For those investors holding gold ETFs (GLD, SGOL, PHYS), gold equities (ABX, GG, NEM, etc), and even silver ETFs and equities (SLV, PAAS, PSLV, SLW, HL), it is critical to know the direction of the gold price. In this week's COTS report, we're starting to see some very pessimistic positioning in gold - very bullish for the actual gold price.
Before we analyze the short interest in the latest Commitment of Traders (COTS) report, let's go over a couple of basics of the COTS report.
About the COTS Report
The COTS 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 COTS 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 COTS 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. For a downloadable report see here.
This week's COTS Report - Gold
The COTS report is full of information, but I have found the most pertinent section to monitor is the Managed Money traders. These traders are the most active and often change their positions between extreme optimism to extreme pessimism and back - which greatly influences the commodity price.
In the latest COTS report (for 2/12/13), there has been a massive increase in the Managed Money gold short position.
This is a massive short position based on the COTS data. In fact, the last time the short position was over 29% was in November of 2008 when gold was priced at $733 / oz - two weeks later the gold price was at $820 / oz, and it ended up closing the year over $850. That equates to a 15-20% gain over two months.
Not only is the short position in the managed money traders very large on a percentage basis, but at 49,153 short contracts, it is the largest it has ever been for available COTS data going back to 2006. In fact, the last time that the short contracts were even above 40,000 contracts was in May of 2012 - gold was trading at $1579 and the following week it gained 2%. Three months later it was at $1668 - a nice 6% gain in a few short months.
Finally, the COTS report was based on Tuesday's trader positions when gold was trading at $1647.50 - it has since dropped another $40 which signifies a probably much higher short position than the data would seem to suggest.
Gold has had a rough month and it seems sentiment has turned overly pessimistic, but based on the COTS report, this is the time investors and traders should be loading up on gold. Pessimism is high and Managed Money shorts have taken a very bearish view on things - historically that has been a very bullish thing for the gold price.
Now is the time to be buying gold, and look for a quick unwind in the short position to more average levels on any bit of gold-positive news - and this could involve very large jumps in the gold price (in 2008, we saw $100 weekly gold price rises after shorts hit these levels). I think a few months from now we will look at these levels in gold as a short-term bottom.
Disclosure: I am long SGOL, GG, HL, PAAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.