The Latest Commitment Of Traders Report Shows Something We Have Never Seen Before

by: Hebba Investments


- The latest COT report shows a net speculative long position of close to 257,000 contracts, the highest we have ever seen.

- Additionally, total speculative longs are at 279,000 long contracts outstanding which is also the highest ever seen.

- This report closed on Tuesday, so it does not include any of Friday's tremendous price action in gold and so we expect current positions to be even more bullish.

- All of this is worrisome from a contrarian point of view, and we think investors need to stay disciplined here as there are few longs left to buy.

In the latest Commitment of Traders report (COT), we saw another week where, surprisingly enough, speculative longs continued to build on record-breaking position levels. This build in speculative long positions was despite the fact that the COT report closes on Tuesday and thus didn't include any of Friday's massive post-Brexit jump in the gold price - which means whatever positions we see this week that we should expect a more extreme position next week with gold $50 higher.
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 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 shows another huge increase in gold speculators while shorts decreased their own positions once again.
As investors can see, speculative longs increased their positions by 11,716 contracts despite a fall in the gold price during the reporting period (from $1,287 to $1,273 per ounce) - which is fairly unusual. Speculative shorts continued to decrease their own positions for the fourth consecutive week by another 4,320 contracts.
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, we have surpassed the previous net position that we hit in 2011. To put some numbers onto this record high, the previous record net long position was in the week of 8/2/2011 and we saw 259,002 long contracts compared to 5,349 short contracts for a net long position of 253,653 contracts. This week's speculative positioning of 279,379 longs and 22,481 shorts works out to a net speculative long position of 256,898 contracts - a new record high.

Additionally, this new record high was achieved with a gold price of $1,272.60 per ounce and doesn't include Friday's tremendous jump in gold - so we're probably well over that record high. From a contrarian perspective that is VERY dangerous.
As for silver, the week's action looked like the following:
The red line, which represents the net speculative positions of money managers, increased by a little more than 10,000 contracts while shorts decreased by a little under 4,000 contracts - which pretty much mirrored gold. Just like in gold, net speculative silver positions hit an all-time high last week - and that also didn't include Friday's jump. We are truly at historical highs in both metals.
Our Take and What This Means For Investors
We will not get into Brexit talk and its implications for gold investors because that cannot be done with true justice in this piece so we are going to save that for the next piece - we will solely focus on the Commitment of Traders report for this article.
The most obvious thing that should be clear to all investors is that the positions of speculative traders are all-time highs at a net long position of close to 257,000 contracts in gold and 75,000 contracts in silver. As we have stated before, that is a worrisome sign and something that should make contrarian investors pause in their tracks.
We know some investors have been wondering why this matters since gold has been rising despite record-high position in the COT. We would remind investors that ultimately price movements always come back to new buyers or sellers, whoever has the advantage, in general, determines the price action. Of course, there is more to the gold market than the COT report (such as physical markets, ETF markets, etc.), but let's also remember with a weekly net change of around 15,000 speculative contracts (about 1.5 million ounces or $2 billion) and an increase in total open interest of around 21,000 contracts (about 2.1 million ounces or around $2.7 billion), these are very large figures in the gold market on a weekly basis and thus they matter. For comparison sake, the SPDR Gold Trust ETF (NYSEARCA:GLD), the biggest gold ETF in the world, added around 500,000 ounces in the same time frame.

Coming back to the COT report, our all-time highs in both net speculative gold position AND total nominal speculative long contracts outstanding means that we're really in uncharted bullish sentiment - at least amongst speculative traders. That also means that gold is certainly not a contrarian trade amongst speculators (being short actually now), and we are concerned there will be little in the way of new buyers entering the COT gold market as total speculative gold traders have already beaten the all-time highs. Maybe we can see some shorts cover since we're still above 20,000 speculative shorts (all-time lows are under 5,000 contracts), but it is hard to see that many more new longs enter the market.
In fact, we believe that the Brexit early morning spike in gold may have been primarily short covering.
Notice that the spike close to $1,360 occurred dramatically and in a parabolic fashion and then prices gradually fell. In fact, gold's Friday close of $1,315.60 was actually $25 lower than its midnight price and close to $40 lower than its high - gold actually declined on Friday. That is generally not a bullish sign and suggests short-covering and then a lack of buyers to propel the price higher - precisely what we'd expect from record-high speculative positions as seen in the current COT report.
Also, investors should remember the COT report is also based on Tuesday's gold price when it was trading at under $1,280 per ounce - based on Friday's closing, we are clearly above these historic levels.
Thus, while it's VERY hard to not be bullish with such a spike in the gold price, based solely on the COT report (again, we'll cover Brexit in our next piece), you have to be extremely cautious here. We think at this point investors should actually be decreasing gold positions in ETFs and miners such as the SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust ETF (NYSEARCA:SLV), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and miners such as Randgold (GOLD) and Barrick Gold (NYSE:ABX).

Of course, keep core positions but don't get carried away with emotions here - gold is currently an extremely crowded trade and even the price action has all the signs of a short-term top. We think it is much more prudent for investors to take profits and expect a significant pullback here based on the COT positioning and wait for a better entry point.

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