Tags: Precious Metals

With Gold Prices Down, Here's Where the Money is Flowing

By , Contributing Writer, Money Morning •

As pointed out in a recent article by Money Morning Global Resource Specialist Peter Krauth, there is something interesting happening with gold prices.

Paper gold, controlled by Wall Street, is going down. But demand for physical gold all over the globe is going up every time that gold prices are down.

That's not the only place divergences are occurring in the global gold market. A divergence can even be seen in the difference between Wall Street speculators and commercial interests in the paper gold market.

The speculative momentum players continue piling on shorts, while commercial interests are following a path 180 degrees opposite.

The question remains for those investors interested in gold as to who will be right in the end. The short-term Wall Street speculators or more long-term players?

Speculators vs. Commercial Participants

The weekly commitment of traders report for the week ending May 21, issued by the Commodities Futures Trading Commission, showed the bearishness toward gold among traders continued to grow.

Large speculators' net long positions in gold futures and options continued falling to lows not seen in several years.

Managed money accounts lowered their exposure to gold to the lowest since the CFTC began this report back in September 2009. These accounts were also busy adding to short positions on gold.

Net long gold positions for non-commercial traders such as hedge funds are now at the lowest level since November 2008.

No surprise here. . .speculators hate gold and would rather speculate in stocks at the moment.

By the way, small traders are at the most bearish since February 2001. This is approximately when gold prices began their more-than-a-decade-long bull run.

But it's a completely different story when one looks at what commercial players - so-called "smart money" - are doing in the gold market.

As gold prices have fallen over the past several months, commercial traders have been busy investing in gold with new long positions in the yellow metal.

According to the CFTC's latest report, commercials have increased their net position in gold by over 185,000 contracts. Their level of bullishness is now at the highest since October 2008.

Central Banks Still Buying as Gold is Down

The International Monetary Fund issued a report on May 27 showing that central banks in emerging markets continued buying gold while the metal's price fell.

The IMF report listed Russia, Turkey, Belarus, Kazakhstan, Azerbaijan and Greece as buyers during the past few months.

The three former Soviet states - Belarus, Kazakhstan and Azerbaijan - added to their gold reserves at a 75% faster pace in April than in March. Russia continues to be the top purchaser globally of gold in recent months.

And whatever happened to Greece being forced to sell their gold holdings? It added to its gold reserves for the fourth month in a row in April.

Alexandra Knight, an economist at National Australia Bank, told Bloomberg, "We expect the trend of central bank buying to continue, especially in the emerging economies. The longer term trend for central banks to increase gold reserves remains intact."

Soros Bullish on Gold Prices?

Then there's George Soros.

The mainstream financial media has reported over and over again about how George Soros sold some of his holdings in the SPDR Gold Trust ETF (NYSEArca: GLD). The position was lowered in the first quarter of 2013 to 530,000 shares from 600,000 shares.

But the mainstream financial press largely ignored the latest 13-F release from the SEC for Soros Fund Management LLC. It reveals positions as of March 30, 2013.

According to an article from Bull Market Thinking, the 13-F showed that Soros Fund Management significantly added to its gold-related holdings. 

The Soros Fund added 1.1 million shares of the Market Vectors Gold Miners ETF (NYSEArca: GDX) to bring the total to 2.666 million shares.

And yes, the Soros Fund did reduce its position in the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) to 1.2 million shares from 1.998 million shares. But a position of 1.51 million call options on that index was initiated.

Soros also maintained a $32 million position in individual gold mining stocks.

Looks like George Soros is not as bearish on gold as portrayed by the media.

For more on the divergence happening in the gold market, check out Peter Krauth's full analysis: Has the Great Gold Crash Divorced Bullion from Futures Prices?

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