Political Metals

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Our May21 entry in the table of forecasts by industry leaders, we had Gene Arensberg forecasting that gold and silver is very close to a bottom. Today, he released a video explaining in detail why he thinks recent Commitment of Traders (COT)  data from the COMEX supports his view.

Source: GotGoldReport.com
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This chart by Richard Guthrie (Live from ‘The Bridge of the Silver Rocket Ship’) illustrates the main point of the video above.

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Understanding this chart:
Every Tuesday, COMEX, the exchange for trading gold & silver contracts, reports the number of Shorts (contracts to Sell metals) and Longs (contracts to Buy metals) held by various classes of traders. Of specific interest is the Shorts & Longs held by the Commercials (large Bullion Banks like JP Morgan & HSBC that dominate the market). This chart plots the Net Short for gold & silver combined (number of Shorts minus number of Longs for gold & silver) held by the Commercials against the total Open Interest (total outstanding contracts).

A Zero figure means the Commercials as a whole are holding an equal amount of Long & Short contracts. A large positive number indicates that they have positioned themselves for lower metals prices because they are holding very much more Shorts than Longs (ie they “think” prices are heading lower, so they sell ahead). A small positive number  indicates that they have positioned themselves for higher metals prices because they are holding only slightly more Shorts than Longs (ie they “think” prices are heading higher).

You’ll notice that the figure never gets negative, that is, they always have more Shorts than Longs. Why this is so depends on who you believe. If you believe that Blythe Masters of JP Morgan is telling the truth, than it’s because they are hedging against their clients’ Long positions. If you think GATA and the likes are telling the truth, then it’s because the Commercials are suppressing metals prices on behalf of Central Banks due to the fact that gold & silver are Political Metals.

Back to the chart…

The sharp drop since February, to a level not seen for over a decade, tells us that at this point the Bullion Banks are not anticipating much lower prices, or are not planning to manipulate prices much lower, whichever suits your conviction. This is why going by the COT analysis above, the signals are bullish.

Historically, there is a strong correlation between sharp drops in Commercials Net Short positions and a rally in metals prices.

When the Commercial Net Short blue line approaches the descending green trend line, it bounces back together with a rebound in metals prices. The chart on the right, courtesy of Richard Guthrie shows the correlation with silver prices. The same applies to gold.

Historically, as the metals prices rise, the Commercials start piling up their Shorts again to suppress or manage the rate of rise, and the whole cycle repeats itself.

When, not if, this price suppression scheme comes to an end, prices of these Political Metals are expected to rise with the force of a coiled spring or a beach ball held under water freed of their restrains.

Caution:
If the past is any guide, the above bullish signals may come to pass. Nevertheless, this trend or correlation may be broken, resulting in even deeper corrections in metals prices. Never underestimate what desperate people can do at desperate times such as these!