Speculative Longs Add To Their Gold Positions, But Here Is Why We're Bearish On Gold For Next Week

Hebba Investments

 
- Despite the rise in speculative longs, the gold price went down during the COT reporting period.

- This is generally bearish in the short-term as it suggests that positive COT positioning was negated by outside bearish pressure on gold.


Despite our short-term bearishness, we remain positive on gold for the long-term because structurally positive factors remain.
 
The latest Commitment of Traders (COT) report showed an increase in speculative longs while shorts closed out their positions as gold continued to meander during the COT week (Tuesday to Tuesday) closing slightly down. The three major events that we discussed last week all ended relatively positive for gold as the Chinese holiday didn't cause any major "hits" to the gold price, the Fed came out with a relatively dovish statement, and on Friday the jobs report was relatively neutral (job gains but wage and hourly earnings disappointments).
 
On Friday afternoon, San Francisco Fed President John Williams threw a wrench in the mini-gold rally as he said in an interview on Bloomberg TV that despite the weak January jobs report and Wall Street's drastic drop in probability of a March rate hike, it was still possible. "I don't agree. All our meetings are live," he said to counter Wall Street's presumption.
 
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 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 rise in speculative gold positions for the third time in four weeks as longs increased their positions by 6,283 contracts on the week. On the other side, speculative shorts decreased their own positions by 6,105 contracts on the week.
 
The total net speculative increase was a little over 12,000 contracts, but interestingly enough, gold actually fell for the COT reporting period (Tuesday to Tuesday), which is often a short-term bearish sign. It suggests that despite increasing bullish bets on gold, there must have been other weakness otherwise the gold price would have risen.
 
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 increase by 12,000 as it ended the COT week at 72,000 net speculative long contracts.
 
Despite the rise we are still fairly low in terms of the historical net long position.
 
As for silver, the action week's action looked like the following:
 
Source: GoldChartsRUS
 
 
The red line which represents the net speculative positions of money managers, showed another increase in speculative positions for the week of around 7,700 contracts. As is obvious from the chart above, speculators have been much more bullish on silver than on gold. We are not sure why, but without any expected supply crunch or demand jump, this makes us much more cautious on silver than on gold.
 
Late Friday Fed-Speak
 
As we mentioned earlier, after the relatively weak jobs report and the jump in gold, the Fed's John Williams says he "sees some arguments to raise rates in March" in an interview with Bloomberg news. The bullet points of the interview, at least per Zerohedge, were the following:
 
  • WILLIAMS SAYS MARCH IS ON THE TABLE, DECISION DATA-DEPENDENT
  • FED'S WILLIAMS SAYS ALL FOMC MEETINGS ARE LIVE
  • FED'S WILLIAMS: INFLATION MOVING BACK TO 2%
  • WILLIAMS SAYS MARCH IS ON THE TABLE, DECISION DATA-DEPENDENT
  • WILLIAMS SAYS 3 HIKES `REASONABLE GUESS' FOR FED RATES IN 2017
  • FED'S WILLIAMS SAYS NOT WORRIED ABOUT U.S. ECONOMY STALLING
  • WILLIAMS: INFLATION WILL BUILD UP IF WE PUSH ECONOMY TOO HARD
  • FED'S WILLIAMS SEES SOME ARGUMENTS TO RAISE RATES IN MARCH
Of course, there was a corresponding rise in the US Dollar:
 
Source: Zerohedge
 
 
In our opinion this is simply the Fed trying to play both sides of the game as they want to keep uncertainty in markets so as not to have markets preempt any move (or non-move) on their part.
 
Our Take and What This Means for Investors
 
We will do something new this week and add a little gold "barometer" to sum up our opinion on gold in an easy-to-read table. The key to this and any other gold prediction is to understand the "why" in the prediction so we also give our reasoning for the barometer calls. In the short-term nobody can really predict the gold price anywhere close to 100%, anything over 60% for long periods of time. While we move to the medium and long-term, we become much more confident in the prediction as the structural issues that are not relevant in the short-term become much more important - and these are easier to foresee.
 
We would love to hear our readers' thoughts on this new table so please give thoughts on this new table in the comments section.
 
 
For the short-term (week-long timeframe), we are neutral on gold with a bearish leaning. The rise in COT positions for the week, but lack of increase in the gold price, suggests weakness in other areas of the gold market. This is slightly negated because we remain at relatively low historical levels of COT longs, thus there is room for additional longs to join the market. As for silver, we are bearish in the short-term for the same reasons as with gold except that silver has a much higher COT net speculative long position, thus it is much more vulnerable than gold.
 
For the medium-term (less than 6-month long timeframe), we remain bullish on gold as structural issues and market uncertainties take precedence over short-term COT developments. Problems in Europe, potential trade barriers, global mistrust, and potential financial black swans make gold a buy for the medium-term. We remain neutral on silver as its correlation with gold is positive, but the much larger COT position and ETF holdings temper our bullishness. Additionally, the European VAT tax on silver makes gold more attractive for European investors.
For the long-term (greater than 6 months timeframe - yes this is long-term in our current investment climate), we remain extremely bullish on gold as all the reasons to hold gold in the medium-term apply with the additional reasons of a weaker dollar (you can read why here), structural debt issues, and falling mine supply. We remain bullish on silver for the same reasons mentioned for gold, but it remains riskier because of the large ETF holdings (liquidation would be scary) and its lack of central bank purchases. Its small market size though means additional volatility, and while this may increase silver gains versus gold, it also means much greater risk and thus the risk-reward advantage goes to gold and keeps us "bullish" and not "extremely bullish."
 
Compared to Kitco's gold survey, our short-term view of gold remains a contrarian position as most of the Kitco respondents believe that gold will rise next week:
 
Source: Kitco
 
 
We always like being contrarian so in our view that is another positive.
 
These are our short, medium, and long-term views on gold and investors wishing to trade or invest in these prediction (or invest against) them can take the appropriate positions in physical gold (for longer term investors) or the SPDR Gold Trust ETF (NYSEARCA:GLD), and ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL). For silver, positions in the iShares Silver Trust (NYSEARCA:SLV), ETFS Silver Trust (NYSEARCA:SIVR), and Sprott Physical Silver Trust (NYSEARCA:PSLV) are all ways to invest. Again, we love to hear from readers and try to respond when we can, so please let us know what you think positively or negatively.

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