COT Report: What Do Commercial Gold Traders Know That We Don't?

by: Hebba Investments

Speculative gold traders continued to cut back on their net gold positions.

Despite the stable gold price, commercial gold traders increased their positions to the most bullish since early 2017.

Commercial gold traders also cut back on their short positions by more than 30,000 contracts which is the largest amount in years.

We are much more bullish on gold than the market and we think gold may break out to the upside fairly soon.

The latest Commitment of Traders (COT) report showed gold speculators continue their reduction in their long positions as they cut back again, making this the sixth week out of the last seven that speculative long positions have dropped. Speculative gold shorts also cut back their positions by 3,000 contracts, suggesting that trading interest in gold is dropping. This doesn’t surprise us as gold has meandered around the $1,300 level for six weeks now and nobody seems particularly confident on a breakout to the upside or downside. Unlike gold, silver speculators are gradually building up their long position (albeit from negative levels) as speculative longs slightly increased their own positions on the week while speculative shorts stayed essentially neutral.

The real interesting action, though, has been in the commercial category of traders (representing gold miners, jewelers, and other large producers/merchants), as they covered more than 30,000 short positions on the week despite no real action in the gold price. This brings their net short position to the lowest level since early 2017 – before a significant 10% rise in the gold price.

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 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

*Gold price data reflects the COT week (Tues-Tues) not a standard week (Mon-Fri)

For the week, speculative longs decreased their positions by 6,524 contracts for the sixth week out of the last seven, while speculative shorts also decreased their own positions by 3,355 contracts. Gold closed the COT week (Tuesday) at $1,292.05, which is not far from where it stands for the Friday close so the COT trader positions are probably very similar to market close positions.

Moving on, the net position of all gold traders can be seen below:

Source: GoldChartsRUS

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 remain around the same levels at 58,000 net speculative long contracts. In terms of the historical range, the speculative positions are now standing at some of the lower levels on the 10-year chart.

What was really interesting, though, is that gold commercial entities were busy covering shorts at one of the fastest paces in years.

*Gold price data reflects the COT week (Tues-Tues) not a standard week (Mon-Fri)

In fact, the commercial gold long position (27% of total) stands at the highest level since January 2017 when the gold price was under $1,200 – which was the bottom as the gold price rallied more than $100 from that low. This is something very interesting and we like to see as it makes gold attractive from a trading perspective.

As for silver, the week’s action looked like the following:

Source: GoldChartsRUS

The red line, which represents the net speculative positions of money managers, showed the speculative position increase by around 3,500 contracts in silver as speculative longs added to their positions while shorts essentially held their current levels.

Our Take and What This Means for Investors

The unusual bullish activity in commercial longs despite a meandering gold price has piqued our antennae as it usually signals the beginning of a short-term rally. Silver speculators have increased their own positions back to more neutral levels, while China decided last week to scale back its subsidies on solar energy due to massive increases in adoption.

These may be a headwind for silver, so we are lowering our position from Extremely-Bullish to Bullish on silver, while we are increasing out short-term view on gold from Bullish to Extremely-Bullish as we have a suspicion that commercial bullishness will be followed by gold breaking out of its doldrums to the upside.

We think it is time for investors to consider adding to their gold positions and silver positions through some of the ETFs (SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust ETF (NYSEARCA:SLV), Sprott Physical Silver Trust (NYSEARCA:PSLV), and ETFS Physical Swiss Gold Trust ETF (NYSE:SGOL), etc.).

Disclosure: I am/we are long SGOL, 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.