Bullion Bull Over? Data Suggests Temporary Pause

Are we having fun yet? The market’s gyrations are enough to make you seasick. Up, down, up, down. Make up your mind already. Recent weeks have left many investors and analysts wringing their hands about a possible end to the bull market’s incredible five-year run. The charts are as opaque as a Fed meeting press release: which way they’ll go is anyone’s guess.

In strange times like these, a growing number of market players is turning for illumination to the Commitments of Traders reports. This is the free government data released each week by the U.S. Commodity Futures Trading Commission. The regulatory agency collects data on trillions of dollars of futures and options holdings in 100-odd markets—everything from the S&P 500 (SPY) to the NASDAQ 100 (QQQQ), crude, soybeans and the euro (IEV).

The data is difficult to interpret, but research has shown it can warn of possible market turns when traders hit historic extremes in their positioning.

The latest COTs report issued last Friday, Nov. 16, suggests the recent explosive rise in precious metals prices may not yet be at an end. How do we know this? The small traders in gold and silver have built highly bearish derivatives since the summer, and they’ve remained resolutely gloomy about bullion despite the ramp-up in prices.

The latest COTs report shows the gold small traders have reduced their net long position to the smallest it’s been since late June. That was just before the price of gold exploded from below $640 an ounce to peak above $830 in early November. Bullion prices have since retreated, but the COTs data suggests this may be a temporary spot of weakness rather than a new downtrend for precious metals.

I’ve developed a trading setup based on the gold small traders that I use to trade the Canadian Gold iUnits ETF (symbol XGD, trading in Toronto). This setup works by trading opposite to the small traders when their net position hits specific bullish or bearish extremes. This setup flipped to bullish back in May, and the Nov. 16 COTs report gave me a renewed bullish signal for XGD.

My setup for silver works by trading opposite to the silver small traders. It’s been long since July, when the silver traders hit a bearish extreme in their net position. (Disclosure: I’m long both XGD and iShares Silver Trust (SLV).)

The COTs data for the U.S. dollar index supports this generally bullish view for the precious metals. The latest COTs report shows the “smart money” commercial traders—the folks generally seen as the traders with the best market information—again reducing their net long position as a percentage of the total open interest, their seventh such decrease in a row. Their positioning is now decidedly bearish in comparison with the historic data.

However, I should point out that my trading setups for gold itself (tradable with StreetTRACKS Gold Trust (GLD) or iShares COMEX Gold Trust (IAU)), the HUI Gold Bugs Index (tradable with Market Vectors Gold Miners (GDX) or PowerShares DB Gold Fund (DGL)) and USERX Gold Fund all flipped to bearish in late September, and they remain on that bearish signal as of the latest COTs report. Sorry, gold bugs! Alas, the coast may not be completely clear. These bearish signals did presage the current bout of weakness for the sector, but perhaps the overall COTs data is telling us the recent selloff is but a pause, not an end to the precious-metals bull.

Good luck in your trading and investing this week.