The Latest Commitment Of Traders Data Shows Traders Building Large Gold Short Positions

by: Hebba Investments

Latest COT report shows speculative interest rising in anticipation of the upcoming Fed Meeting.

The rise was one of the biggest weekly rises of the year and puts total speculative short interest at one of the highest levels of 2015.

The last time short interest rose by a similar amount marked a bottom in the gold price, so this may be a good time for investors to go long gold.

Gold investors have seen gold drop over the past month close to new YTD lows, perhaps due to the upcoming Federal Reserve meeting where the possibility exists for a rate hike.

But what is interesting the latest Commitment of Traders (COT) report which showed that interest in gold is picking, albeit short interest. 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.

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.

There are a few things to note here. First, over the past week we saw one of the largest rises in speculative trader short positioning as the gold price dropped from $1192.80 per ounce to $1177.40 per ounce (remember this reporting period closes on Tuesday).

Secondly, and perhaps more importantly, we saw a tremendous jump in speculative short positions rise to one of the highest levels of the year at 82,238 open Managed Money short positions. It was also the second largest weekly rise in short positions as these traders sold 19,502 contracts short over the reporting period - only second to the 20,084 short rise seen in the 3/17/15 report. That was the previous bottom in the gold price, so this may be a good contrarian indicator.

Finally, the proportion of Managed Money shorts has risen to one of the highest levels of the year at 39.31% of outstanding Managed Money positions short.

Conclusion for Investors

The more than 19,000 short positions that speculative traders added over the past week was one of the highest of the year. This may be due to anticipation that the Fed will either hike rates in next week's upcoming meeting, or they will signal a stronger possibility of a rate hike. Either way traders seem to be selling a lot of gold contracts short, which may signal a nice buying opportunity as often these large short positions are a good contrarian indicator on where the price of gold is headed in the short term.

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 ETFs (SPDR Gold Shares (GLD), PHYS, CEF). In 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 Tahoe Resources (NYSE:TAHO) or Pan American Silver (NASDAQ:PAAS) - though we're not suggesting these companies specifically but only suggesting them for further investor research.

Of course gold may go down further due to the upcoming Fed statement, but it is always a better time to buy gold (or any other commodity) when short interest is high and thus investors are mostly gathered on one side of the boat.

Disclosure: The author is long SGOL, TAHO, PAAS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.