The Post Election COT Report Was Issued And This Is How Traders Were Positioned For The Precious Metals Bloodbath

by: Hebba Investments



Summary

- Pre-election showed traders weren't as neutral as some commentators had predicted in gold.        

- Gold and silver traders have been building up speculative positions for the past month leading up to election day.
       
- Obviously, the bloodbath in precious metals post-election wiped out much of these positions.
       
- Based on our forecasts, we expect the net speculative position in gold to be around 100,000 contracts long.
       
- That would be the lowest levels since February and we think its an excellent buying opportunity for those willing to invest against the grain.

       
As we mentioned in our Seeking Alpha Instablog note (if you're not a subscriber please do so you get notified), this week's Commitment of Traders report was released a business day late on Monday November 14th because of a US Federal holiday. That means it is essentially a full week late in terms of trader positioning, but we think its relevant nevertheless.
 
What is interesting about this report is that since it closed on Tuesday November 8th, it shows trader positioning going right into election night. We all know what happened that night, and the following few days, so that shouldn't be anything new to us. But what we can do is take this report and project where trader positioning is currently to get an idea of how oversold the gold market. We will do that by taking trader positioning and using historical calculations to take the difference in the gold price and see how that shapes up.
 
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
This week's report showed a slight rise in speculative gold positions for the third straight week as longs increased their positions by 4,416 contracts on the week. On the other side, speculative shorts increased their own positions by 582 contracts on the week. Neither change is particularly large and shows traders holding tight into elections.
 
Also, what this tells us is that while speculative traders were not at all-time highs in terms of gold positioning, their positions had jumped significantly from where they were a month earlier.
As for silver, the action week's action looked like the following:
 


Notice that same jump in silver speculators leading into elections? Again, not near its previous highs but there were certainly a lot of speculative traders buying leading into the elections.

While that alone wouldn't forecast the big post-election drop we have seen in precious metals, it certainly shows us that the long-PM trade wasn't a lone-wolf type deal.
 
Our Take and What This Means for Investors
 
Based on our historical COT data, over the past year whenever we saw drops in the gold price of greater than 3% on the week we saw a net speculative drop of greater than 50,000 contracts. All of those drops in the gold price were between 3% and 3.5%, but as we stand today around the $1225 range in gold, this week's drop would be closer to 5% - so we would expect a greater drop in net speculative exposure when next week's COT report is issued.
 
We think the net speculative drop will be in the 60,000 to 70,000 range, which would put the net speculative position (currently around 176,000 contracts) into the 100,000 range, which would be lowest since early February when gold was trading around $1209 for the COT week. We are certainly not negative because we are starting really high position, but the market is now much less long - which is probably not news to any gold investor.
 
We cannot help but look at this as, excuse the pun, a golden opportunity for investors as gold and miners are now trading at what they were trading at in early February. That is despite the US electing a president that has promised massive spending and tax cuts - which would no doubt lead to huge deficits for the US. There is simply no way this can happen without an issuance of a massive amount of debt and the resulting increase in the money supply.
Thus we continue to believe that this is an excellent opportunity for investors to increase exposure 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), and some of the quality precious metals miners. There is a lot of work to get done before we see economic improvements, and much of that proposed work involves policies that are highly inflationary - and that should benefit gold.

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