Gold Has Entered The Uncharted Territory

Summary

• Commitments of Traders reports deliver interesting data on the so-called "spreading."
• "Spreading" may be considered as a measure of the current uncertainty in gold / silver futures markets.
• The current high spreading figure means that gold futures traders are very uncertain about the direction the gold prices are heading for.
• In my opinion, risk-averse investors should now refrain from taking serious positions in gold or gold-related stocks.

In its last article, Hebba Investments, one of the best of Seeking Alpha's gold analysts, made an interesting observation. According to the Commitments of Traders report, the so-called spread position, held by money managers, increased significantly, compared to the previous week. I think that this occurrence is very important because it discloses the current shaky state of the gold market. What is more, it seems that a few weeks ago this market entered into uncharted territory of the current stage of the gold cycle. Let me discuss this issue a little bit deeper.

Spreading

According to the U.S. Commodity Futures Trading Commission:

"Spreading" is a computed amount equal to offsetting long and short positions held by a trader. The computed amount of spreading is calculated as the amount of offsetting futures indifferent calendar months or offsetting futures and options in the same or different calendar months"

In other words, if a trader holds a long position in gold futures amounting to 10 contracts and, at the same time, he/she holds a short position in gold futures amounting to 10 contracts, such a position is reported as the spreading of 10 contracts.

At this point somebody could ask: "What is the sense to hold offsetting contracts?" The answer is quite simple - although the net effect of holding an offsetting position in futures contracts is neutral, the trader may hold futures contracts with different expiration dates. In this way the trader is managing the risk. For example, the trader may hold a long position in gold futures amounting to 10 contracts expiring in March 2017 and, simultaneously, he/she may hold a short position in gold futures amounting to 10 contracts expiring in December 2017. The net effect is neutral but we may also say that the trader is optimistic on gold prices in the short term (March 2017) and pessimistic in the medium term (December

Analyst’s Disclosure: I am/we are long GDXJ. 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.