The Recent COT Report Gives Us Some Insight In The Current Mindset Of Gold Investors

by: Hebba Investments

- Gold speculators increased their net long position by 43,000 during the week. 
- Silver speculators were much less bullish as they only increased their own net long position by 4,300 contracts.
- This suggests that speculators are buying gold because they are risk averse and seeking defensive positioning.
- The large build in speculative gold net longs with only a small increase in the gold price suggests weakness in other areas of the gold market.
- Investors need to be buying back some of their gold speculative positions but since we expect a further drop in gold wait until then to be fully invested.

With the Fed behind us and the US presidential debate and the Deutsche Bank(NYSE:DB) drama taking center stage in financial markets, this past week's Commitment of Traders report saw a large build in gold speculative traders. While not unexpected considering the European banking issues that have roiled markets, we would have expected larger rise in the gold price considering the position increase in speculative gold bulls. Interestingly enough, silver did not follow gold's lead and speculative traders' silver positions only increased slightly.
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 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
As investors can see, this week's report shows that speculative longs broke a two week decline in positions and increased their positions by a very chunky 38,621 contracts - the largest increase since mid-June. Shorts continued their lackluster trading as their positions decreased by 4,137 contracts for the week.
Given that gold only rose by 1% for the week, this net speculative position increase of a little under 43,000 contracts is not very inspiring for the gold longs - we would have expected to see a larger move in the gold price with that large increase in speculative 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, speculative traders significantly increased their positions for the week which ended before we saw the Deutsche Bank issues taking center stage in markets on Wednesday and Thursday. Currently, those positions sit at a net long position of around 262,000 contracts, which we expect to be a bit lower as of Friday's close as gold showed a bit of weakness in the later end of the week (the COT report only shows positions as of Tuesday).
As for silver, the action week's action looked like the following:
The red line which represents the net speculative positions of money managers, saw a slight increase on the week of around 4,000 net contracts, but nowhere near the rise that we saw in speculative gold positions for the week. Put in percentage terms, gold's 43,000 contract rise in net speculative positions represents a little over 5% of the total gold open interest count of 793,000 contracts. This compares to silver's 4,300 contract rise in the net speculative position which only represents a little under 2% of the total silver open interest count of 224,000 contracts.
Why this divergence? We aren't sure what to make of this, but knowing that silver speculators tend to be a more speculative type of trader than those that buy gold and seek greater gains and have a greater risk profile, we think this bit of a divergence may be proof that the gold trade is now primarily based on defensive positioning - investors are seeking protection rather than appreciation here. That makes a lot of sense considering their quite a bit of potential market-moving geopolitical risk events in the next few months, and just this week Deutsche Bank's problems brought a possible European banking crisis in as another risk factor for investors.
Conclusion for Gold Investors
Last week we emphasized that investors need to begin rebuilding gold positions if they sold over the past two months because as we move away from Fed speak and into, what we believe are serious possible negative catalysts for global markets, it would be irresponsible not to own at least some gold.
Having said that, the fact that we saw a large build in speculative gold longs last week and not much of a pop in gold suggests that there is some weakness in the non-speculative and physical markets that is taking some of the wind out of the sails of gold. Investors should also remember that gold speculators have a net long position in gold that is close to all-time highs and much higher than the positions we saw back in 2011 when gold was trading at $1800 per ounce - gold is currently not an out-of-fashion contrarian trade right now.
Thus we expect a bit more of a pull-back in gold in the short-term but we urge investors to start building back some of their gold trading positions in the gold ETF's such as the SPDR Gold Trust ETF (NYSEARCA:GLD), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), iShares Silver Trust (NYSEARCA:SLV) because despite this pull-back the risk is too great that one of these upcoming catalysts (US presidential elections, the Italian Referendum, European banking shortfalls, etc) shakes markets and shoots gold much higher. But don't buy back all of the sold positions quite yet, as we think there will be a retest of $1300 and there will be a better buying opportunity as some of these speculators jump ship.

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