The Latest Commitment Of Traders Data On Gold Shows Something Very Surprising
Mar. 29, 2015 3:28 AM ET | 4 comments | Includes: AEM, AGOL, GG, GLD, IAU, NEM, OUNZ, SGOL Disclosure: The author is long SGOL, PAAS, AG. (More...)
Summary
Despite the large weekly rise in the gold price speculative traders increased their short positions.
Current Managed Money short positions are at all-time nominal highs at over 84,000 short contracts outstanding.
This rise in short after a large rise in the gold price is unusual and suggests that the latest rise in gold was not due to COT short covering.
We take a contrarian view and think gold may have much more short-term upside.
Gold investors have experienced a nice rebound since the Fed meeting, as gold and the GLD have seemingly bottomed out when the Fed came out as more dovish than expected.
But what is interesting the latest Commitment of Traders (NYSE:COT) report which was a bit of a surprise for us. We've covered the report a number of times in our free weekly email newsletter, but every once in a while we notice something significant that gold investors should note. This COT report shows that while gold has been rising, short positions of Managed Money traders have been rising along with the gold price - a pretty rare event which we will discuss further.
While the COT report is not always a good indicator of the future price of gold, it does provide investors holding gold ETFs (GLD, SGOL, and PHYS) and gold equities an insight into the positions of commercial producers and large money managers.
For those not familiar with it we will give a quick overview and then get into the latest COT report. About the COT Report
The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investor a way to see what larger traders are doing and to possibly position himself accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.
The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned. This Week's Gold COT Report
This week's report shows speculative traders continued their bearish positioning as seen in the table below. (click to enlarge)
There are a few things to note here. First, over the past week we saw a rise in speculative trader short and long positions as the gold price rose from $1150.75 per ounce to $1191.50 per ounce (remember this reporting period closes on Tuesday). The rise in long positions with a rising gold price is to be expected, but we rarely see a rise in short positions as the gold price rises - so that is a bit unusual though not unheard of.
Secondly, and perhaps more importantly, we have also seen speculative short positions rise to the highest levels in the history of our COT report data (dating to 2006), at 84,022 open Managed Money short positions. That is very surprising considering the rise in gold that we have seen over the past week - Managed Money short covering has certainly not contributed to the recent rise in the gold price.
Finally, the proportion of Managed Money shorts has risen to the second highest in our records at 42.07% of outstanding Managed Money positions short. That is only a rounding error away from the 42.80% all-time high seen on 12/3/2013 - three months later gold would be 10% higher. Conclusion for Investors
Ordinarily we may want to take short-term profits on gold positions with a more than $50 weekly move in gold - though we remain VERY bullish in the intermediate to long term on gold. But after looking at this report and seeing the large amounts of Managed Money shorts that are predicting and positioned for a fall in the gold price, it is very difficult to sell. In fact, when we're seeing all-time COT report highs in Managed Money shorts positions on both a nominal and percentage basis, we think there can be a much higher rise in the gold price in the short term as well.
Thus we think it is prudent that investors take the contrarian position here and build gold positions by increasing exposure to physical gold and the gold ETF's (SPDR Gold Shares , PHYS, CEF). On the short-term, good miners also may see a greater rise in share price simply on the expected rise in the gold price so investors seeking leverage may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) or Pan American Silver (NASDAQ:PAAS) - though we're not suggesting these companies specifically - only suggesting them for further investor research.
Of course gold may go down further and short positions may increase to higher levels, but timing that bottom is not something we can do as investors so simply buying in during pessimistic times is good enough for us. Nobody is predicting a significant short-term bullish move in the gold price (which is showing in COT speculative positioning), but that may be the best contrarian reason to see a rise in gold.
