Cotton Charts

Actually, that's a sort of play on words. We're not going to look at the cotton charts. We're going to look at the CoT and some charts.

First, the CoT. Again, remember that this was an odd CoT week. It was a full five days and it started on 1/2, which had the big rally. It also includes the huge selloff of 1/3 and into 1/4. It then captured the really nice rally on Tuesday. So, for the reporting week, we're left with this dichotomy: Gold was down $14 but its OI was UP over 13,000. Silver was UP 24¢ but its OI was down by over 4,000. Hmmmm. What in the name of Harvey Organ is going on here??

Frankly, the gold CoT was great. For the week, the Large Specs dumped 4,800 longs while adding 900 shorts and the Small Specs dumped 3,700 longs while adding 800 shorts. All totaled, the spec side decreased their net long in gold by about 10,200 contracts. For me, because the week was relatively flat overall for price, this spec dumping is just another sign that the 1/3-1/4 beatdown really was a washout low that culminated at $1626 in the wee hours of 1/4.

Now here's the fun part. Soaking up those 10,200 net contracts could have simply come from Cartel short-covering but it didn't. The Cartel only covered 1,300 shorts. The remaining 8,900 contracts were absorbed by Cartel buying and adding long. What more could you want from a bottom? This is a spec dump and Cartel buy. Very bullish, indeed, and it lowered The Cartel net short ratio to just 2.17:1. Again and for reference, just prior to the last two rallies the Cartel net short ratio fell to near 2:1. On 8/14/12, it was 1.98:1 and on 12/26/11 it fell to 2.01:1. Clearly, anything near 2:1 is bullish. With the action of late this past week, we've likely seen the ratio fall even more but we'll have to wait until next Friday to find out.

The Silver CoT is also interesting but not for the same reasons. Remember, on balance price was rising while OI was falling. For the week, the Large Specs dumped about 1,000 longs but still hold over 37,000 contracts. The Small Specs did a double-cross by dumping 1,500 longs and adding 1,500 shorts. The Silver Cartel used this net selling pressure of 4,000 contracts to reduce their net short position by 4,000.

The only change this week is that the other-than-JPM (OTJPM) crowd essentially "stood down". Instead of adding longs like they've been doing (and keeping JPM from covering), they dumped over 400 contracts. Not much in the grand scheme of things because they still hold long about 45,000. But why the change in trend? Did JPM put the word out that they wanted them to "stand down" so that JPM could cover as many as possible, as quickly as possible? Maybe. Because by not adding longs, the OTJPMs allowed JPM to cover 4,500 shorts. That's the most they've been able to cover in one week since this latest manufactured decline began back in October. Hmmm. Collusion, anyone??

Regardless, this is a bullish CoT, too, simply because of the numbers. The Silver Cartel now has a net short ratio of 1.92:1 and though this is not as bullish as gold, it's not too scary, either. For reference, let's use the 8/16/12 CoT and the 12/26/11 CoT again. On 8/14/12, the Silver Cartel net short ratio was 1.49:1 and on 12/26/11 it was 1.34:1. Again, a Silver Cartel net short ratio of under 2:1 isn't scary but it doesn't mean we're out of the woods yet, either. Caution is still warranted.

And here's something else for you to chew on over the weekend. The latest price peak for the metals was in early October. On 10/2/12, the price of silver was just under $35 and the total OI was 139,117. As of last Tuesday, the price was just above $30 yet the total OI had only fallen to 137,452 for a drop of just 1%. So what's the deal? Where's the rotation? In summary, it looks like this:

The Large Specs have dumped 10,000 longs and have had no change in their short position.
The Small Specs have dumped 5,000 contracts and added almost 2,000 shorts.
The Cartel (namely JPM) has been able to cover just 7,400 shorts.
The OTJPM Silver Cartel has added 9,200 longs.

So price is down because the spooked-out, fraidy-cat specs have sold. Into this weakness, the OTJPMs have increased their gross long position by over 25% from 35,788 to 44,977. Your decision is: Whom do you want to follow here? The dumping Specs or the buying Cartel???

To help you with this question, here are two charts. Notice that gold is still consolidating and basing but looks to begin a sustainable rally in the next 2-4 weeks. Silver, on the other hand, is working itself into a corner once again and appears to be ready to break out and UP. Just give it a little more time.

OK, that's all for now. Time to go watch some football. For those who wish to profit by fading my bets, I like Denver, SF, Seattle and Houston. Have a great weekend!