Inputs and comments

*Courtesy of GATA’s good friend John Brimelow and his view of the open interest situation…

Thursday, May 30, 2013

The CME Final for Wednesday confirms that volume was 327,090 lots, 14.56% above estimated. Open interest however is reported to have plunged an astonishing 27,202 lots, 84.61 tonnes or 6.62%, to 383,799 lots. The Preliminary had suggested a 3.55% drop.

Gold was up 0.9% basis the floor close and 0.99% basis the stock market close. Open interest has not been this low since August 2009, although it got down to 385,434 lots on August 17th last year.

The June contract shed 48,076 lots, with August gaining 13,377 contracts and December 6,621. No other contract changed significantly. This was not a spread being reversed. See http://www.cmegroup.com/daily_bulletin/Section62_
Metals_Futures_Products_2013102.pdf

Since Wednesday May 22cnd open interest has fallen 67,536 lots or 14.96%. Gold basis the stock market close rose $40.30 or 2.92%.

Bill, before we jump to any hasty conclusions, let's look at the hard data - and my interpretation is uber bullish. First of all, the o/i did not drop 50k. The June contract dropped 48k, which is a massive drop. HOWEVER, a little over 20k of that rolled into August and December (13.3k and 6.6k each). That is a big roll. The net drop in o/i in gold is 27.2k. Yes it's big, but the o/i for June was very big, and it is still big given that June longs can now be delivered. http://www.cmegroup.com/daily_bulletin/Section62_Metal
s_Futures_Products_2013102.pdf

We need to understand where the selling came from, and we won't know unfortunately until a week from Friday's COT. However, we know that the hedge fund category, as of the last COT, was near a low gross long position going position going back to late 2008. The net long position was near an all-time record low, and close to being net short. Here's the chart that shows that:

http://traderdannorcini.blogspot.com/2013/05/speculators
-continue-to-sell-gold.html

My point here is that the selling may or may not have come from the hedge funds, because the hedge funds have largely already sold out a large amount. The selling may have come from Ted Butler's "raptors," who get reported in the commercial/bank category but according to Ted have built up a big long position. My bet is that half the selling came from the managed money and that was the outright selling and half came from raptors, and that's the entity that rolled forward. This makes sense to me because the raptors were getting longer when gold was testing 1300 - and the hedge funds were shorting to them. The raptors likely took some short profits on the stuff they bought $80 lower and rolled the rest. The more I write this out, the more I think I have good shot at being right about this.

The other likelihood is we also saw come decent selling from the "other reportable" category and the "non-reportable" retail category, both of which have built up large relative total o/i positions. Here's a link to the disaggregated COT from last Friday: http://www.cftc.gov/dea/futures/other_lf.htm

If my view is correct, this is unbelievably bullish, because historically, when the o/i has gone below the 400k level, it means the hot money chasers now have plenty of firepower to chase the momentum higher. This will be turbo-charged by the still big gross short position of the funds, which will still be huge even if they covered some yesterday. The hedge funds now have the firepower to drive the market higher from both short-covering and piling into the long.

Then you add in the physical shortage component....boom goes the dynamite