The latest Commitment of Traders (COT) report showed a fifth straight week of speculative long selling in gold as gold dropped on the COT week – though obviously it turned it around after the COT week ended (Tuesday). Based on when this report closed, the net speculative gold long position fell to the lowest level since January 2016.
Though silver was really the story this week as silver speculators “went negative”, and as of the close of this COT report, are net-short silver. This is a very rare event for this speculative class, and we haven’t seen this since mid-2015.
But as we observed last week, these low speculative levels (or bearish may be the better term) tend to make excellent times to invest. For example, last week’s tactical buy call based on this weak positioning turned out to be a very good call for investors able to implement it.
We will get more into some of these details 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 investors a way to see what larger traders are doing and to possibly position their positions 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 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
*Gold price data reflects the COT week (Tues-Tues) not a standard week (Mon-Fri)
For the fifth week in a row, speculative longs cut back on their long positions by a mediocre 8,273 contracts, while shorts increased their own positions by a huge 2,403 contracts. The current 43.8% speculative short percentage is on the extremely high side of the report, and we would have to go back to January of 2016 to see a similar short-to-long ratio – which is positive for contrarian gold bulls.
Moving on, the net position of all gold traders can be seen below:
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, we saw the net position of speculative traders drop by around 9,000 contracts to 27,000 net speculative long contracts.
As for silver, the action week’s action looked like the following:
The red line which represents the net speculative positions of money managers, showed another decrease in the net-long silver speculator position as their total net position fell by around 7,000 contracts to a net speculative SHORT position of 5,000 contracts. This is the first time since 2015 we have seen speculative traders so bearish on silver.
While we have argued for a few months now that silver’s fundamentals are currently fairly weak, when it comes to such speculative bearishness in the market, our contrarian antennae perk up. One thing we do have to note though is that this COT report was dated as of last Tuesday – which was before silver’s strong end-of-week rally. So that means that traders are almost certainly less bearish than the report suggests – but we’re still near this historical lows in positioning.
Asian Gold Demand Remains Weak
If it wasn’t for the fact that physical demand for gold was so weak, we would be very bullish on the precious metals based solely on the COT positioning.
But while last week saw an increase in demand because of the drop in gold prices, it seemed to stabilize when prices rose. As one Singapore based dealer mentioned, "There was quite a bit of physical buying when prices dropped, but with prices going back up slightly around the $1,220 level, demand has stabilized." Chinese and Hong Kong premiums remained essentially flat on the week.
In India, premiums continued to fall despite the price drop.
This is not too surprising as India saw a lot of gold demand last month in preparation for the July 3 percent tax increase, but nevertheless it means Indian buyers and jewelers are clearly not making as many physical gold purchases as in the past. That is a big deal for physical gold demand as India is the number two importer of physical gold, so it is something investors should note.
Our Take and What This Means for Investors
If we solely made our decisions based on the COT report, this week would be another clear and obvious buying week. But we do take other factors into consideration, and the very weak physical demand we are seeing from Asia is quite concerning from our point of view and we do not believe gold or silver can make new highs until the physical markets get stronger. It seems the attitude in the physical markets is pretty lackadaisical and there is no sense of urgency to buy on price increases.
While last week’s tactical buy view turned out to be very accurate, we are no longer as convinced on the short-term picture. We are this shifting our view in gold from Bullish to Neutral, and our view on silver from Extremely Bullish to Neutral. Just as physical buyers see no urgency to buy when the price rises, we see no urgency to remain very bullish on gold and silver in the short-term – better to take profits and look for other tactical buy opportunities. Platinum though is a quite different story.
Thus in reverting back to our Neutral position, we recommend that investors that made profits last week on our tactical buy call, take some or all of those profits and sit back and watch. That means selling cutting back on gold and silver positions in the ETF’s (SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust (SLV), Sprott Physical Silver Trust (PSLV), and ETFS Physical Swiss Gold Trust ETF, etc). But our neutral position also means we would definitely consider adding to our positions on any big drops in the gold or silver price, as we feel the downside would be fairly small with speculators holding such bearish views.
Disclosure: I am/we are long SGOL, SIVR, PPLT.
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.