Wednesday, October 26th, 2016 MST

LCs reduce long dollar position

When I woke to lower metal prices this morning, I was somewhat taken aback. I had just read Gene Arensberg’s report on the huge reduction in the large commercials’ long position in the dollar. The LCs, who had been bullish on the dollar, reversed course last week. As Arensberg notes, the LCS are thought to have a crystal ball when it comes to predicting short to intermediate-term futures prices.

For the last reporting period, the LCs dumped 7,042 USD net long contracts for a whopping 71% reduction in their exposure to the dollar. Looking a little further back, the LCs appear to have completely abandoned the dollar. May 1 the LCs were long 23,380 USD contracts; as of the last reporting period they held only 2,811 net long contracts, an 88% reduction. Now that is a position reversal of monumental proportions.

The dollar is, of course, the other side of the coin from gold and silver. Investors buy gold and silver primarily as hedges against a decling dollar. So, when supposedly astute investors dump dollars, that is bullish for gold and silver. And, Arensberg posted another report on the LCs’ position in gold last week, on which I commented in my June 18 post:

Meanwhile, large commercials (LCs) decreased their net short gold position by 38,391 contracts or 28% for the weekly reporting period ending Tuesday June 12. This is considered bullish as it is commonly believed that the LCs have a crystal ball when it comes to short-term swings in the price of gold. When LCs see lower prices ahead, they increase their short position; when they see higher prices ahead, they reduce their net short position.

So, the LCs have not only reduced their long position in the dollar but also have reduced their short position in gold. Despite today’s lower prices, these are bullish developments for gold and silver.

A final thought: the LCs’ crystal ball sometimes gets cloudy, making it difficult to read. In late 2005, they were short huge positions in gold and silver, and by May 2006 had lost billions as gold and silver climbed to decades high prices. So, the LCs’ recent activity in the dollar and the gold futures markets are not guarantees of higher prices for gold and silver, but I’d rather see the LCs bullish on gold than bearish.

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