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A Gold Whale Surfaces

(This is a condensed and edited version of an article previously published for subscribers)

Compelling data in recent Commitments of Traders (COT) reports point to the emergence of a very large buyer in COMEX gold futures. The last four COT reports, starting with the report for positions held as of August 10, show a dramatic increase on the long side in gold for the 4 largest traders (not to be confused with the concentrated short position I speak of regularly, particularly in silver).  Data over the past 4 reporting weeks indicate that a large non-commercial trader has amassed as many as 40,000 COMEX gold contracts, the equivalent of 4 million ounces of gold.

In addition to the concentrated long position being among the highest on record, even more interesting is that the sharp increase began during the reporting week corresponding to the recent deliberate smash down in gold and silver prices into August 9. What this indicates is that the large non-commercial trader, most likely included in the Other Large Trader reporting category, bought most aggressively into that price smash – apparently by design.

For the record, nearly 40,000 contracts of COMEX gold futures has a total notional dollar value of $7.2 billion (at $1800 per ounce) and each dollar move higher or lower would equate to $4 million for the holder, and $400 million for each $100 move in the gold price. Minimum initial margin requirements would run $8250 per contract or $330 million for 40,000 contracts. My best guess is that the position in question was acquired at roughly a $1770 per ounce average price.

At the same time, a prominent large investor, John Paulson, has been quite vocal about the future prospects for sharply higher gold prices. He is someone who is quite capable of amassing such a large COMEX gold position. In addition, Paulson has publicly remarked that he intends to deploy leverage designed to produce an ultimate return on gold of 25 to 50 times his original investment. Certainly, a large core long position in COMEX gold futures augmented with other derivatives, such as options, would seem to provide the opportunity for such outsized returns.

The large, long gold futures position was established and added to on the deliberate price smash into August 10 – almost as if the buyer was waiting to start accumulating on lower prices. Make no mistake, whoever the buyer is, it’s safe to say that it is not a momentum or technical type trader buying price breakouts and who is likely to sell on price breakdowns. Buying into a severe price decline connotes the actions of someone interested in accumulating at lower prices, along with the implication of holding the position for however long it takes before true value is achieved. These are hallmarks for Paulson’s past market plays. Long a gold advocate, Paulson was the largest holder of GLD, the big gold ETF in past years, but if he is the big whale in COMEX gold future, as I suspect, that is something new.

Should gold prices surge higher in the future as the buyer of the gold futures contracts obviously anticipates, the large purchase threatens to upset the well-oiled machine on the COMEX in force for decades in which the commercials continuously hoodwinked the managed money traders in and out of positions. The large purchase will only add to the burden of the commercial shorts to provide enough new short positions to prevent prices from rising.  As word of the large position gets out, other large traders may also become interested in gold. And if it is Paulson, who wouldn’t want to piggy-back on a trade from someone who single-handily netted $20 billion in his famous bet against subprime mortgages in the Great Financial Crisis?

Ted Butler

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