blows Up At The Fed; Reveals His Biggest “Currency” Position

The Fed “causes reckless behavior” said Druckenmiller, adding “the Fed has no endgame and the end objective seems to be preventing the S&P from having a 20% decline.”

“Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation” he said, without naming the metal.

We know what he was talking about. Gold.