Gold hasn’t just been moving up strongly in the last four months, it has been doing something extraordinary. It has been rising even while the dollar has been rising against foreign currencies. In other words, gold hasn’t just been strong, it’s been super-strong. There are some daily indicators of gold futures trading that provide a window on what’s powering that strength. 

Take a look.

The comparison of gold to currency

The long-term chart below compares the Dollar Index (the DX, a basket of foreign currencies) with gold. Normally the two rise and fall together. But in the last few months, gold has broken out higher, even while the currencies have been falling. Gold rising on top of a rising dollar is a signal that gold has taken on a life of its own and is beyond the control of any monetary authority.

COMEX futures data reveal the action

New York’s COMEX futures exchange is the center for gold trading in the United States. The standard contract is 100 oz, worth about $50,000. The margin to trade a contract is $2,025, or about 4%. For a speculator, this means a margin of 25-to-1. There are currently 335,000 contracts open, covering gold worth $17 billion.

A COMEX gold futures contract can be settled by delivering or receiving gold bullion at a COMEX-designated warehouse. But most futures traders unwind their positions before the delivery period begins, so normally, physical deliveries and purchases of gold are a relatively small part of the picture. A long speculator will stay in the market by opening a new contract each time an old one approaches expiration and is closed out. Short speculators typically do the same.

But from time to time, some big players may actually buy or deliver physical gold at a COMEX warehouse. Something surprising has been happening recently: long speculators are taking delivery in much larger numbers than in the past. Warehouse supplies of gold bullion are still large, but deliveries show a different character of the investors.

The delivery period for gold is the last month that a particular a contract trades. The most recent contract to expire was October, and the December contract is now in its delivery period.

Since the beginning of December, there has been a big jump in delivery notices by long speculators. They now have 17,528 contracts (or 1,752,800 ounces) of gold called upon—and 6,307 contracts (or 31,535,000 ounces) of silver called upon. This represents 38% of the registered gold in COMEX warehouses and 48% of all COMEX physically registered silver. A daily report of warehouse stocks is available from at the COMEX at  Link 

COMEX data is provided daily, but not with historical time series, so it is not immediately obvious that recent deliveries have been unusually large. For comparison, I obtained delivery data for the recent October contract where deliveries rose to a then surprisingly high 11,072 contracts. To compare the two months, I have overlaid the October contract with the December contract. Even though we are still early in December and there are more weeks for deliveries to be made, December is way ahead of October. The chart below will require daily monitoring to see if the high pace of deliveries continues.

The data to monitor progress for the above chart can be found at: Nymex Link

Commitment of Traders

Commitment of Traders data is collected by the Commodity Futures Trade Commission and reported weekly. It shows the number of contracts held by the Big Commercial traders and the Big Non-Commercial traders (often called the large speculators). The third element of total Open Interest is the Non-Reported or Small Speculators.

The net position of the three categories can be compared to the historical gold price to see which group follows the price most accurately. There is a correlation between gold and the position of the Non-Commercials. Using this indicator as a trading tool is more complex than this explanation, but the chart below does show that Non-Commercials are long, expecting gold to rise:

The chart above is from the excellent web site at www.sharelynx.com that has more gold and silver charts than any other source I’ve found. The top line shows the gold price. The middle line shows that commercials have a net long position. The bottom blue and red lines show the sum of the long positions in blue and the short positions in red for the Non-Commercials. The difference of the two lower lines is plotted as the line in the middle panel. With Non-Commercials long, this a bullish sign.

My conclusion

Even though the government claims that we don’t have inflation and the dollar has been relatively strong of late, gold has been on a big up-move. This view of the futures market shows internal pressures that are positive for gold. Adding my observation that interest in gold hasn’t yet reached the general investing public, the conclusion is that gold has further to go. A 10% to 20% rise would move it to between $560 and $610 per ounce.

© 2005 Bud Conrad, Email
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