Speculative Traders Cut Gold Long And Short Positions - Is Gold Still Overbought?

by: Hebba Investments


Speculative gold longs and shorts cut positions in anticipation of the Wednesday Fed meeting.

Despite these position cuts, gold long positions remain significant.

Short positions as a percentage of total speculative positioning continued to decline for an 11th straight week.

In the latest Commitment of Traders report (COT), we saw both speculative gold longs and shorts decline as traders closed out positions. Since this report reports positions as of 3/15/16, we think this decline in speculative positioning was primarily in response to the Fed meeting that was scheduled for the next day - traders were lowering risk in preparation for the meeting. Despite that, speculative gold positioning remains very geared towards the long end as total shorts as a percentage of total speculative positioning declined for an 11th straight week(!).

We will get a little more into this but before that let us give investors a quick overview into the COT report for those who are not familiar with it.

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 themselves 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 experts 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 that all traders cut their positions in preparation for the results of the Fed meeting.

As is clear in the table above, speculative positioning significantly favors the long side despite the cut in positions as speculative longs still hold 171,675 contracts versus the speculative shorts at 24,870 contracts. As a total percentage, shorts make up only 12.65% of speculative positioning after falling for an 11th straight week from a high in late December of 56.67% - a pretty consistent and significant decline.

While the decline in shorts as a percentage of total speculative positioning is clearly significant in terms of short-term historical data, during the latter part of the 2011-2012 gold bull market, shorts were consistently under 5%. Thus, bulls may expect more declines in short positioning to reach those levels.

Our Take and What This Means For Investors

As we know now, the Fed meeting turned out to be positive for gold as the Fed seemed to be a lot more dovish than investors expected - certainly more dovish than we expected. Despite that we really think, gold and the precious metals are significantly overbought here and we think it is clearly paper investment demand carrying gold higher as physical demand seems to be weakening in both the Indian (with record-breaking discounts on gold) and Chinese markets.

Of course, we know paper-gold investment demand can be extremely strong and move prices much faster than physical demand, so this rally can continue further simply based on that fact. But we feel that gold needs some consolidation after its rapid rise over the past month as it is already up 17.9% on the year in USD terms.

Source: Sharelynx Charts

Additionally, we wouldn't be surprised if we start seeing the Fed tightening up a bit considering that stock markets are close to all-time highs. In fact, Fed President Jim Bullard now expresses his hawkish opinion - with stocks back nearer record highs - that it would be "prudent policy to edge rates toward normal levels."

We want to emphasize that despite our belief that gold is significantly overbought in the short term, we think there are plenty of reasons to be bullish on gold in the long term so this is not a "get outta town" call on gold. In fact, we think there's an elevated chance for financial stress and chaos which would trump this overbought status on gold.

That is our dilemma - we believe in gold in the medium/long term so we don't want to abandon positions, but ex-financial chaos or surprise inflation, we think there's some downside here.

Thus, what we are doing is selling some of our non-core position miners and gold positions such as the SPDR Gold Trust ETF (NYSEARCA:GLD), the ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), Tahoe Resources (TAHO) and Randgold (GOLD) - we are waiting for a better entry point that we think will come over the next few months.

Disclosure: I am/we are long 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.