Aug 1, 2018
The Commitment of Traders reports for COMEX gold and silver are back to levels that often precede price bottoms. Could they also be telling us something about the current yuan-gold correlation?
As background for this article, please be sure to review these two posts from last month: Has the PBOC taken control of the Gold Market & Potential Impacts of Yuan-Gold Peg where we first laid out the details of the current yuan-gold correlation and then projected what it might foreshadow.
Our working theory is that China—knowing that a massive devaluation of the yuan versus the dollar is possible/pending due to the expanding U.S. tariffs—is actively attempting to lower the dollar price of many commodities, including gold. Simply put, if the dollar price of these goods can be dropped by roughly the same percentage as the yuan devaluation, the relative cost of the goods in yuan remains unchanged.
Here are the last two months of CNYUSD and COMEX gold plotted together:
But again, it's not just gold. Here's the CNYUSD with COMEX copper:
Here it is with COMEX platinum:
And here it is with COMEX zinc:
As you can see above, however, the most pronounced correlation is in COMEX gold. The question becomes: Is this a deliberate program by the PBOC to act through their global accounts to influence the futures markets OR is this just a bunch of items, trading in tandem and simply reacting to the same stimuli of pending tariffs?
And this leads us to the most recent Commitment of Traders report for COMEX gold. On the report released last Friday, July 27, (surveyed Tuesday, July 24), we saw four significant levels:
• The gold Large Spec GROSS short position was 172,203 contracts. This is a new ALL-TIME high, eclipsing the 159,441 level seen on July 21, 2015 (four days after "Gold Is A Pet Rock" - WSJ).
• The gold Large Spec NET long position was 48,597 contracts. That's the lowest since January 19, 2016.
• The gold Commercial NET short position was 65,668 contracts. That's the smallest since January 26, 2016.
• The silver Large Spec GROSS short position was 84,487 contracts. This is a new ALL-TIME high. The previous peaks were 82,934 back on April 3 of this year and 81,400 contracts on July 14, 2015.
OK, on the surface, that's all pretty bullish, right? There appear to be record amounts of Spec short fuel for an epic squeeze. And most likely this is the case. All we need is a turnaround to start the short-covering extravaganza.
However, you should also consider this... One of the "solutions" that we've discussed for how the PBOC could drive the apparent yuan-gold link is massive shorting through offshore accounts. Sort of like how you see U.S. treasury buying and selling from places like the Cayman Islands when the TIC reports are reconciled (https://www.zerohedge.com/news/2016-06-15/what-behind-record-sale-75-billion-us-treasurys-foreign-holders). In this scenario, the Chinese could be using their own offshore funds to affect COMEX prices. If this were the case, these accounts would likely show up in the Large Spec category, as they almost certainly wouldn't be listed as Commercial.
Again, none of this can be proven. We are simply speculating. However, you'll recall that the yuan-gold peg really took over on June 15, two days after the FOMC. Gold had been steady and rising above $1300 and the CNYUSD was stable, too.
On the CoT surveyed Tuesday, June 12, the Large Specs were GROSS short 72,512 contracts. Again, as of last Tuesday, this position had grown to an all-time high of 172,023. That's nearly 100,000 new shorts! Now granted, much of this 100,000 came from "traditional" Specs such as hedge and trading funds, as price broke down through both the 200-day and 200-week moving averages. But 100,000 contracts?? That's 10,000,000 ounces of new shorting!
For perspective, let's look at the last couple of times COMEX Digital Gold has been smashed on a scale similar to the present:
• After Trump's election, price fell from $1330 to $1130 in seven weeks. The Large Spec GROSS short position rose from 73,177 contracts on 11/1/16 to 112,305 on 1/3/17. An increase of 39,128 contracts.
• At the bear market lows in late 2015, price fell from $1180 to $1059 in seven weeks. The Large Spec GROSS short position rose from 68,551 contracts on 10/27/15 to 143,141 on 12/8/15. An increase of 74,590 contracts.
• In early 2015, price fell from $1290 to $1140 in seven weeks. The Large Spec GROSS short position rose from 43,991 contracts on 2/3/15 to 113,953 contracts on 3/24/15. An increase of 69,962 contracts.
• At present, price has fallen from $1305 to $1215 in seven weeks. The Large Spec GROSS short position has risen from 72,512 contracts to 172,023. An increase of 99,511 contracts.
So, does this prove that the Chinese are driving the yuan-gold link as we suspect? Of course not. However, the CoT data certainly provides some circumstantial evidence of how it might be taking place. Would 25,000-30,000 contracts of PBOC shorting be enough to establish and maintain the peg?
It seems the answer may be in how the data changes when price finally begins to recover. At that point, we'll have to diligently watch the yuan-gold correlation and the CoTs to see if they change in unison. Will price rally in a traditional short squeeze or will price only crawl higher while the massive shorts remain in place, despite what would be significant margin calls? Will price finally break free of the peg as shorts are squeezed and covered? These questions will be answered in the weeks ahead, but it's good to start considering them now as we try to determine where gold prices are headed in the second half of 2018.