Gold 'Players' Signal Possible Up-Turn

Includes: GLD, IAU
by: Chris Ridder, CFA

Who are the "players" in the gold market? Well, each week the U.S. CFTC releases figures for futures contracts traded in the U.S. and regulated by this government watchdog. The reports are released each Friday at 4 p.m. EST and provide a snapshot of the market's composition as of the close the previous Tuesday.

Categories are reported as follows:

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The CFTC reports how much in each category is long, short or spreading. For my analysis of the gold market I took the net percentage reported in each category. I find this more meaningful then saying, "X is net long 10,000 contracts," since the open interest of futures contracts changes over time. As an example, if hedgers were 10% long and 25% short, then I would report the net being at negative 15%. Here is a chart from June 2006 to last week showing the net positions of hedgers, swap dealers, money managers and small speculators.

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The above graph shows money managers and small speculators with their smallest, net long positions since January of 2009 for small speculators and November 2008 for money managers. Hedgers had their smallest, net short position since January 2011. Finally, swap dealers had their smallest net short position since November 2008; which as also the third highest position in the data covered.

A trader/investor can then look at how each group has positioned itself at turning points in the gold market. I have plotted weekly charts of each "player" vs. GLD (gold ETF). First up is the plot of the hedgers vs GLD.

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One can see that hedgers took off net short positions into this latest down move in gold. They do not have a record position, as they did in the 2008 bottom in the gold market, but they are much less bearish.

Next up is the swap dealers vs. GLD.

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The swap dealers are almost at a record position at -.9% net short. This data series has never been positive but the dealers are within "spitting distance." We can see that they, or their clients, are not positioned for a down move in gold.

Now, onto the money managers vs. GLD.

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One can see that the money managers appear to be dominated by trend followers who get long or short depending on various technical indicators, ie. "hot money." They have, for the most part, been positioned incorrectly at the turning points in the gold market over the last six years. Their position now is unlikely to comfort gold bears.

Finally, we come to the small speculators. Those traders or investors who do not have enough size to "count." These are the least well capitalized traders and therefore the weak hands.

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These weak hands have quickly turned the most negative on the gold market in the past three years. They could be net short, for the first time, in just a few weeks if this pace keeps up.

Taking this all together, it adds up to a possible trade, worthy bottom coming in the gold market. The market participants with the most knowledge and most money are the least negative, relatively speaking, on gold over the last few years. Money managers - the "hot money," and small speculators are close to matching their net positions which coincided with the 2008 low in gold.

The CFTC data was from May 15th, 2012, and that day GLD closed at 149.74, and in the three days since this data was gathered GLD has risen up to 154.55. There is no guarantee that this is the "bottom" in gold, but it does show evidence that the down move could see a tradeable move back up for the gold bulls. This data, and the fact that the GLD short interest just increased by 42.7%, means the bears have a lot more "players" in their trade than they previously thought.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours.

Additional disclosure: I am long gold, gold stocks and gold stock options.