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A Note Of Caution (And Ambiguity) On Precious Metals

Suddenly, gold and silver are good again. In two short months, they’ve morphed from targets of derision to shiny new toys on the financial playground.

Not surprisingly, questions have been pouring in from people who kind-of sort-of know the precious metals story and are wondering if they should jump in with both feet. A reasonable response: “If your time frame is the coming decade, sure, go for it. But if you’re thinking in terms of months rather than years, you should be considering entry points and accumulation strategy.”

Which brings us to the Commitment of Traders (COT) report. Most new precious metals investors have never heard of it. And since it seems to be a pretty good indicator of those metals’ short-term price fluctuations, this might be a useful time to define and explain it. So here goes:

Gold and silver prices are set in the “paper” market where big players trade futures contracts that enable them to buy (or require them to deliver) large amounts of metal at some point in the future. There are two main groups in this market: The “commercials,” including fabricators that buy metal and turn it into coins or jewelry and big banks that trade for their clients and their own accounts, and the “speculators” (hedge funds and other institutional gamblers) who use futures contracts to bet on the metals’ price movements.

Over and over again, the commercials trick the speculators into piling in or out at exactly the wrong time, thus moving prices in ways that benefit the former. They might, for instance, sell a few contracts into the market when most traders are at lunch or home for the night, pushing the price down and activating hedge fund stop-loss orders. Those sales push prices down further, activating technical signals that cause momentum traders to short the market, producing yet another sharp drop. Then the commercials step in and buy very cheaply — raising prices a bit and leading speculators to go long, pushing prices back up to where the game began. As observers like to say, “wash, rinse, repeat.”

The COT report quantifies who’s long and who’s short and by how much, which makes it a snapshot of how the above game is going.

Here, for instance, is a chart showing what the speculators are up to. When the blue line depicting their long positions and the red line depicting their shorts diverge, that means hedge funds and other traders have been suckered into betting on a gold price surge. When the lines converge, speculators have been fooled into betting aggressively on a decline. The thin gray line is the price of gold. As you can see it tends to do the opposite of what the speculators expect.

What is this chart saying now? Well, the lines have diverged, indicating that speculators are extremely bullish. History says they are now sheep lining up for slaughter, in the form of a gold price correction which forces them to cover at a loss. So — again, based on history — a better entry point for incoming gold investors might be a few months off.

Gold COTs March 16

However — and this is a very big caveat — indicators work until they don’t. Someday the paper markets will be overwhelmed by a tsunami of demand for physical metal. The commodities exchanges on which futures trade will run out of inventory and default when too many holders of long contracts demand delivery, and gold and silver will rocket higher. On that day everyone who isn’t fully invested in precious metals will be out of luck.

And some claim that day is at hand. In a recent King World News interview, metals trader Andrew Maguire noted: “Now that we are entering a negative rate world, I am seeing a lot of very large-sized institutional money looking for a home. Some of this money is flowing into gold, and this is confusing technical traders who are battling what looks like a technically overbought gold market…”

So for new precious metals buyers, is it better to get in gradually, using the COT report and other indicators to help define entry points? Or should they ignore the squiggles, stop being cute and just fully commit on the assumption that whatever price they pay today will be dwarfed by what prevails when the system finally breaks down?

There isn’t, alas, a one-size-fits-all answer to such a question. So why bother discussing it? Because it’s interesting. And more information is always better than less.

29 thoughts on "A Note Of Caution (And Ambiguity) On Precious Metals"

  1. Mt Rubino begins by questioning the knowledge of the public regarding price discovery in the metals, then continues with a breathtakingly naive (misinformed… a purposeful misdirection?) description of the COMEX COT Report.

    The “Fabricators” of the metal are included in what most call the “Commercial” traders which, while it does include the industry players, the primary movers are of course the big banks on Wall Street (I know, shocking news…lol)… and that is clearly documented in the Largest Trader data, where 4 or less sources control the shorts (as we speak, and of course that is JPM & perhaps another partner in crime)!

    To publicly ascribe these criminal activities to the producers of the metal, who have been financially decimated by the criminal activities of the bullion banks is malpractice at best… and complicity is certainly on the table.

  2. The amount of physical gold in Western Central Bank Vaults is at an historic low. All available physical gold has been/is being sold to China, India and Russia. Together they buy up all that is produced in a given year…and then some. You can see where the paper gold holders are headed…off a cliff. They will continue to play their game until the end. Ah, there’s the rub, when is the end? Judging by the low quantities in the West coupled with the fact that the East is not selling, just accumulating…I would go with the Eastern philosophy…physical is good(no counter party), paper is paper. That goes for currency as well.

  3. Boy, talk about a ton of analysis for a gram of MAYBE. Maybe buy now, maybe buy in a few months. As a bullion dealer, let me give you some sage advice: When you got the dough, GO. The physical market is increasingly in short supply, and we just found out that Canada has disposed of close to 100% of its gold reserves. Which means: when the crapola hits the fan at any minute, and I mean any minute as sure as all the tea AND HUMONGOUS BAD DEBT in China, the U.S. and the Canukians will be scrambling to find gold to fill Ft. Knox and Quebec.

    These guys are as smart as the Brits in 1998 in disgorging large quantities of gold to buy interest bearing Government paper, so when they are through selling, meaning putting large supply into the market, you should be in there buying. Maybe, maybe, maybe, hell no. Buy when the idiots running our countries are selling or have finished selling. THAT TIME IS NOW, PILGRIM.

    1. Not so fast Pilgrim…You know damned well that ALL markets are massively manipulated, (or I hope u do..)! It’s not the “idiots running the countries that
      are controlling things: Study up on g Edw Griffin, Carroll Quigley, Bill Still, James Corbett, and Dr Nicholas Hagger (The Syndicate).
      Jumping in with both feet at this point may be exactly what the master global manipulators are wanting u to do as this article suggests.
      Yup, I’m sure u’v heard of a ‘Dead Cat Bounce’ amigo.
      There’s still a 50/50 chance that Harry Dent / Jim Rogers will be proven correct and if so, gold is headed below 1000 and maybe even 700 before the dust
      settles. If the global stock market REALLY tanks, then head for the exits.

      otoh, If one of several ‘black swans’ swoop in with a ‘big dump’ or war escalates in the M.E. or somewhere else, then, “Katie bar the door”!

      1. Markets may be manipulated but they are manipulated by people that ARENT as smart as they think they are or they want us to think they are, otherwise the World economies wouldn’t be going bust. They are better at lying and stealing other peoples money.

        1. Majorx, If u review what g Edw Griffin (Creature From Jekyll Island), Hegel’s (Hagelian Dialectic), Carroll Quigley’s (Tragedy and Hope), and Bill Still’s (Secret of Oz), you’ll see that these economic events are well planned: Problem ~ Reaction ~ Solution and ORDO AB CHAO.

          The ‘implosion’ is on the way and it IS PLANNED!
          (Probably this year or next!) They may term it a ‘Reboot’ or ‘Global Financial Reset’ and don’t be surprised if Ray Kurzweil isn’t part of the mix, overtly or covertly.
          (If u don’t know who he is, watch some of his youtube clips)

          1. I heard of Kurzweil but dont remember what his claim to fame is. If they can manipulate catastrophe to that degree then they can make sure they win and the 90% of the rest of us go completely broke. Is that also true? I doubt it.

          2. If u research some of Kissinger’s audacious statements he refers to the future masses as ‘Useless Eaters”! Go to youtube and search ‘Georgia Guidestones’…Note what the ‘first commandment is on there.
            Here is one of Kurzweil’s interviews:

            Predictions for 2020s With Ray Kurzweil
            Predictions for 2020s With Ray Kurzweil

    2. The Bank of Canada is in Ottawa not Quebec. Our nutty politicians and bankers hate gold and silver. Without total regime change Canada’s monetary sins will not be repented of, end of story. There is no means to enforce accountability and corrective action on banks and governments short of invasion and take over.
      The powers that be think they are doing the right thing and they are immune to punishment because they control the courts, coinage, media, political parties and military. Why should they change a damned thing except a few rules to suit themselves if things get difficult like in 2008. The crook was caught long live the crooks is the way of it.

  4. I would bet on gold going up,…all of the analysis are next to meaningless in these crazy times.All of the charts & theories from the past are not worthwhile when pitted against

      1. It depends on how far the fractured financial situation migrates into the political & social structure.If it gets wild enough it would be anyone’s guess
        as to the value of gold.Of course if it got to that we would have bigger & worse problems to worry about!

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