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Huge gold short position detailed in Commitments of Traders
February 25, 2013, 1:04 PM
After a selloff that dragged gold futures down by more than 2% last week, Monday’s rebound isn’t much of a surprise, and some analysts say that a report released Friday has a lot to do with it.

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Analysts pointed out some interesting developments in the Commitments of Traders report released by the U.S. Commodity Futures Trading Commission.

“The producer merchants, the category that includes the natural hedgers, are at their lowest net short position since 2008 at the same time that the managed money traders, the funds, are record short and at their lowest net long position since November 18, 2008,” said Gene Arensberg, editor of the Got Gold Report. “I have not seen the COT ‘rubber bands’ so over-stretched in opposite directions as they are now.”

The funds showed a collective reduction of nearly 36%, or 23,772 contracts, in their net long gold positions to an “extremely low” 42,810 contract net long positions, according to Arensberg.

Extreme lows for the managed money net long positions are “usually associated with important bottoms for the price of gold,” said Arensberg.

James Turk, founder and chairman of GoldMoney, said the COT report was “unprecedented,” in part because the professional traders category “had one of the largest switches from long to short that I can recall.”

He pointed out that the report was based on data only from Tuesday, “so it does not even capture the additional shorting that was likely when gold was under pressure the rest of the week.”

He also see the extreme bearish levels as laying the groundwork for a rebound like Monday’s.

“It means that the short position in gold is huge and potentially vulnerable,” he said. “In other words, it could lead to a buying panic by the shorts if the gold price continues to climb higher as it is doing today.”

On Monday, April gold GCJ3 +0.61% traded at $1,589.40 an ounce, up $16.60, or 1.1%. It settled Friday at its lowest level in seven months.

Basically, the market can gather two things from the COT report, said Brien Lundin, editor of Gold Newsletter. “We can expect very high volatility and at some point, a powerful short-covering rally should occur,” he said.

For more: UBS is predicting a ‘major gold rally’ this year.

http://blogs.marketwatch.com/thetell/2013/02/25/huge-gold-short-position-detailed-in-commitment-of-traders/