Who Drives the Price of Gold?

A common fantasy of many precious metals bloggers is that there is some evil cartel that drives the price of gold by manipulating it on the COMEX.  There is ample data that shows otherwise, which I have been reluctant to dive into, on account of my new policy of not spending my time educating unappreciative goldbugs for free.

Recently, however Trader Dan Norcini dug into the data to try to clearly illustrate this point once and for all: that it’s the hedge fund category of traders on the COMEX who drive prices -  despite the fact that the precious metals bloggers who don’t know what they’re talking about tend to focus on the large Producer/Merchant category of traders instead and assign blame and attribute motivation to their positioning.   I’ve mentioned several times in passing, in various comment threads, that the big players are counterparties – taking the other side of the flow of the price-makers.   But rather than belabor the point, just look at the data.

Trader Dan’s post separated the long and short positioning for the Managed Money category of traders in the COT (Commitment of Traders) report that is published weekly by the CFTC.  Dan goes into detail to describe the changes of the positionings and their impact on the price of gold over the past 2 years.  When hedge funds are buying and covering shorts, the price of gold rises.   Dan goes into more detail to distinguish between what he views as the significance of short covering vs. new longs coming into the market.

I suggested to him that if one were to just look at the net positoning instead of the longs and shorts separately (which gets confusing for novices, in my opinion, the way he graphed it), that the picture would be even clearer.  So I went and compiled the data myself.  Here it is, presented without further comment.

The first chart is the NET positioning (longs – shorts) of the Producer/Merchant category of traders in the CFTC report vs. the price of gold.  This category would include what the goldbug community refers to as “The Cartel”:

pop quiz - is this a price maker or a price taker?

pop quiz – is this a price maker or a price taker?

The next chart is the NET positioning of the Managed Money category of traders in the CFTC report vs. the price of gold:

Managed Money Net positioning vs gold price

Managed Money Net positioning vs gold price

These charts clearly show that one of these classes of traders is driving/making price – highly correlated with price – and that one of these categories of traders is acting as a counterparty: taking price.  I’ll leave it up to you to figure out which is which.

Dan Norcini – Gold Price vs Hedge Fund Activity

CFTC COT Data

Precious Metals Charlatans – Freaks of the Industry

-KD

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