Norcini has been stunningly accurate in his predictions of the movement in the gold and silver markets.  Now the acclaimed trader discusses these incredibly important developments in both of these markets below:

Eric King:  “I will hand it off to you on the COT (Commitment of Traders Report).  Dan, you can give out the numbers there, but I told you I thought there was a 50,000 contract shift by the commercials (this week, which will be reported in next week’s COT report).  So they should (now) be net long (gold) 30,000 to 35,000 contracts.  I told you I thought it was (the year) 2001 since they had been long.  You went and checked the history and indeed it was.”

Norcini:  “Yes (the commercials were last long gold in 2001).  We don’t have the detailed breakdown to data that far (back), that we do since they revised it going back to 2006, but nonetheless we can get a pretty good insight into who was positioned where.

Of course gold was in a bear market for 20 years before it was turning, but when you look at the positioning of speculators, they had been driving that market down.  The funds were short and the commercials were long (back in 2001) (see chart below).

But what basically happened was the commercials were positioned on the long side of the gold market at the very bottom in November of 2001.

If you go back and look at a monthly chart (see below), it’s kind of interesting because that was the bottom (in 2001 when commercials were net long gold).  From that moment on the gold market never (broke below) that low.  Gold was trading around $274 an ounce and it never again went down to that level.  That’s noteworthy.

Generally, Eric, I don’t like to make a big deal out of these COT reports because way too many people (attempt to) use them as some sort of “Holy Grail,” but I think at this point, because of the dramatic shift we’ve seen now, we are going to have to start paying attention to positioning of these traders from this point forward.

Based on this most recent (COT) report the hedge funds were still net longs in this (gold) market, and the commercials were still net short.  But that did not cover Wednesday, Thursday or Friday’s activity.  And as we know, that was huge volume on Thursday, some of the biggest volume we’ve seen in gold for a long, long time....

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“There was a big change internally in this market and a huge shift in the composition of who was on what side (of the gold market).  My suspicions are like yours.  I would not be the least bit surprised when we see next Friday’s (COT) report, to see that maybe a 50,000 contract shift, from basically the commercials being net short 15,000, to perhaps being net long by 30,000 contracts, and the hedge funds (now being) on the net short side of this market.

We have the ingredients for a turn (in the gold market), but all of this is going to depend on some sort of spark to begin to force the speculators out (of their short positions) ... Remember, you don’t have the short selling from the commercial category anymore.  They are on the long side.  So if you are going to get this market to drop lower, you are going to have to have hedge funds and other speculators who want to aggressively sell (gold short).

... We have had a significant retracement in gold.  I’m not saying it can’t go lower, but what I am saying is that it’s going to take a lot of fresh short selling to drive this market down substantially lower at this point.  At some point the risk/reward ratio no longer favors being short in gold, and it could be that we are getting very close to that level right now.” 

Norcini also added:  “People who put their positions on in a market, whether they take a long position or whether they take a short position, based on a Commitment of Traders reading are novices.  I don’t know how else to say it.  They have no experience trading.

You don’t ever want to do that as a trader.  First off, you don’t know when any market becomes imbalanced.  Some people say, ‘Well, the market has too many people on the long side,’ or ‘the market has too many people on the short side.’  Frankly, excuse my language, but how the hell does anybody know that?

Who comes out and declares categorically it cannot get longer than it is, or cannot get shorter than it is?  The fact is nobody knows.  You can watch these things, you can monitor these things, you can make historical comparisons, but you can’t say dogmatically because every year, every month, every week, every day is a new scenario for a market to trade.

We can’t always extrapolate from what we’ve seen in the past to what we’re going to see in the future.  We just can’t.  So when you look at the COT (Commitment of Traders), yes you can note what you think might be imbalances, but until the price confirms your way of thinking, you don’t act on it (as a trader). 

And if you want to act on it (as a trader, not a long-term investor) you might as well go to Vegas and roll the dice because there’s no difference.  You are basically just going to get out there and test your luck and you might make it and you might not.  

The consequences if you fail, however, can be devastating because anybody who took a long position in the gold market prior to this week’s selloff based on a COT report just got mauled.  Their trading account was probably wiped out and their career as a trader is probably finished.

So you look at these things, and you watch the price action to tell you, yes, the selling is becoming exhausted, and then perhaps you can use that in conjunction with some other indicators.  That’s what we are trying to do here now as we’re watching this market descend further. 

We’re noting (now that) the balance has shifted.  We’re now noting that there is more than likely a very good chance the commercials are net long this market (in gold for the first time in 12 years), against hedge funds being net short.  Now that this is occurring we are going to very closely monitor the price action to give us some sort of indication that the selling pressure is alleviating and that perhaps this (gold) market is going to try to forge a bottom.

When it does, I think we will be able to note it and position ourselves accordingly and make money going in the other direction.  That’s what this game is all about when all is said and done.”

IMPORTANT - This was just a small portion of the type of critical information which is covered each week in the KWN Weekly Metals Wrap with Bill Haynes and Dan Norcini.  To hear a continuation of this conversation, you can listen to the entire interview by CLICKING HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Dr. Paul Craig Roberts, MEP Nigel Farage, Rob Arnott, Egon von Greyerz, Gerald Celente, James Turk, Dr. Philippa Malmgren, Eric Sprott, Jim Grant and Art Cashin are available now.  Also, be sure to hear the other recent KWN interviews which include Marc Faber and Felix Zulauf by CLICKING HERE.

Eric King

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