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Monday, 30th July 2018

Is Gold Now A Beach Ball Under Water?  

The CME COT report of July 27 shows non-commercial gold shorts have suddenly spiked to a 25 year high. Over the past five years, every similar spike in short interest (red arrows on the chart below) has led directly to a short squeeze rally in the gold price, with an average gain of 12.5%. Why should this time be any different?

Ceilings Index (USD) - Last Price 0.172M +53577

The Daily Sentiment Index reading on gold for Friday, July 27, 2018 was unchanged at a low13% while the Hulbert HGNSI was also unchanged at -2.17%, indicating that gold timers were more short than long. In a sign of the times, effective last Friday,the $2.3 billion Vanguard Precious Metals and Mining Fund (VGPMX) was renamed the Vanguard Global Capital Cycles Fund "as part of a restructuring intended to broaden the fund's mandate and diversify its portfolio." In short, they dumped their gold holdings.

The Vanguard fund's percentage of gold mining stocks dropped suddenly from roughly 80% to 25% as a result of the change in its mandate, which might explain the high volume, capitulation-style drop in major gold stocks such as AEM, ABX, and GG on Thursday. As pointed out by The Daily Market Summary, AEM was the fund's largest position as of June 30th, NEM was the second largest, and ABX was its fifth largest.

Also of note, gold stocks have generally performed better than gold itself since the most recent gold price swoon that began last April. And junior gold stocks have fared better than the large caps...both positive indicators.


GDX:GLD VanEck Vectors Gold Miners ETF/SPDR Gold Shares NYSE

GDXJ:GDX VanEck Vectors Junior Gold Miners ETF/VanEck Vectors Gold Miners ETF NYSE

GDX made a marginal new low for the move on Friday, but GDXJ did not. The last time this divergence happened, it marked the December, 2017 low in gold.

Back to last Friday's COTs. The commercial net short position fell 11% to 65,688 contracts as of Tuesday, which is the lowest short position since January of 2016, also a low in gold. The gross speculative short position rose 7% to a new all-time high of 172,023 contracts. This COT data obviously hasn't mattered yet, but it will at some point.

The aggressive players on the short side over the past few weeks have been the hedge funds, found in the disaggregated COT data as Managed Money. The gold Managed Money category reported a record net short position last Friday (see chart below). When this reading hits extremes, it typically signals that a turn higher is just around the corner.

Gold - Managed Money (futures only)

Meridian Macro estimates that the hedge fund net short position totals nearly $4.5 billion (see chart below).

Gold - Managed Money Net Position

Meanwhile, Managed Money players have put on a record short position in Treasuries (a bet on higher rates) and are now crowding back into dollar long positions where their very strong buying has curiously not popped the dollar index above resistance at 95 (see below).

US Dollar Index -- Institutional Asset Manager Net Position (# of contracts, futures only(

In aggregate, we see the potential for a reversal of recent trends where gold rises due to a short squeeze aided and abetted by lower interest rates as Treasury shorts are squeezed and accompanied by a reversal in the dollar. Perhaps gold is now a beach ball under water?