COT FIGURES REVEAL GOLD NOT AS OVERBOUGHT AS FEARED / MACLEOD FINANCE

COT figures reveal gold not as overbought as feared

The gold price is now being driven higher by paper markets, not Asian retail demand which is deterred by sudden higher prices. But will it last?

Alasdair Macleod

While last Tuesday’s Open Interest increased by 26,833 contracts, net longs of the Managed Money category only increased by 2,664 contracts. 

On provisional figures for Friday, open interest fell by 20,147 contracts from Tuesday, so Managed Money going into Monday is almost certainly less net long than the category was on 17 September (the previous Tuesday) when the price was $2569 — $89 lower.

The reason for concentrating on Managed Money is that it is comprised of leveraged hedge fund speculators and therefore is a good gauge of sentiment. 

While there are other factors, such as the October Comex gold contract running off the board, to see the price $89 higher despite net profit-taking by the hedge funds is notable.

Theoretically, it creates room for further hedge fund buying, putting the squeeze on the Swaps, comprised mainly of bullion bank trading desks and market makers. 

However, it is overbought, suggesting caution is appropriate. 

But to have the position now appearing to decline on a rising price is worth noting. 

This also happened in 2020, when MM net longs declined on a rising gold price. 

The period of this unusual development is shown between the pecked lines in the next chart.

Note how net Managed Money longs halved between September 2019 and August 2020 while the gold price rose from $1545 to $2070. 

It wasn’t just Managed Money: Comex Open Interest fell from a record 796,883 in 4 January, 2000 to 561,837 on 4 August against the trend of rising gold prices.

Could it happen again?

Last week, it was clear that it was hedge fund activity leading to higher prices, simply because gold rose intraday most times during New York trading hours. 

In my market report last Friday, I pointed out that these dealers were almost certainly selling the dollar as much or even more than they were buying gold, following the Fed’s 50 basis point cut in the funds rate. 

That this is squeezing the establishment shorts is evidenced by the likely drop in Managed Money net longs. 

It might be an early sign that the establishment shorts are being forced to capitulate, though it is too soon to make that call.

Meanwhile, the price appears to have run ahead of retail demand in China and India, where gold traded at a discount to London/New York spot. 

This is hardly surprising, given the suddenness of the rise. 

Retail demand in Europe and the UK is hardly sparkling either, though ETFs are now seeing net subscriptions. 

That China’s retail appears out of it means that the Golden Week holiday next week (1—7th October) should have little impact. 

However, the sudden strength in the yuan, coupled with the PBOC’s cut in interest rates might change that:

No, this is a big boys’ game. 

Doubtless, next week will see another surge in stands for deliveries, confirming the sand is running out of Comex’s hourglass. 

And over the weekend the assassination of Hassan Nasrullah, Hezbollah’s leader, and of Iranian General Abbas Nilforushan marks a significant deterioration of the Middle Eastern situation.

Next week, we will be watching for signs of whether the dollar and US Treasuries still retain their safe haven role. 

Or whether gold is seen as even safer.