I have been speculating for weeks that matters could develop in the wrong direction for the commercial shorts on the COMEX gold market. What these seasoned traders do is sell gold short (with a promise to buy it back at future prices) every time gold becomes technically overbought. I was shocked to see that the COMEX commercial short position was pushing up towards record levels as we entered the fall of 2009 - traditionally the strong season of the year for the gold price.
The strategy is a knee-jerk one, and it usually wins good money for the commercial shorts at the hands of optimistic long traders and speculators. However, I was beginning to think this time that it's just been getting too easy to short gold every time it becomes technically overbought. (The short trade has won at the $1000 level four out of four times since March 2008.)
With gold having just broken out to all-time record nominal US dollar highs, and with COMEX commercial shorts deeply over-extended, it is now logical to expect that we will soon have a new crop of gold buyers (as the short sellers will at some future point have to buy back the gold they sold short at prices which at that time were under $1000 per ounce).
The shortsellers are now facing combined seasonal and cyclical strength in the gold market which overrides such technical factors as MACD and relative strength. As a long-term gold investor, I believed that these seasonal and cyclical factors were more compelling than concerns about gold's short-term overbought position (as it is still moderately priced on a long-term relativity chart).
The following relative gold price chart is courtesy of Adam Hamilton, a brilliant analyst who offers the excellent Zeal Intelligence advisory letter. As you can see, while the gold price has surged to new highs, the price of gold relative to its 200-day moving average remains in the low to moderate range:
I expect that the savvy shorts will wait for a pullback from here to buy back the gold they have already sold (that is, they're too smart to buy all at one time), but now they will be gaming each other, so I'm not sure how many opportunities the shorts are going to have to repurchase gold at much lower prices than we are seeing today. Those who wait for the dust to settle could end up holding the bag for much larger losses.
So who says that short-selling hurts the gold market? The short sellers - too smart for their own good at times - have become our new best friends - and they'll be paying more for gold now and in the future than we did when we bought it long ago!
Hmmm... Here's an interesting tidbit. It turns out the commercial shortsellers in gold are primarily US banks. According to Gene Arensberg, "Just three U.S. banks, the largest of the largest hedgers and short sellers, accounted for six-tenths of all the large commercial net short positioning on the COMEX. It doesn’t take a Harvard economics degree or a Goldman Sachs quant box to understand that the short side – the side which benefits if prices fall – is dominated by a very small, very powerful elite group of financial 'wizards' whose ability to manage risk is now highly questionable."
Let me add to Mr Arensberg's sage comments that a Harvard degree would probably be a disadvantage to a gold market investor at this particular moment in history.
My meditation for today: So, the folks who got trillions in government bailouts are now placing these taxpayer-donated funds on the short side of the gold market? Hey, I'm not complaining --- it's all helping me. But I certainly feel sorry for the US taxpayers - including their children and grandchildren - who are going to be paying for decades to come for the big US banks' costly decision to crowd into COMEX short positions like a flock of geese!