As you can see on the first chart, the recent low in F (two weeks ago) was the lowest reading observed going back more than 10 years. The next two charts show the amazingly good correlation between troughs in F and troughs in the price of GLD. Even if we assume that gold has entered a secular bear market in July 2011, this correlation still holds equally well for both the bull phase (up to July 2011) and the bear phase after July 2011.
Moral of the story: a very large rally in gold is imminent, since commercial traders would not reduce their hedges almost to 0 unless they thought that the potential upside in the gold price over the next WEEK greatly exceeds the potential downside. They can adjust their positions every day, and the fact that they are keeping their hedges so low implies that they expect a large rally to start any day now (or at least the gold price to move sideways until the large rally begins).Incidentally, similar charts, but more dramatic, can be made for silver -- the current value of F_silver is 3% now! Historically, F_silver has oscillated between 10% and 80% going back to 2000...
Hope you are right David. Looks like they are playing a sort of "reversion to the mean" trade, getting longer as the price of gold goes down and shorter as it goes up. Usually a smart way to go.
ReplyDeleteSaw an analyst on TV this week saying the marginal cost of gold production is now around $1,100, so that would normally be a pretty firm floor for gold unless we have a large supply/demand imbalance in the market. My biggest concern would be the level of GLD redemption's which is price-insensitive selling and doesn't pay attention to fundamentals.
"the marginal cost of gold production is now around $1,100"
DeleteI bet they'd keep on producing at a loss as long as shareholders remain passive.
Also, steel producers claim the price of iron ore is too high while ore producers can't seem to make any profit due to oversupply.
Someone's pulling our leg?
Good work David, I'm impressed!
ReplyDeleteSome have suggested the theory that commercials are buckling to investor pressure since so many producer CEO's have been ousted.
Although, it sure does make sense that commercials are reverting to the mean but who defines the mean, commercials or the market? Producers are supposed to sell their products at a gain, that's their function. Now it seems they have been reducing those sales which may simply indicate the PM's are trading near or below production cost, or is demand outstripping supply?
DeleteCan we assume share prices (a function of earnings?) would be even lower if commercials had not hedged their production? What is producer hedging, isn't this simply making supply available at some (perhaps contractual, not spot) price?
Also, where's the inflation? The global economy isn't exactly setting growth records these days.
DeleteOf course now, the balance sheet recession may be making a comeback due to popular demand, that might help to reflate the PM sales?
Personally, my newest theory is PM's should be bought as central banks are selling, and sold as central banks are buying.
I'm having trouble with David's charts (ie, they don't display for me)?
ReplyDeleteWork great here. Can even click on them to enlarge.
DeletePretty impressive bro! Although I'm still trying to figure it out!
ReplyDeleteGood concept, I'd actually like to see (max-min)/(2x mean) this method works well in the case number of samples are statistically limited. I'm guessing David has 120 samples over 10yrs.
DeleteNot that the charts would change all that much, I doubt they would.
Basic concept is solving dy/dx f(x) = 0 for inflection point?
DeleteTHAT cleared things up!
DeleteI'm hoping he drafts another SA article to present the data, would like to see the comments.
DeleteMight even get to see a pop for AUMN when it hits the wires?
AGNC - -16% Div cut not as deep as anticipated?
ReplyDeleteAluminum - Looks like BACML has been downgrading parts of the aluminum complex, CNEX and CLF specifically, notes LME aluminum is stuck in warehouses.
ReplyDeleteAlso:
Japan Economic Watch: Exports up 10.1% YoY to beat expectations
Stinker on SNTA @ 3.89.
ReplyDeleteI second the motion, @ $3.88
DeleteLots of bag holders, coming closer to being one of the elves.
Deletewhats the deal with this one?
DeleteInch by inch... step by step... $3.92.... $3.91....
DeleteI didn't realize it but the Russell 2000 & SOX both registered new highs yesterday. That's bullish in my opinion. I think everything else follows soon.
ReplyDeleteClosing highs would be better, but we're not far away.
Delete2nd_ave -- if you still can't see my charts, I can e-mail them to you...
ReplyDelete"Good concept, I'd actually like to see (max-min)/(2x mean)"
ReplyDeleteCP, can you please re-write your desired expression using CS and CL variables, which is the only two relevant variables I have for each week.
am i the only one that feels mentally inferior here? my brain keeps getting blocked and circles back to that awesome blurred lines video by robin thicke...
DeleteHi David, my idea was to use a slightly different denominator: 2x mean (arithmetic average of commercial position) otherwise same as your calculation expressed in percent.
Delete"Also, where's the inflation? The global economy isn't exactly setting growth records these days."
ReplyDeleteExcept for late 2010/early 2011 and also early 2013, the chart of expected 10-year inflation shows little correlation with the price of gold:
http://research.stlouisfed.org/fred2/graph/?graph_id=80368&category_id=0
Something else has been driving POG recently...
"Something else has been driving POG recently..."
DeleteDo you think there's some relationship/correlation with the "Balance Sheet Recession" (in my mind this BSR translates to deleveraging)?
Where people were buying PM's in order to hedge some hazard posed by FED policy and since the danger has subsided?
Another feature you might also consider is placing the standard deviation on there as well? Maybe you already thought of doing that...
DeleteI might post a SeekingAlpha article about gold in a few days, once the reaction to today's FOMC announcement settles down.
ReplyDeleteAs for AUMN, I really don't have anything else to add now. I want to wait until they announce the completion of the tunnel (ramp) into their key mining area (which will allow them to bring the heavy machinery there and start quickly expanding the production volume), and if the share price will not pop after that announcement (which will probably be made in mid-July), THEN I will write an article and ask WTF the investors are thinking...
DANG filled the gap for 6/17. Thinking of setting a stop just below it.
ReplyDeletePut a hard stop at 7.70
Deletehit that unfortunaetly
DeleteOff my TBT @ 70.01.
ReplyDeleteIt is an easy swing trade right now.
Completed the DRAM fill @4.00
ReplyDeleteWhat exactly did the market get pissed off about? And why did PM investors get equally pissed off?
ReplyDeleteDavid - Short term movements are impossible to predict, no matter how much traders with expensive monthly fees might suggest. Paying more attention to longer term trends is more profitable in my opinion.
DeleteDavid --
ReplyDelete2:05 pm : The Federal Open Market Committee has just released its latest policy statement, which was met with selling across the major averages. Meanwhile, the dollar index has jumped to a session high near 80.75.
zerohedge @zerohedgenow
Benny and the Inkjets soundbite so far: "we were puzzled..."
Downtown Josh Brown @ReformedBroker32s
"It's a threshold, not a trigger" - that used to work on girls in high school.
Off SPXS @10.35
ReplyDeletenice trade.
DeleteWow, I didn't notice that jump in $USD. Gold/silver should be down much more in the face of such a jump.
ReplyDeleteDid investors expect the Fed to do something about the falling inflation, and since the Fed didn't do anything, $USD jumped?
I made the right call for Tuesday> EEM closed up +0.6%. I should have taken it all off the table then. Instead, I pressed my bets in front of the Fed’s monthly statement today, and will take a hit on the trade. (Sure, I could hold for another day or two, but you know that’s not my style. Of course, it’s also not my style to let a gain like yesterday’s get away from me, but pressing bets often pays off in craps and in the stock market.) DJIA is off triple digits, miners will likely hit new lows, and Emerging Markets will not be spared. EEM off @ 38.85, and RYWVX off at the close.
ReplyDeleteSPX -- the geometry of what just happened ...
ReplyDeletehttp://www.screencast.com/users/springheel_jack/folders/1306/media/d9808426-afec-426a-a1bb-8b0948eac7d2
i still think we close this month flat...1,630. in fact, i think we trade sideways for another few months.
DeleteMultiple Options ... not sure we stay here .. most summers not like that
Deletehttp://stocktwits.com/message/14177362
http://stocktwits.com/message/14182940
SNTA - I chickened out and canceled my $3.88 bid just prior to Mr. Crackly Voice(Bernanke)'s appearance.
ReplyDeleteafternoon,
ReplyDeleteTBT - I thought about selling my remaining TBT position today but I didn't. I'm really surprised TBT ended the day as strong as it did. Is it because buddy Ben think's they will start backing off the bond buying program next year and it doesn't matter what's happening now, its what will happen in the future? I dunno. I thought bonds should have rallied (TBT trade down) from what I was reading.
I just pulled up my fidelity account and this is the headline I see
Delete"Bernanke says Fed likely to reduce bond buying this year"
That will do it. Maybe TBT goes to mid or upper 70's. It's been a lonnnnng time.
"Hi David, my idea was to use a slightly different denominator: 2x mean (arithmetic average of commercial position) otherwise same as your calculation expressed in percent."
ReplyDeleteCP, isn't 2x mean = (CS+CL), which is precisely my denominator?
3-month chart of AUMN: triple bottom or triple top? Half empty or half full? :)
ReplyDeleteBut given that both GDXJ and SLV made new 52-week lows today, it is quite admirable that AUMN finished near a 2-month high...
new post (now that I'm home, David's charts display beautifully!)
ReplyDelete