Let me clarify the concept here of commercial futures so that
you better understand what's happening with the commercial futures
in the gold market:
When the gold commercial net short is very low, that's typically
bullish for gold, and when it's very high, it's typically bearish.
Some folks have labeled the commercials as the 'smart' money,
however this is not really the case. It's all about hedging,
let me explain with a couple of examples:
Let's say you have a farmer who has a crop of soybeans in the
field of about 100,000 bushels that he will reap from the fields in
3 months and sell on the open market. Let's say that the
price of soybeans is currently trading at $10 a bushel, and that he
has a break even price of $7 a bushel. He is concerned that
prices may fall and is happy to lock in $10 a bushel now for these
soybeans that he will sell 3 months from now as that's a nice
profit.
The farmer can lock in this $10 price by selling 20 soybeans
futures (20 soybeans contracts controls 100,000 bushels of soybeans
equal to his current crop in the field as each future contract
controls 5000 bushels) with an expiration 3 months from now.
This is called a
Short
Hedge because he is Long the crop in the field, but
short the futures as the hedge. The short hedge will allow
him to lock in the current $10 price and sell his crop 3 months
from now at $10, which he is happy with. If Soybeans falls to
$7 a bushel three months from now he can still sell them for $10.
If prices go higher 3 months from now to $12, well he
obviously loses on the futures, but gains on this crop. This
is a perfect hedge
So back to the commercial gold futures:
When gold prices rise, the commercial net short increases, why?
It's not that the
commercial traders are bearish, it's the exact same thing as
the example above with the soybeans, the gold miners are adding
more short hedges. You have a gold producer / miner who has
gold in the ground to mine and sell on the open market in the
future. The higher that gold prices go, the more favorable it
is for the gold miner who is more willing to lock in current gold
prices for his commodity by putting on a short hedge, i.e. selling
gold future contracts, this the commercial net short
increases.
It should now be clear what's actually happening here with these
detailed examples.
I also like to see large speculators decreasing their longs as
the Commercials decrease their shorts, ie as the bars narrow to the
median line as is occuring...
Gold Commercial shorts examplained
Posted by matt on 15th of Jul 2017 at 04:57 pm
Let me clarify the concept here of commercial futures so that you better understand what's happening with the commercial futures in the gold market:
When the gold commercial net short is very low, that's typically bullish for gold, and when it's very high, it's typically bearish. Some folks have labeled the commercials as the 'smart' money, however this is not really the case. It's all about hedging, let me explain with a couple of examples:
Let's say you have a farmer who has a crop of soybeans in the field of about 100,000 bushels that he will reap from the fields in 3 months and sell on the open market. Let's say that the price of soybeans is currently trading at $10 a bushel, and that he has a break even price of $7 a bushel. He is concerned that prices may fall and is happy to lock in $10 a bushel now for these soybeans that he will sell 3 months from now as that's a nice profit.
The farmer can lock in this $10 price by selling 20 soybeans futures (20 soybeans contracts controls 100,000 bushels of soybeans equal to his current crop in the field as each future contract controls 5000 bushels) with an expiration 3 months from now. This is called a Short Hedge because he is Long the crop in the field, but short the futures as the hedge. The short hedge will allow him to lock in the current $10 price and sell his crop 3 months from now at $10, which he is happy with. If Soybeans falls to $7 a bushel three months from now he can still sell them for $10. If prices go higher 3 months from now to $12, well he obviously loses on the futures, but gains on this crop. This is a perfect hedge
So back to the commercial gold futures:
When gold prices rise, the commercial net short increases, why? It's not that the commercial traders are bearish, it's the exact same thing as the example above with the soybeans, the gold miners are adding more short hedges. You have a gold producer / miner who has gold in the ground to mine and sell on the open market in the future. The higher that gold prices go, the more favorable it is for the gold miner who is more willing to lock in current gold prices for his commodity by putting on a short hedge, i.e. selling gold future contracts, this the commercial net short increases.
It should now be clear what's actually happening here with these detailed examples.
Nicely put Matt. I also like
Posted by saturn6 on 15th of Jul 2017 at 05:03 pm
Nicely put Matt.
I also like to see large speculators decreasing their longs as the Commercials decrease their shorts, ie as the bars narrow to the median line as is occuring...
speculators are dumb money
Posted by roger on 15th of Jul 2017 at 05:50 pm
commercials are smart money