The upper chart shows the London PM gold fix for the last 10 years. The bottom chart shows the net Comex positions of large traders. It isn't clear what units these are in ( tons, koz, contracts, etc ) . Anyhow, the correlation between the moves in the metals prices and the level of shorts/longs is incredable - and very consistant. For 6 years, through about 1993, whenever the net postion of large traders moved from short to long by about 30,000 units, the price of gold would move up by about $50, and vice versa.

Then something happened! From 1993 on, the swings in the large trader positions became gigantic, roughly 2.5 to 3 times the size of the swings in the prior six years,however the impact on the price of gold associated with these swings was dramatically smaller. For instance the largest swing was around the beginning of 1996, when the trader position went from about 40,000 short around the end of 1995 to 80,000 long in early 1996, a total move of 120,000. The movement of gold price during this period was only about $30 up. Thus it seems like the impact of changes in short/long positions of the large traders was reduced by a factor of 6-8, and this change happened in a period of about a year.

First question for the experts - Can anyone tell me what happened to the market dynamics around the end of 1993 that would cause this major change? One explanation, though I am just guessing, is that this is when gold loans and leasing by the central banks started, thus increasing the available gold pool to be used for shorting etc., maybe by 10x. This availability could be the reason the magnitude of short/long swings increased by a factor to three. It could also explain why the sensitively to these swings decreased by a factor of 6-8, i.e. just too much of the stuff to push the price around.

Continuing, the whole point of Blanchard presenting this chart was to show that the short position now is at a record level, roughly -70,000, and that when this record position unwinds, the price of gold will soar.

My first comment. Shorts may be a record level today, but not impressively so.

Second, when the big traders position last went from -40,000 to +80,000, gold price only went from around $380 to $410. The implication to me is that when the current -80,000 short position unwinds, we can expect about a $20 movement in gold price. Not bad, but nothing to write home about. I seem to recall some on Kitco giving this massive short position much more significance than it seems to actually have. What am I missing?

http://www.quote.com/cgi-bin/jchart-form?genApplet=yes