Short-Covering or the Biggest Average-Down in History

One of two things is going on in the gold futures and options market – either the Billionaire Bagholders Club™ is doubling down or the shorts are taking profits from the recent plunge.

Here’s Bloomberg:

Hedge funds increased bets on gold rallying after prices plunged the most in 33 years, underscoring billionaire John Paulson’s view that bullion will rebound.

Fund managers and other speculators increased net-long positions in gold by 9.8 percent to 61,579 futures and options in the week ended April 16, U.S. Commodity Futures Trading Commission data show.

Paulson & Co. said in a letter to clients last week, joiningBlackRock Inc. (BLK), the world’s biggest money manager, in predicting a rebound.

“Given the price action, this rise in holdings was pretty surprising,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “People may have been looking to get back into the market and are taking advantage of the price to do so. There are people who still have a long-term belief in it. Physical buyers have also stepped up.”

First of all, this is a good sign. I’m rooting for a rebound even though we’ve had nothing at stake in the precious metals whatsoever since the beginning of the year. But I know many folks that are freaking out and sitting on enormous amounts of either paper or physical or some combination of the two. I know they’re planning on trimming and normalizing into whatever bounce comes so I’m hoping they get the chance.

But one spectator says that the rally was really just a short-covering event and, as such, not a great sign (you want shorts positioned if you’re a long, that’s how prices are pushed higher).

Here’s what Stanley Crouch says:

While the net-long position in gold climbed last week, most of the gain was attributable to a retreat in short holdings rather than an increase in long wagers. The divergence shows that the gain in the net position may reflect short traders taking profit, rather than investors becoming more bullish, according to Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp.

“Sometimes you have to peel the onion when you look at this data,” Crouch said. “It looks like that after such a big drop, people who were short were ready to take their gains. That might also be why the price stabilized, and it could mean that it’s even more vulnerable now.”

You know, it’s possible (likely?) that the bounce was a combination of both short-covering and dip-buying, but I don’t believe that the major funds who are already laden with GLD and miners and such are actually adding to their positions. I think they’re rattled and will be lightening up if the price gets near 1500. But I guess that’s what makes a market.

What do you think is going on?

Source:

Hedge Fund Gold Wagers Defy Worst Slump in 33 Years: Commodities (Bloomberg)