Fueling Golds 2016 Upleg - GoldSeek.com
They bought 15.5k gold-futures contracts that CoT week, cutting their total shorts from near-record levels to 167.5k contracts. But that is still extremely high by all historical standards, not far from the all-time record of 202.3k in early August. Even during the recent Fed-distorted years, speculators gold-futures short-side bets generally meandered in the trading range between 75k to 150k contracts shown above. Merely to return near recent years 75k-contract support for the fifth time since late 2013, speculators are going to have to buy 92.5k gold-futures contracts to offset and cover their shorts. And to mean revert to total speculator shorts normal-year average levels of 65.4k between 2009 and 2012 before the Feds stock levitation started, these traders have to buy a staggering 102.1k contracts. Thats an incredible amount of gold! Each gold-futures contract controls 100 troy ounces of the metal, so that equates to total gold buying in speculators short covering alone of 317.6 tonnes! For an idea of how enormous this is, quarterly global gold investment demand in 2015 up to Q3 averaged 228.0t. So we are talking about overall world investment demand soaring 139% on speculator short covering alone within a condensed several-month span! Short covering unfolds so rapidly because traders are legally obligated to effectively pay back the gold they effectively borrowed to sell short. And the leverage in gold futures is so extreme that they cant afford to wait to cover once gold starts rallying. A single gold-futures contract controls $107,000 worth of gold at $1070, yet only requires a maintenance margin of $3750. That makes for extreme leverage of 28.5x! A mere 3.5% rally in the gold price at that kind of leverage would wipe out 100% of the capital risked by fully-margined gold-futures speculators. So gold-futures short covering rapidly feeds on itself, with all the covering buying blasting golds price rapidly higher which forces additional speculators to cover their own shorts. The more short covering, the faster gold rallies. The faster gold rallies, the more shorts are covered. By the time gold-futures short covering has run its course and fizzled out, speculators buying long-side gold futures start returning. And their bets are exceedingly low right now, which means they also have huge buying to do to mean revert to normal. As of that latest CoT report on the 22nd, American futures speculators only held 189.7k long-side gold contracts. Thats their lowest level since way back in April 2014. In those last normal years between 2009 to 2012, speculators averaged weekly long-side gold-futures positions of 288.5k contracts. Merely to mean revert to those normal levels without even overshooting would require 98.8k contracts of buying equivalent to another 307.2t of gold! In total, American futures speculators alone need to buy the enormous equivalent of 624.8t of gold simply to normalize current extremes!
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