Index funds rebalancing - buying gold and silver

pmbug

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Every year, those who manage the major commodity indices such as the Goldman Sachs Commodity Index ( GSCI) and the Dow Jones/AIG Commodity Index, REWEIGHT the composition of the various commodities that comprise their respective index. Some category of commodities see DECREASES in the weighting for that particular index; other commodities see INCREASES in the weighting.

This is common practice and happens every single year. It impacts the various markets for about a week or so as those INDEX FUNDS (These are sometimes referred to in industry slang as LONG ONLY funds) that benchmark against these indices must then BUY or SELL those commodities in order to bring their portfolio into line with the NEW WEIGHTINGS for that year.

In the case of gold and silver, both GSCI and DOW/AIG RAISED the weighting for these precious metals for 2014. That means index funds will be buying this first week of the year to align their portfolios.

That is what we are seeing occur in gold and silver today. I would expect this to provide some support to both markets until the bulk of this new money allocation process is completed.
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More: http://traderdannorcini.blogspot.com/2014/01/index-funds-buy-precious-metals.html
 

rblong2us

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its just a little bit of 'rebalancing' so it doesnt count as big funds purchasing pm's

Trader Dan used to be pretty bullish on the shiny but seems to be taking a more chart based position these days.
Think hes fed up with being 'wrong' ............ another 'capitulation' ?
 

pmbug

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A bit more detail on the investment:
... According to S&P Indices (which manages both), total assets estimated at $155bn track these two indices, of which $75bn tracks the former, and the balance of $80bn the latter. Both indices are rebalanced in the first two weeks of January starting last Wednesday, and according to an S&P press release, this will lead to $1.1bn extra being invested in gold contracts.
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This translates into an extra 9,200 Comex gold contracts and 3,845 silver contracts. Given the low level of open interest on this market these increases can be expected to have some impact as the rebalancing exercise works through five business sessions starting on Wednesday 8th January.

However, much more serious is the calculation that on the new weightings these two indices are responsible for long positions on Comex (assuming for the moment this is where all the exposure ends up) totalling some 95,555 gold and 37,476 silver contracts including the rebalanced extras. In the Managed Money category, where these positions should be recorded, gold longs on 31 December amounted to 96,000 contracts, and in silver 31,800. So nearly all the Managed Money gold longs in the market bar 450 contracts are theoretically passive investments and silver's actually exceeds Managed Money longs by a significant margin. So on the long side of this category there are no bullish speculative bets at all.

It is likely though that some of this exposure will be covered through forwards on the London market. Nevertheless, these longs exist, and there are bound to be other passive derivatives replicating custom and other indices, suggesting we are using conservative estimates.

Therefore, assessing the likely impact of these passive longs on Comex throws a new light on the record level of Managed Money short positions, making them more extreme and dangerous than is generally recognised, not least by the shorts themselves. There are simply very few genuine bull positions in this category at all and therefore minimal liquidity for the bears to close into.

These shorts are also in competition with the bullion banks, which with only one or two notable exceptions in the gold market are also running illiquid short positions. As for silver, even the largest bullion banks have been unable to close their shorts, with the eight largest still needing 45,000 contracts (225,000,000 ounces, or about 30% of global mine production).

In summary, a potentially vicious bear trap is now set in both precious metals on Comex, and unless some liquidity can be whistled up from elsewhere it is difficult to see how this dangerous situation will be reconciled once the traps are triggered without some serious injury for the bears.

http://www.goldmoney.com/research/r...s-and-their-effect-on-gold-and-silver-futures
 

DCFusor

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I guess you could hope they have the wit to stay up late and buy during the nightly naked-short slamdowns in a thin market, and make that a little harder for whoever is doing that.
 

CoinExplorer

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Wow, that's great info, PMBug. Sorry for the late reply, I was at the 2014 FUN Show in Orlando. I got to see the Brasher Doubloon before the auction, where it went for $4.5 million, and saw the 1913 liberty nickel and 1804 silver dollar that the ANA owns.

I'm also happy to report that retail demand is quite strong, even though the US Mint delayed the release of the 2014 ASE until the Monday after the show.
 

pmbug

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It really seems like the drop in spot has spurred, not dampened retail buying demand from what I can read on the internets. Nice to have it confirmed by a dealer.
 
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