In the latest Weekly Update we pointed out that the commercial position in the futures market is simply the opposite of the speculative position. Consequently, it isn’t possible for speculators to increase their long exposure to COMEX gold futures unless commercials increase their short exposure. This means that when speculators, as a group, recently piled into long positions in gold futures, it was a mathematical necessity that at the same time there be a rapid increase in the commercial net-short position. Furthermore, we can be sure that speculators were the drivers of this process because the price went up along with the speculative buying, as it almost always does. We are returning to this topic today due to an article posted at Mineweb.com on Monday.

Apart from a quote by Doug Casey*, the above-linked article is total nonsense from start to finish. Its central idea is that the recent rapid build-up in the commercial net-short position in Comex gold futures is evidence of commercial traders positioning themselves to profit from a large decline in the gold price, in similar fashion to the way they positioned themselves to profit from the large gold-price decline that occurred in April of last year.

The reality is that large price declines in the gold market have always, and will always, go hand-in-hand with the commercials becoming less ‘short’ or more ‘long’, because large price declines always go with speculative selling. Just as speculators, as a group, can’t increase their long exposure to gold futures unless commercial traders increase their short exposure, speculators, as a group, can’t liquidate their longs unless commercials liquidate their shorts. To repeat: one is a simple offset of the other, with speculators in the driving seat.

The above-linked Mineweb piece is full of silly comments, but the silliest comment of all is reserved for the final paragraph. We are referring to this: “The big money is totally profit oriented so those with it have the power to sell short, drive the price down and then repurchase at far lower prices and allow the prices to rise again and profit on the upside accordingly.” We could write an entire article dealing with the errors in this one sentence, but we won’t; we’ll summarise. First, every rational participant in the financial markets is “profit oriented”. Second, having access to a lot of money and being profit oriented does not give a trader the power to make prices do whatever he wants. Even the central bank, which has unlimited access to money, often has trouble making prices cooperate in the short term and has never been successful at controlling prices over long periods. Third, unfortunately for the “big money”, in the real world it isn’t possible to drive a major financial market down via aggressive short selling and then cover the short position while the price remains low. Covering the short position will drive the price right back up again. Sometimes the price rise fueled by short covering will be less than the price decline fueled by the prior shorting, but at other times it will be more. On average, the profit from such a strategy will be ZERO.

In any case, we can tell from the relationship between price changes and changes in net positions that it’s the speculators and not the commercials that are driving the gold market