Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more therafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:

 

“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,” according to an e-mailed response to questions.”

 

(emphasis added)

A friend reminded us that Paulson & Co. runs many funds that are denominated in gold. Any redemptions from these funds would therefore reduce the need for hedging. So it seems that Paulson's investors have cut their exposure to the gold denominated versions of his funds at exactly the wrong moment. This is actually something that always tends to happen near market lows. Apparently a number of other prominent hedge funds, including the Soros fund, also cut their exposure in the second quarter. So far they have all been wrong twice: first by holding on until the lows were made, and then by selling just as the market reversed and a rally started. As a matter of fact, we think it is a good thing these investors are gone. They were all late-comers to the gold bull market and their involvement has essentially proved to be a curse rather than a blessing. In fact, one should probably begin to get careful once they decide to get involved again, which is bound to happen at some point. In the meantime, these latest news may well contribute to a developing 'wall of worry' backdrop.

 

Gold Stocks – Technical Conditions Continue to Improve

In our last update we discussed the idea that the previous downside gap region in the HUI should begin to provide support if the recent advance was the 'real McCoy'. This appears to have happened and hopefully this time the support will manage to hold.

In addition, the HUI has in the meantime already advanced toward the 100-day moving average, which has not happened in a long time. A new MACD buy signal has been given as well. Last but not least, although this is written before the close of trading on Thursday, it appears as though the index may finally be about to make a higher high after putting in its first major higher low last week. This clearly represents a notable change in the market's character.

 


 

HUI-annot

The HUI daily. The technical backdrop continues to improve – click to enlarge.

 


 

Below is another look at the HUI-gold ratio, which has broken its previous downtrend and continues to advance. Currently the ratio is close to a lateral level of resistance, but it seems likely that it will be overcome. An ongoing rise in this ratio is a necessary precondition for the continuation of the rebound.

 


 

HUI-gold ratio

The HUI-gold ratio – there are numerous positive divergences, and it appears as though it is finally overcoming its medium term downtrend line for good – click to enlarge.

 


 

Gold – Dips Are Getting Bought, Sentiment and Positioning Leave a Lot of Room for Further Improvement

Gold suffered another sharp dip early in Thursday's trading, but once again buying emerged in an area of near term support. Note the surge in trading volume near the intraday lows. The probability that resistance in the $1,350 area will fall is clearly rising – the more often dips elicit new buying and the more often the resistance area is tested, the more likely it will fall.

 


 

Dec Gold-30 minute

Gold December futures contract, 30 minute chart. The dip early on Thursday has attracted buyers. Volume near the low was strong, which is often a positive indication – click to enlarge.

 


 

Lastly, we want to briefly comment on recent developments on the sentiment and positioning front. The most recent commitments of traders reports show that big speculators are finally reducing their gross short positions in gold futures, leading to a slight increase in their net long position. The net long position had recently fallen back to levels last seen in 2005. Contrary to the widespread idea that an increase in speculative short positions is a positive, we hold that on the contrary, that bulls want to see growth in the net long position held by large speculators. This is so because this is the group that usually gets market direction right and the buying and selling of which is the major driver in the futures market. It only serves as a contrary indicator at extremes. Quite often it happens even near extremes that the large speculator category is beginning to take defensive action shortly before major highs or lows are reached (this happened e.g. in the silver market shortly before it topped in late April 2011).

Since recently a short term extreme in prices and positioning has in fact been reached, a change of opinion by this group of market participants would open the way for at least a major retracement rally. Here is a chart depicting the positioning of futures traders:

 


 

CoT gold

Commitments of traders in COMEX gold futures, via sentimentrader. Large speculators have finally stopped adding to their gross shorts and have begun to reverse the recent trend in positioning – click to enlarge.

 


 

Along similar lines, we find that the 'public opinion' chart – a composite of various sentiment surveys – remains at a very low level, just slightly off its recent lows. Should the recent rally prove durable, there would be a lot of negative sentiment that could be unwound and provide fuel for additional advances. Similar to the CoTs, negative sentiment is not a bullish indicator per se. It is contrarian only near extremes. Once a trend changes, it can help to support and magnify the new trend.

In other words, this will only be meaningful if a significant trend change is indeed in the works (the obvious caveat to this is that gold has yet to move above significant short term resistance). However, once one can be reasonable certain that a more durable trend change is indeed underway, it will of course be a good thing that the indicator is currently still at such a low level.

 


 

Public opinion gold

Gold, public opinion. If the market changes direction, there is a lot of room for sentiment to move from one extreme to the other – click to enlarge.

 


 

Conclusion:

So far, so good.

 

Addendum:

Shortly after we finished writing this update, gold has indeed broken out above the $1,350 resistance level. So a few of the above comments have already been superseded. If the breakout holds, there is likely going to be additional upside in the short to medium term.

 

 

Charts by: StockCharts, BarCharts, Sentimentrader


 

 
 

Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.

 

Thank you for your support!

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

 
 

3 Responses to “Gold and Gold Stocks Update – John Paulson Sells GLD”

  • ManAboutDallas:

    There’s another side to the GLD redemption : it’s how the Smart Money, i.e. the Soros’ and the Paulson’s, arbitrage their way into physical gold. Soros has done this already, then bought that huge call position in GDX or GDXJ, can’t remember which. Paulson may just be doing the same.

  • worldend666:

    A long time since I saw smiles on the faces of gold investors :)

  • rodney:

    Yes, the close at 30.40 for GDX makes it look like a genuine breakout. Strong volume too.

    Long @ 27.42, looking for opportunities to add some more. This could become another bull market.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • HelloThe Stock Market in Trouble - How Bad Can it Get?
      A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
  • mineGold Stocks at an Interesting Juncture
      A Fascinating Parallel We have recently discussed the sentiment and positioning backdrop in gold on two separate occasion, as it has once again reached rarely encountered extremes (see “Gold Panic” and “Gold and the Grave Dancers” for details).   Image via bullionstreet.com   Not much has changed on that front, except for the fact that small speculators have increased their net short position in COMEX gold futures to the highest level in nearly three decades last...
  • drop-water-gold-power-40854578Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
      Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday.   Image credit: dreamstime.com   Interestingly, for the first time in many months, there were three up days in a row prior to the...
  • gold rush copyA new Multi-Year High in Buying by Gold Sector Insiders
      Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years.   Image source: bidness etc   The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%:   INK's gold insider sentiment...
  • 110570_Panem-et-circensesThe Trump Phenomenon
      Surprising Success We were wondering a while if there was anything we could say about the highly entertaining real estate mogul who has successfully hijacked the Republican nomination process – apart from the fact that he is sporting a haircut that looks a bit like a helicopter landing pad, endowing him with instant recognizability:   Teflon-Donald Trump, the unlikely front-runner with the interesting haircut Photo credit: Dominick Reuter / Reuters   Of course...
  • oil_3136994bIs Crude Oil Close to a Low?
      Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing.   Photo credit: Alamy   Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
  • panic-buttonThe Stock Market's Panic Potential
      The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
  • USDCNY(Daily)The Donald and China, or The Fallacy of Protectionism
      Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
  • rotoThe Economy is in Liquidation Mode
      Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?   The birthplace of roller disco turned out to be edible, sort of Photo via...
  • gold closeupMonetary Metals Supply and Demand Report 9 August, 2015
      Withdrawing the Gold Bid Last week, we left off with this:   “Something is happening with gold…”   It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit, which currently has nontrivial value. A dollar is worth 28.4mg gold. To understand the second, let’s look at how markets work at the mechanical level.   An assortment of well-known bullion coins and bars from all...

Support Acting Man

Archive

Own physical gold and silver outside a bank

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com