London & Hong Kong Traders:

Open interest has fallen almost 30%, but gold has only dropped 6%. Normally if you are a short in a market and you start to have an asset correct because of significant liquidation, you will see a precipitous drop in price. Given the sheer volume of contracts that has been liquidated, we should have seen a massive correction in gold. Instead it has stayed incredibly strong.

More here.

Larry Williams writes:

Open interest rallies or declines must be put into perspective of who is causing the OI move, which group of traders…to just mention OI w.out background is not a full meal.

Rocky Humbert writes: 

I would add the following to Larry's comment — which is something that makes today's markets quite different from decades past — and which changes the character of OI and CFTC commitment of traders data.

In a futures market, the long positions must EQUAL the short positions. Hence it's a zero sum game. This is not true in the physical gold ETF!!!

For example, when a long liquidates his gold futures, the short is also liquidating his short position. And the open interest declines. Larry and Anatoly believe that there is predictive information in this.

However, in the gold etf, there is no genuine reduction in open interest. Instead, when an ETF long sells his gold ETF position, the gold leaves the ETF system — and the physical gold finds its way to another holder outside of the ETF system. Because gold is (mostly) not consumed by commercial end users, the gold remains in existence in perpetuity. In theory, in a futures market, if the open interest is zero (and remains at zero), the price of a commodity will not change. The price will just sit there. However, in the case of physical gold, the open interest can never be zero — since the physical bullion will continue to exist (whether inside or outside of the ETF system.) This means that gold (whether entering or leaving the ETF system) has a quasi-permanent open interest.

None of this is necessarily predictive of the gold price– however, it's important to understand that the CFTC data on gold futures open interest misses this nuance. 

Larry Williams: 

Great points, thanks for making them.

Who are the players in the ETFs? Relatively small specs, I assume.

And on gold consumption it is consumed, not like wheat, but the physical inventory is turned into rings and things so the inventory needs to be replaced my commercial users. Commercials do take delivery. 


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