Resources for the Independent Trader Blog Speculation: Will Gold Fall Further? The Classic Gold Bubble Question Answered Dear Reader, This report is another collection from various well-respected writers, and would give you an insight what has happened to gold the last week or so. There are different views, and could be confusing for an investor/trader how to react towards gold, buy or sell. Download, read and act wisely. Please forward to your colleagues, friends, whom ever you know. Will Gold Fall Further? By: Street Authority
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Speculation: Will Gold Fall Further? The Classic Gold Bubble Question Answered
This report is another collection from various well-respected writers, and would give you an insight what has happened to gold the couple of weeks l or so. There are different views how to react towards gold, buy or sell.
Will Gold Fall Further? Gold's Plunge Ultimately Healthy for the Sector How Gold Prices Work in the Post-Crash Shortage The Classic Gold Bubble Question Answered Gold Market Speculation: Who, What and Why?
Download, read and act wisely. Please forward to your colleagues, friends, whom ever you know.
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Resources for the Independent Trader Blog
Speculation: Will Gold Fall Further? The Classic Gold Bubble Question Answered
Dear Reader,
This report is another collection from various well-respected writers, and would
give you an insight what has happened to gold the last week or so. There are
different views, and could be confusing for an investor/trader how to react
towards gold, buy or sell.
Download, read and act wisely. Please forward to your colleagues, friends, whom ever you
Make no mistake: this is not an "arbitrage" which holders of gold in one form can exploit
simply by spotting it. The reason the kilobar premium in Singapore for instance has
surged in the last two weeks (and it's fading as demand eases off) is the tight supply of
production capacity, relative to dealer demand. Swiss refiners are booked solid until end-
May for kilobars, we are told. So getting your metal into retail form would be hard. It is also something to which professional distributors already devote their operations.
The answer then to "What is gold worth?" is more complex, but only a little. Like silver
or any other physical good, it depends both on where it is and what form it takes. Coins
and small bars are currently at a premium. So is metal in Hong Kong and Mumbai. Those
mark-ups are highly variable however, and accessing them as a private investor is hard.
First you need to have paid all those extra fabrication and logistics costs. Then you need
to find a buyer willing to pay you the premium, rather than shopping around amongst retail dealers.
Would that be the "real" price anyway? Only if you could achieve it. Yet the gap between
retail-product and wholesale prices is feeding an idea popular with bloggers right now
that professional "spot" prices are somehow divorced from "real gold" values. Such
frustration is understandable perhaps. Last month's price-drop has cost a lot of long-
term precious metal owners a lot of missed profit, and more recent buyers are out of pocket still worse.
But as professionals in the physical market, we can assure you that the spot price is the
price of physical gold and silver in large-bar form right now, just as always. We go on
settling physical gold and silver bars daily, picking up real physical bullion and moving it
to accredited storage outside the banking world. The quality of the bars, fully
allocated to Bullion Vault clients at all times as the Daily Audit shows, is warranted by
the Good Delivery standards. We also have inspection reports from independent
experts which make clear that what belongs to BullionVault users is indeed warranted, high-quality gold.
So the real price of physical gold right now? Go to Bullion Vault's Order Board, and you'll
see firm bids and offers for Good Delivery metal, already delivered inside accredited
vaults. In each location – London, New York, Zurich and Singapore – you'll enter a live
peer-to-peer market, where buyers and sellers are meeting to agree their price in free competition, with instantaneous settlement inside the vault.
One side wants to pay as little as possible. The other wants to get as much as they can.
So whether you think the price is too high – or too low – depends on which side you're
on. BullionVault lets you set your own bid or offer. Whether you get the price that you
want depends on what the other side does. But that is how markets work. And different
markets for different things shouldn't be confused. There's enough trouble trying to spy
gold and silver's underlying direction right now without mistaking chocolate in one store for cocoa on the other side of the world.
Adrian Ash, 01 May '13
Adrian Ash runs the research desk at BullionVault, the physical gold and silver market
for private investors online. Formerly head of editorial at London's top publisher of
private-investment advice, Adrian Ash was City correspondent for The Daily
In Commerzbank's opinion, a comparison between the current situation in gold and the former bubbles is superfluous at best.
Frank Holmes, 02 May '13
Frank Holmes is chief executive officer and chief investment officer of US Global
Investors Inc., a registered investment adviser managing approximately $4.8 billion in
13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a
controlling interest in US Global Investors in 1989, after an accomplished career in
Canada's capital markets. His specialized knowledge gives him expertise in resource-
based industries and money management.
Gold Market Speculation: Who, What and Why? - 30 April 2013
Making sense of the Comex...
EVERY FRIDAY the Commodity Futures Trading Commission releases data that enable
analysts to 'take the pulse' of various commodity markets, writes Ben Traynor at BullionVault.
The Commitments of Traders (CoT) report gives the aggregate positions held by traders
from the previous Tuesday, including the number of long contracts (that stand to benefit if prices rise) and short contracts (that benefit if they fall).
Included in the CoT is positioning in gold and silver futures and options on the New
York Comex. A futures contract is a standardized agreement to buy or sell a particular
commodity at a particular date in the future. On the Comex, each gold futures contract
is for 100 troy ounces, while each silver contract is an agreement to buy or sell 5,000
ounces. A Comex option meanwhile gives its owner the right, but not the obligation, to
buy or sell a futures contract.
The CoT breaks traders down into four categories:
1. Producer/Merchant/Processor/User
2. Swap Dealers
3. Managed Money 4. Other Reportables
Other smaller traders are also accounted for separately as 'Nonreportables'.
This CFTC document gives brief descriptions for the four categories above. In essence,
the first, Producer/Merchant etc., is anyone who is in the relevant industry commercially
and using the futures market to hedge the price of their inputs or outputs (e.g. mining companies, refiners, jewelry manufacturers in the case of gold).
A Swap Dealer (usually a division of a major bank, see here for a list) may be dealing
in swaps with speculative counterparties or with industry clients looking to hedge; the
swap dealer may then be using the futures market to hedge their own book.
Managed Money, as the name suggests, includes hedge funds and the like, while Other
Reportables are traders large enough to report their positions but who are judged not to fit into any of the other three categories.
One closely-watched metric from the weekly CoT is the so-called speculative net long,
which is calculated by taking the total number of open long contracts held by
'speculators' (we'll get to who they are in a moment) and subtracting the number of open short contracts.
The spec net long is viewed by many as a useful gauge of how bullish or bearish the
market is. If the spec net long goes up, the implication is that speculators are growing more bullish. If it goes down, they're getting less so.
There is, however, a problem with the spec net long. There doesn't seem to be
agreement on what exactly it is. Different analysts calculate it differently, depending on who they class as speculators and the types of contracts they look at.
Who are the speculators?
Until September 2009, the CoT used to break large traders down into two main camps:
commercial and noncommercial (there was, as now, also a Nonreportables category to account for smaller players).
Commercials comprised the first two categories mentioned above, Producer/Merchant etc.
and Swap Dealers. The noncommercials were regarded as speculative money, and hence
it was their positioning that was used to calculate the spec net long.
Since September 2009, when the CFTC started publishing its disaggregated CoT, the
picture has become more nuanced. Many analysts still lump Managed Money and Other
Reportables together as the noncommercial, speculative end of the market. An example
is Japanese trading house Mitsui, whose weekly report quotes the net long in broken
down in terms of 'Large Specs' (i.e. Managed Money and Other reportable together) and
'Small Specs' (the Nonreportables), in terms of futures only, options, and the futures and options combined.
South Africa's Standard Bank also lumps both types of noncommercial player together,
calculating a net long figure based on the aggregate futures and options positioning of Managed Money and Other Reportables together.
Others analysts prefer to look at Managed Money in isolation, viewing it as a purer
measure of speculative sentiment. One example is Commerzbank, whose research notes
quote the spec net long in terms of futures contracts held by Managed Money. Brokerage
INTL FCStone also looks just at the managed Money category, but it differs from
Commerzbank in that it uses futures and options combined to calculate the figures it quotes as the spec net long.
Which classifications of traders you count as speculative can make a difference. As an
illustration, here's what happened in the week ended Tuesday 16 April, a week in which
gold saw its steepest price drop in three decades:
Managed Money responded to the price drop by cutting aggregate short positions and
increasing long ones. Other Reportables did the exact opposite (as did Nonreportables).
And this was far from the only week when the two camps of traders moved in different
directions. It seems the positioning decisions of Managed Money and Other Reportables
are driven by different motivations.
There is no right or wrong answer when it comes to who to include as 'speculative'
traders.In many cases it is a judgment call for the regulator, not an immutable fact.
An important point to stress is that it is the trader that is categorized, not trades
themselves. This means that an entity classified as 'speculative' (Managed Money or, for
some analysts, Other Reportable) may still hold positions that have a nonspeculative
motive (e.g. hedging a swap position) and vice versa. Yet those positions will be counted towards the grand total of such positions held by speculators.
What contracts should be considered?
For each commodity market the CFTC publishes two versions of the CoT each Friday.
One is based only on positioning in futures contracts while the other also includes
options. Most weeks, both reports tell a similar story in terms of changes in the spec net
long. But this is not always so.
The table below shows how the spec net long changed in the week ended April 16 2013,
according to four different ways of calculating it:
By the end of Tuesday 16 April gold was down more than 10% from a week earlier. As
you can see from the table, this price drop was met by a large increase in the futures
only net long position of Managed Money, whose futures and options net long also increased, though less dramatically.
If you include Other Reportables, however, then for the week in question it makes a
difference whether or not you include options. On a futures only basis the net long of all
noncommercials went up, but if you include options it fell. Why?
Our guess is that this is in part explained by what's known as delta-weighting. When
calculating traders' positions for its weekly report, the CFTC weights long and short
option positions according to what's known as the 'delta', the sensitivity of the option's
price to movements in the underlying, in this case the price of a gold futures contract.
So if a $1 move in the price of the futures contract results in a $0.50 move in the price of the option, the option is said to have a delta factor of 0.5.
Let's say a trader holds 100 identical call options (the right to buy at a given strike price).
He is considered to be long since he stands to benefit from a rising price in the
underlying. The CFTC converts the trader's option position into a futures contract
equivalent by multiplying the number of contracts by the delta factor. If the option has a
delta of 0.5 then the trader's option position appears in the futures and options CoT report as a long position of 50 futures contracts.
By April 16, with gold having fallen so hard, many of the long options held a week earlier
were now well out of the money. Those that had not been closed out will have seen their
deltas fall dramatically. A call option to buy at $1800 an ounce isn't worth much once
gold's fallen below $1350 – and it doesn't get much more valuable even if gold climbs $50 or $100 from there.
The same dynamic works the other way with short positions – any well out-of-the-
money puts on Tuesday April 9 that were still open a week later will have seen their
deltas rise.
This, we suspect, goes some way to explaining why the changes in futures and options
spec net long cited above tell a different story from the futures only. On Tuesday 16
April, the biggest open interest for May call options was at the $1650 strike price, at
12,261 contracts. Yet these calls would have been given a lower weighting in the CoT for that day than they had been a week earlier.
Of course, market-driven changes to delta weighting are not the whole story – no doubt
a lot of long option positions were closed and short ones opened when the price started
to fall. This aspect of the CoT is however worth bearing in mind when analyzing the
numbers, especially at times when the price has moved a long way.
Why are traders long or short?
When trying to make sense of Comex positioning, the fundamental question is why
traders are long or short. Are they hedging a commercial activity? A position in another market? Or are they taking an out-and-out speculative bet on price direction?
The CoT does not provide enough information to answer these questions definitively.
Classifying traders according to their typical trading activity, as the CFTC does, allows us
to inferences, but always bear in mind that even professional analysts don't agree on
who should be regarded as a speculator. Remember also that just because a trader may
be classed in a 'speculative' category does not mean all their trading should be considered as such.
As we have seen, it can make a significant difference who you regard as a speculator, as
well as the types of contracts you take into consideration. These decisions are judgment
calls. Often it makes little difference to the overall story whether you look at futures only
or futures and options, or whether or not you split out Managed Money. But occasionally
it does – and as we saw in April 2013 this can be at times when sharp price moves have
already created a confusing picture.
Ben Traynor, 30 Apr '13
Editor of Gold News, the analysis and investment research site from world-leading gold
ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street
Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he
is a professional writer and editor with a specialist interest in monetary economics. Ben
can be found on
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