CRACKING THE ENIGMA CODE
By Adrian Douglas
Regular readers of the daily MIDAS will know that I have been tracking the trading behavior of Goldman Sachs on the TOCOM. The TOCOM has a website that publishes the positions of its members the day after the trading session is closed. The COMEX, by comparison, is totally opaque and there is only a twice weekly report called the Commitment of Traders which lumps all Commercial Traders positions together, all large Speculators positions together, and all Small Speculators positions together. It is not very useful in discerning the activities of the members of the Gold Cartel who have been manipulating the gold market for more than a decade. Goldman Sachs is the only member of the Gold Cartel who has a seat on the TOCOM. It struck me that tracking their trading would open a small window on the dark world of the gold market.
Goldman Sachs only became a member of the TOCOM at the end of last year. They IMMEDIATELY built up a short position of 2.2 million ozs and then promptly covered ALL the position on the rapid price drop in Dec 2005 as gold reached $535 intraday and fell to $493 in just eight trading days.
This caught my attention and prompted me to follow Goldman's gold trading from January 2006. I felt that cracking the "enigma code" of their trading strategy would lead to a clearer understanding of how close we are to their total demise on the COMEX.
I have been following Goldman's gold trading on a daily basis. I suddenly realized to crack the code I needed to look at it from a bigger perspective. So I plotted Goldman's NET SHORT position against the gold price which is shown below.
What can be seen is that the net short position goes through cycles. The cycles are labeled to indicate if the cycles are similar. For example A1 and A2 are similar in character but B2 is different to C.
In early 2006 GS was increasing its net short position as the gold price was rising. When the gold price peaked they covered (declining net short). This was the pattern of cycles A1 and A2. This indicates a desire to slow down the gold price rise.
The pattern then changed. In B1 GS increased their shorts all the way up to what appeared would be another top. But the gold price continued to rise. Goldman was forced to cover on a RISING gold price. In cycle B2 Goldman again shorted the gold price all the way up but the gold price wouldn't break down. Instead the POG chopped sideways. When the POG wouldn't break GS was forced to cover in a sideways chopping market.
In cycle C Goldman again increased their shorts, but very gingerly and not to the same net short level as in cycle B2 where they had just lost their shirts. Again the gold price wouldn't break down and they were forced to cover against a rising gold price.
We are now in cycle D. Goldman Sachs has adopted a totally new approach. They have increased their short position very aggressively as the gold price began to fall from the $720 level. This is a time when they would have typically covered. This is why they have been so aggressive on the COMEX selling the market down. If they fail to break the gold price down on this reckless shorting they are doomed. They need a significant drop to cover their shorts profitably. You can see that their net short position is currently matching the highest levels it has ever been on the TOCOM. So if they fail to break the gold price they will either have to continuing shorting and put even more money at risk or try to cover in a parabolic gold price environment which will drive the POG higher even faster.
The way I decipher the Enigma Code from TOCOM is that Goldman Sachs have a gold trading book that went seriously under water since cycle C. They appear to be recklessly "doubling up" to recover those losses and are now betting the farm on a gold price break down and are feverishly working the TOCOM and the COMEX. In cycles A1 & A2 the gold price danced to the short position tune of the Pied Piper of Wall Street. The gold price is now dancing to some different tune. Goldman Sachs has chosen to play the same old tune a bit louder.
Market historians will remember the infamous Nick Leeson who when caught in a similar predicament betting that the Nikkei would rise bankrupted the venerable Barings Bank.
It is hard to say just how desperately Goldman Sachs needs the market to go their way, but one thing is for sure is that when there is blood in the water the sharks move in.
Adrian Douglas
May 17,2006
May 19, I think:
Bill,
In the May 18 TOCOM session Goldman Sachs appeared to throw
in the towel in trying to break down the price of gold (another bluff
perhaps considering their performance on the COMEX today). They covered
3,691 shorts. They achieved this by covering 720 contracts in DEC 06,
4,533 contracts in FEB 07 and going short 1562 contracts in APR 07.
Goldman Sachs is LONG in every month up until DEC 06 to the tune of
3,338 contracts. They have NO shorts in any month before DEC 06. They
have only 380 shorts remaining in DEC 06. They are short 18,481
contracts in FEB 07 and short 30,558 contracts in APR 07. They have
ZERO offsetting longs in 2007. ZIP, NADA!
I find this a rather peculiar portfolio of gold futures for a company that made a press release today predicting a gold price of $800/oz by the end of 2007. So far on the TOCOM for 2007 they do not have a futures contract for one single ounce of gold on the long side! They are short 1,569,248 ounces of gold!
If I was some crazy, bitter and twisted conspiracy nut, I might think that their press release was designed to sucker in some more lambs to the slaughter! The COMEX Open Interest is indicating the Cartel has run up against a brick-wall. There are no more longs to flush out. They need some unwitting, innocent fools to rush in as fresh prey. In this 5 year gold bull market Goldman Sachs has never put out a bullish gold price forecast. Now with a huge short position on TOCOM they put out a bullish forecast?? …Oh! Grandma Sachs what big teeth you have!..."All the better for chewing on juicy longs, My Dear".
I am sure there must be some innocent explanation!!!
Cheers
Adrian
May 24, probably:
Bill,
A café member sent me a note to ask how much GS has lost trading the TOCOM.
Let’s imagine that GS has gold to sell. We then count all the short
sales multiplied by the price of gold at the time of sale as income as
this is what they are promising to sell their gold for. Then counting
all the long purchases as expenses I have found a cumulative income and
cumulative expenses. The difference is their total income which is 9.5 B$.
But now let’s assume they don’t have this much gold (which is highly
likely as it is 16 million ozs!!) then to buy it on the market today
(assuming you can just schmoozy up to the COMEX and buy 16 million ozs
of gold at market price!!) would be 10.66 B$. This puts their [TOCOM] loss on paper at
1.16 B$ taking a POG of $650/oz.
When they default (not if) they will undoubtedly be bailed by Uncle Sam
and the settlement will be in freshly printed notes with the ink still
wet.
Regards
Adrian
June 1-2:
Bill,
In the May 31 session on the TOCOM Goldman Sachs reduced their short position by 541 contracts. This is not a significant move considering the size of the GS short position. GS put out a bullish $800/oz forecast on gold just before the recent price downdraft while going short. I speculated that this was a ploy to sucker in fresh longs who would capitulate on the cartel induced price break. The long liquidation so far has been very subdued so GS would be trying to cover in a vacuum if they attempted any significant buying. So today they have put out a 2006 gold price of $635! And a long term forecast of $425! What?! You have to be kidding me! What happened to the $800/oz? This forecast is bearish and is reinforced by similar drivel from Ian Cockerill from GFI. Having run out of willing and gullible new longs, is this a new and unashamedly brazen attempt to flush out some stale longs? [Presumably, stale longs are investors who have held long positions quite a while but are thinking of getting out.] I would say so. But it will not work.
Keep a close eye on silver. The price action is VERY deceptive. It will surprise everyone.
Cheers
Adrian
June 2:
Bill,
In the June 1st session on the TOCOM Goldman Sachs covered 4,181 short contracts. They also sold 71 long contracts. As suggested yesterday GS had run out of new longs to fleece so they had to put out a bearish gold forecast to get some stale longs to do their impersonation of a lemming. Goldman Sachs a few weeks ago put out a bullish call and went short themselves. They now put out a bearish call and then proceed to cover! We would expect nothing less from such honorable bankers. If anyone has read the book "When Genius Failed" about the collapse of LTCM they will know that when Goldman Sachs was given access to the trading positions of LTCM by the NY FED in order to arrange a bail out they downloaded the data for themselves and took opposite positions to those of LTCM for their own account! One can only marvel at their ability to predict market moves!
Goldman Sachs is long in 2006 to the tune of 3,225 contracts. They only have 115 short contracts remaining in DEC 06. They are short 12,460 contracts in FEB 07 and 37,613 contracts in APR 07 with NO LONGS whatsoever!
I believe the lemming hunting season [Presumably, the period when the Gold Cartel will try to convince longs that gold is trending lower.] will be extremely short this year, and in fact may already be over! After doing very little trading for a few days GS is finally covering on TOCOM. The upward moves will be as violent as the down moves we have seen.
Cheers
Adrian
June 1-2:
Good Evening Gentlemen,
During the May 31 session on TOCOM the seven large gold shorts reduced their net short position by 2,502 contracts to 201,009 contracts or 6,462,580 troy ounces.
http://www.tocom.or.jp/souba/gold/torikumi.html
In silver, they reduced their net short position by 228 contracts to 7,443 contracts or 14,357,859 troy ounces.
http://www.tocom.or.jp/souba/silver/torikumi.html
In regards to the seven large TOCOM gold and silver shorts, here are the names on my list:
Sumitomo Corporation
Mitsubishi Corporation Futures Ltd.
Sojitz Corporation
Marubeni Corporation
Mitsubishi Corporation
Goldman Sachs (Japan) Ltd.
Mitsui & Co., Ltd.
I’ve been debating whether I should say there are only six since Mitsubishi Corporation and Mitsubishi futures are under the same ownership. I was even considering saying five but I can’t say that because I have not been able to verify if Mitsui & Co. Ltd. is owned by Sumitomo Mitsui Banking Corporation (the second largest bank in the world, and owner of Sumitomo Corporation).
The last thing that I wanted bring attention to tonight is the pattern that Adrian has mentioned of Goldman Sachs moving their TOCOM shorts out to the farthest month contract. It seems that some of the other large TOCOM shorts and other TOCOM dealers (at least during the May 31 session as revealed on the TOCOM website under: Trading Volume by Member) seem to have done a large and similar in volume of long and short contracts in the April 2007 month. I don’t normally look at this data. I was wondering if any professionals out there would care to comment on it. Could these be spread operations and also why is so much of the volume in the April 2007 contract? Any comments would much appreciated.
http://www.tocom.or.jp/souba/gold/torihiki.html
Definitions:
http://en.wikipedia.org/wiki/Cabal
http://en.wikipedia.org/wiki/Cartel
Other links:
http://en.wikipedia.org/wiki/Goldman_Sachs
http://en.wikipedia.org/wiki/J.P._Morgan_Chase
http://en.wikipedia.org/wiki/J.P._Morgan
Have a great night,
Scott