While Gold Pulled Back, Silver Did Something Very Different

by: Hebba Investments


- Gold speculators continued to reduce both their net long and short positions for a second straight week.

- While gold speculators were cutting back on positions, silver longs took their own positions to new historic highs.

- We don't think silver has the strength to rise while gold declines so silver investors should be careful here.


While we are interested in re-establishing some of our sold gold positions, we think investors should continue to be patient and wait for a further pullback.
 
The latest COT report showed that gold speculative longs continued to sell their positions, which was in contrast to silver shorts that actually increased their long positions for the week. This is a bit strange as silver usually tracks gold and the speculative positions usually do the same.
 
We will get a little 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 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 showed speculative gold longs decreased their positions for the second week in a row, while shorts also decreased their positions.
 
 
While speculative gold longs decreased their positions again, the current outstanding long position of a little under 294,000 contracts is still the fourth highest on record - thus, there is certainly room to pull back further.
 
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, speculative traders have taken a break from their parabolic rise and sit at a net long position of 264,000 contracts.
 
As for silver, the week's action looked like the following:
 
 
 
The red line, which represents the net speculative positions of money managers, increased by a little more than 6,000 contracts while shorts decreased by a mere 200 contracts. This is the second week that we have seen a divergence from gold as speculative silver positions continue to increase while gold speculators have reduced from record-high levels. We are not sure why this is occurring, but we are not sure it is really sustainable unless we see significant industrial silver uptake - and we simply don't envision that with the weak global economy.
 
Our Take and What This Means For Investors
 
While the focus last weekend was on the Turkish coup, and while that may have significant geopolitical consequences moving forward, currently it had only a minor impact on the gold market during the week. For the second week in a row, we saw gold speculators pulling back as they reduced both long and short positions from historic levels. In our view, this is good as we would rather be investing in gold when market conditions are a bit more balanced rather than going long while positions are already at historically long levels. Interestingly enough, while gold speculators were pulling back, silver speculators were once again increasing their own positions despite the weakness seen in gold during the week - for us this is a bit of a warning sign as we do not think silver currently has the industrial strength to hold its own if the gold price continues to weaken.
 
We are getting a bit closer to levels where we would want to reinitiate some of the gold positions we have sold - but not quite yet. Thus, we think investors should hold off or lighten up on gold positions in the ETFs and miners such as the SPDR Gold Trust ETF (NYSEARCA:GLD), the ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and miners such as Randgold (GOLD) and Barrick Gold (NYSE:ABX). Currently, we do not see justification for the divergence between gold and silver and thus we think it is not a good time to be invested in the silver miners or ETFs such as the iShares Silver Trust (NYSEARCA:SLV).

We are still at extremely high levels of speculative gold longs and historic levels for silver longs, so precious metals bulls should be patient here and wait for a bit more of a correction.

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