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Are you COT in a Gold Trap...
Dec 2, 2008
- If you buy metals stocks and
physical bullion, understanding the weekly COT report is very
important. The C.F.T.C. stands for: The United States Commodity
Futures Trading Commission. Each Friday the CFTC publishes their
weekly numbers. On what the various players did during the previous
trading week. Known as the "COT Report". Ending with
each Tuesday's trading. In plain English, every Friday we learn
what the various market players did in the previous trading week.
From Wednesday to Tuesday.
- There are three main groups
of players in the gold and silver markets. The retail clients,
the funds, and the bankers. The CFTC calls these groups "commercials"
(mainly the banks but also other commercial players), "non-commercials"
(funds and large speculators), and "non-reportable positions"
(the public and other small speculators).
- The Friday report is called
the "COT Report". C.O.T. stands for "commitment
- OK, those are the facts. Within
the basic facts are some hidden nuances that make the COT Report
one of the most critical tools a gold and silver investor needs
in their toolbox.
- I would argue the COT Report
is the single most important tool in the gold investor's toolbox.
- Gold and silver investors
try to analyze the reports to figure out what direction the market
may move next.
- I suspect that 99% of investors
are not using the COT tool correctly.
- Let's take a look
at the COT Report for Gold. For the trading week ended
Nov 25, the CFTC reports that the commercials (bankers) liquidated
about 36,000 long positions and added 2,000 shorts.
- The non-commercials (funds)
added 17,000 long positions. And liquidated 16,000 short positions.
The non-reportables (public) liquidated about 1,000 longs and
- One gold futures contract
represents 100 ounces of gold. That's not a small amount of money.
- 10,000 contracts represents
1 million ounces of gold. Currently, that's about 800 million
- For every buyer, there is
a seller. That is a rule of free markets. What is particularly
interesting about the COT numbers is that most of the time, the
bankers appear to be taking the opposite of the trading done
by BOTH the retail clients.
- The bank families have access
to tools that the rest of us don't have. Some of these tools
include: the ability to "create" money, ownership of
clearing houses, exchanges, shareholding in the Federal Reserve.
The list goes on.
- Some would say it is not a
level playing field. I agree.
- Which is all the more reason
to follow what the bankers are doing. Follow their market actions.
- Not many investors understand
the use of algorithms. Most think these are technical black box
trading systems. They are. But one important purpose of these
algorithms is to hide what orders a fund has in the market. To
stop the bankers from seeing their "hand of cards".
- The funds can hide how they
place orders, but nobody can hide their fills. The statistics
bear out this fact. It doesn't matter how the funds place their
orders. The fact is, week after week, the bankers are shown to
be taking the other side of their trades.
- Sadly, looking at the action
in the gold market yesterday, the recent hand of gold cards bought
by the funds last week is now a house of cards.
- It is the funds and public
who are bidding and offering for gold, while the bankers are
simply buying what is offered, selling what is bid.
- 36,000 contracts of COMEX
gold long positions were offloaded by the bankers last week.
That is more than the entire open COMEX position held by all
the world's retail investors.
- That gold was not sold in
lumps, or all at once. The bankers only sell strength, and only
buy weakness. As the retail investors and funds sell, the bankers
buy. As the retail investors and funds buy, the bankers sell.
- Some gold analysts follow
the COT Reports to track what the bankers are doing. They attempt
to piggyback the bankers. This is not as easy as it seems, because
these are total numbers for the 5 trading days ended Tuesday
of each week. There is no breakdown of the daily buy and sell
action. Also, the numbers are not revealed by the CFTC until
Friday. So investors are always getting past, not present statistics.
- Looking at the statistics
week after week, it is clear that the bankers are consistently
taking the other side of the trades taken by the funds and retail
investors. It's not a 100% correlation, but it is very consistent.
- It is also clear that the
funds and retail investors buy strength, and sell weakness. Technical
algorithms and technical analysis triggers "breakout"
signals and "breakdown" signals.
- As the gold price rises, the
bankers are consistently seen to be adding to their overall gold
short positions, and subtracting from their overall gold long
positions. The funds and retail investors are doing the opposite.
- Most gold analysts are looking
for a "turn". A point in time where a chart of the
long and short positions held by the various players is reversing
or accelerating, and they can place their own gold and silver
bets at that point.
- I believe this is where most
gold investors and analysts are making an error. It is my view
that most gold investors operate severely undercapitalized. They
place large sums of money at price points where they expect either
a reversal or acceleration of the gold price trend. Most gold
analysts urge them on in this behaviour, and when their analysis
turns out to be wrong, the investors are asked to take a "stoploss".
- Gold is the world's lowest
risk investment. Yet most investors lose money investing in gold.
By definition, they have sold at a loss. The bankers operate
in the gold market with the ability to stay in the game, regardless
of any and all actions in the gold price. They are fully prepared
and ready to enter orders at any and all possible gold price
- There is a current view held
by some gold analysts and investors that the bankers are in trouble
at the COMEX. That somehow, they won't be able to deliver all
the gold if the small retail investors order delivery of their
contracts. I don't believe this. The bankers that operate the
COMEX also own the LBMA. The London Bullion Market Association.
They also own and/or are partners with many of the world's major
refiners. They are major shareholders in the world's largest
gold producers and many explorers. They are shareholders in the
US Central Bank.
- Given the above facts, I find
it very hard to believe that any COMEX warehouse shortage caused
by retail investment demand for delivery would succeed in "busting"
the bankers or their COMEX. If the COMEX is to be busted, it
is the bankers themselves who will do it.
- Despite what you hear in
the media, the the bankers own a lot more physical gold than
everyone else. So it is the bankers who stand to benefit the
most from a broken COMEX and a skyrocketing physical bullion
- I believe gold will rise to
$6,000 an ounce (or higher). Just like they did in the 1970's,
the banks will make the money, not the retail investor. If the
small investor wants to make money in gold, do not follow the
tactics advised by the gold analysts, like "back up the
truck", "buy the bargains" "this is the traditional
buying season", etc. Instead, focus your efforts on duplicating
the tactics of the bankers in your own buying and selling of
gold and silver.
- This means you must buy gold
and silver robotically. In small portions on price weakness.
Sell a portion of what you buy robotically on price strength.
This is how the bankers operate their trading programs.
- You need to be prepared to
buy gold and silver all the way down. To price levels far below
what you believe is possible. The gold market can do anything.
The bankers know this. So they are prepared for anything. Be
prepared to buy gold at any price, on weakness. If you want to
predict where gold might go, follow the analysts. If you want
to make money in gold follow the actions of the bankers.
- The bankers do not cut their
risk in gold with stoplosses. They do it by increasing the number
of price points where they buy gold and sell it at a profit.
And by reducing the amount of money placed on the line at each
entry point. This is exactly how the bankers operate. And have
operated for hundreds of years. Successfully.
- Here is the latest COT Report for Gold.
Courtesy of the US Commodity Futures Trading Commission.
- The US bond market has been
a mystery to many gold investors. It "should" have
topped out according to most gold analysts. And sent a wave of
money from the world's largest market, bonds, into the world's
smallest market, gold. Causing an astro blast in the gold price.
- That hasn't happened. Instead
of topping out, the bond market, incredibly, seems to be starting
a new leg up. Most gold investors are wondering if this could
have dire consequences for gold.
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