After Last Week's Gold Drop, Speculative Traders Jump Back On Board This Week

by: Hebba Investments

- Speculative gold longs rose and gold shorts covered by a large amount this week.

- In silver, the action was different as we saw major short-covering but no increase in speculative silver longs.

- Next week's big events are US jobs data related and investors can expect volatility in precious metals on Thursday and Friday.

- At this point, our short-term position on precious metals remains at neutral as we see no clear reasons to buy or sell here.

The latest Commitment of Traders (COT) report showed that speculative gold traders last week abandoned short positions and jumped into long positions at the highest rate we have seen in 2017. In silver, the action was quite different as almost all the move was attributed to short-covering, with longs actually declining slightly on the week.
The major (scheduled) event for precious metals next week with be the Non-farm Payrolls report. Though, of course, the ADP and jobless claims report on Thursday will also probably move markets in anticipation of a June Fed rate hike - or if the reports are really poor, maybe that hike (or future expected hikes) may be postponed.
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 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 that after three straight weeks of declines, gold speculative positions rose - and by a significant amount. For the week, they rose 34,696 contracts, which was the largest rise in speculative longs for 2017 and you would have to go all the way back to June 2016 to see a similar rise. This week we also saw shorts close their own positions by 13,042 contracts which completely reversed last week's short rush and brought us back down to a 23% total short position.
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, the net position of speculative traders increased by about 48,000 contracts to 118,000 net speculative long contracts. Based on the last 10 years' worth of data, we are around the average level of trader positioning in gold - so from a COT perspective, gold neither looks overbought or oversold.

As for silver, the week's action looked like the following:
Source: GoldChartsRUS
The red line, which represents the net speculative positions of money managers, showed an increase in the net-long silver speculator position as their total net position rose by around 12,000 contracts to a net speculative long position of 30,000 contracts.
What is interesting about this move in silver is that it has primarily been driven by short covering - actually all of it was short covering as speculative longs fell during the COT week.
Source: CFTC
As investors can see, silver speculators cut their short positions by 12,099 contracts on the week while speculative longs also cut their exposure by a minimal 712 contracts.
As we mentioned last week, our biggest concern with silver is the large amount of physical silver held in ETFs, which are at record-highs as seen in the graph below.
Source: GoldChartsRUS
Last week, total ETF/Fund silver holdings fell slightly by around 1 million ounces; we still worry that if ETFs and funds started selling physical silver in the market, it may be hard for the market to absorb especially considering the decline in silver bullion demand we have seen in 2017 compared to 2016.
On the other side of the coin, we do have to note that the total value of all ETF and fund silver holdings is around $16.8 billion. That is fairly low considering that the SPDR Gold Trust ETF (NYSEARCA:GLD) has a total value of $38 billion by itself. Additionally, the all-time value highs we saw in silver in 2011 and 2012 were over $30 billion - thus, from this angle, silver ETFs are not particularly near their all-time highs.
Our Take and What This Means for Investors
The big upcoming events for next week will be the US jobs reports on Thursday and Friday.
These will be key, at least in traders' minds, to determining the trajectory of the Federal Reserve's interest rate rises. A June rise is almost guaranteed, but the question will be whether the Fed will take it slow on future rises or will it move again a few months later.
We think there are clear issues with the real economy, but we really don't know what the data will show and we have little feeling. But what we do know is that the Fed is dead-set on raising rates for the June meeting, so data would have to be really bad for them not to at least meet those market expectations.
At this point, our short-term view is pretty neutral as we see even odds for metals to move in either direction. Thus, we move our short-term view on precious metals to Neutral on both gold and silver.
Due to our neutral position on precious metals but our bullish view for the intermediate and longer terms, we think short-term speculators should sit tight and not be too exposed one way or the other.
But investors with low exposure may want to take the opportunity to nibble away and add to their precious metals positioning in gold and silver positions (SPDR Gold Trust ETF, iShares Silver Trust (NYSEARCA:SLV), Sprott Physical Silver Trust (NYSEARCA:PSLV), and ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), etc.). For those who already hold large positions in the precious metals, there may be better opportunities to add further at lower prices, so we would not be adding to large positions at this time.

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