The Recent Commitment Of Traders Report Shows Speculative Gold Traders Increasing Both Long And Short Positions

by: Hebba Investments

- The latest COT report shows nominal speculative longs at the highest levels since October of 2012 when the gold price was close to $1,800 per ounce.

- Both longs and shorts slightly increased their gold positions in the latest report.

- We think in the short term, gold is still very overbought, but the long-term future is still bright for gold.

The Paradoxical State of Gold
In the latest Commitment of Traders report (COT), we saw another week where both speculative gold longs and shorts increased. This was the post-quarter end report so we didn't expect too much here, and the slight increase in both sets of positions shows that traders aren't too confident in the direction of gold. Having said that, the speculative long accumulation over the past few months has been tremendous, and we still worry about a potential drop in the gold price if positioning starts to balance out.
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 both speculative longs and shorts slightly increased their positions.
As is clear in the table above, speculative positioning significantly favors the long side as speculative longs hold 194,839 contracts versus the speculative shorts at 31,250 contracts.
This beats last week's speculative long side total, and as we stated last week, this is the highest nominal speculative long position since October of 2012, when gold was close to $1,800 per ounce, as seen in the table below.
Another chart that is closely related but isn't a COT chart, is the following from Credit Suisse which shows the recent increase in ETF holdings versus the gold price:
Source: Credit Suisse
Just as we said last week, as gold bulls this is a bit worrisome as the boat is getting pretty crowded in terms of speculative traders taking the long side of gold, and it means there is a greater opportunity for surprises to the downside.
Our Take and What This Means For Investors
We sound like a broken record, but in the short term, gold looks quite stretched as speculative long positions are at extremely high levels and that is not good from a contrarian perspective. The past week didn't see any significant increases in flows, as both longs and shorts slightly increased positions, but since gold rallied a bit after the report was issued, we sense that there may be more longs than what is shown in the recent report.
Additionally, after looking at the Credit Suisse chart showing ETF gold holdings rising despite a drop in the gold price over the past few weeks, we think that increasing ETF holdings are clearly supporting the gold price. That may not be sustainable without a significant deterioration in financial markets.
While we still are very cautious and risk averse in our current short-term gold positioning and recommend investors do the same, we are extremely bullish in the long term (3-5 years) on gold. As we wrote last week, gold reserves for the major miners are declining, and the cuts in exploration budgets over the past few years and the devastation in junior explorers means that we see no reason for reserves to jump until we see a much higher gold price.
That leaves us in a bit of a paradoxical position as we see the possibility of a large drop in the gold price in the short term, but long term, we see industry fundamentals driving the price higher. We are choosing to deal with this investment environment by lowering our risk and taking profits while waiting for speculative long liquidations, more chaos in the financial markets, or a drop in gold prices. Thus, we are holding off on increasing gold positions in ETFs and miners 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.

But we are certainly not out of the gold market and remain firm in our core gold and silver positions as we see a bright future for precious metals moving forward.

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