For investors holding gold ETFs (GLD, SGOL, PHYS) and gold equities it is critical to know the direction of the gold price. For that purpose, we analyze the weekly COTS report issues by the U.S. Commodity Futures Trading Commission (CFTC) to get a reading on where large traders are positioning themselves in the gold market. I will not go over the basics of this report, but investors unfamiliar with the report can read an earlier post where I discuss what it is in a little more detail
In last week's COTS report we saw some all-time highs in the nominal Money Managed (MM) short positions. This is a very bullish sign from a contrarian perspective, and we showed a table of the only other times where MM shorts were this high on a percentage basis - all five prior times experienced very large gains in the gold price in a relatively short timeframe.
This Week's Gold COTS Report
This week's COTS report is pretty tame and shows a bit of an improvement in the MM long positions and a little covering by the shorts.
Investors should not forget that even though last week was a calm week in terms of the report, we are still at historic levels of MM shorts - with this report being the second highest level of total short positions by the MM traders. In addition, as I have mentioned before, the report is always a bit dated and shows the positions as of Tuesday - which was the day we had a gold spike (to $1620) and then it dropped back down under the $1600 level. Since then we have been a little bit lower than the report's closing gold price, so I would expect there to be more shorts or less longs in terms of the current positioning of traders - so it would be more bullish than the past week's report for contrarian investors.
The historical data point comparison for short interests greater than this week's short percentage total is listed in the following table:
Again, investors should not get complacent because short interest as a percentage is not as high as last week's total. In fact, these are the only occurrences in the COTS report (which dates back to 2006) and incorporates over 350 week's worth of data points where short interest has ever been higher than this week's short interest. As you can see, there have been gains in the gold price on all occasions, with some being very sharp rises over short periods of time.
One thing that can be gleaned from these COTS reports is the way that MM traders move their positions back and forth from high short interest to low short interest, and these moves tend to be correlated very strongly with the gold price. From a logical perspective this makes sense because these are very big players that trade large amounts of gold (each contract represents 100 ounces of gold) - so traders moving in one direction is going to affect the gold price.
Investors should be looking for the short position to stabilize, it is at significant levels right now and all-time highs on a total contract basis. Stabilization in the short position or gold price may cause some of these notoriously finicky MM traders to take some profits and cut their short positions, which would push the price of gold up.
GLD and gold investors should hold tight and be confident in their positioning since there are still a tremendous amount of MM traders on the short side of this gold trade. These MM traders know this and any stabilization in the gold price could cause a number of them to cover and shoot up the gold price.
We have been warning long GLD investors not to play the gold price by trying to make a few dollars worth of profit shorting or staying out of the market, when shorts start covering the gold price could jump very high very fast. These short covers tend to be very violent upswings in the price, and for those GLD holders who have made it this far it is not a risk worth taking. Investors wanting a little more risk may want to invest in SLV or PSLV which usually correlate at a 2:1 ratio to GLD and PHYS.
Disclosure: I am long PSLV, SIVR, SGOL, SIVR. 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.