Learn all about the gold and silver commitment of traders (COT) report and how understanding it can help determine when to buy gold and silver.
This post covers:
- What is the Commitment of Traders (COT) Report?
- The Current Positions in the Commitment of Traders Report for Gold and for Silver
- What is a “Short Squeeze”?
- What is “Short Covering”?
- Is a Gold and Silver Short Squeeze Coming?
- Not Just Record Positions in Gold and Silver Futures
What is the Commitment of Traders (COT) Report?
COTs = Commitment of Traders Report
The Commitment of Traders (COT) Report tracks the positions of gold and silver futures traders. And whether they are long or short – i.e. betting that prices will rise or fall respectively.
In the report these futures traders get grouped according to who they are. For example, Managed Money (hedge funds and the like), or Commercials (commercial hedgers such as miners, actual users of metal etc – usually the “smart money’).
So the positions of these respective groups can be useful particularly at extremes as indicators of where gold and silver prices may soon be about to head. More on that below.
A Quick Glossary of the COT Report Data
The COT report is published by the US Commodity Futures Trading Commission (CFTC).
Here’s an example of what this data looks like: http://www.cftc.gov/dea/futures/other_lf.htm
The report basically categorises traders in various commodities, into different categories and monitors the size of the positions taken. From this it can be determined whether these different groups are betting on the price of silver and gold going up (long) or going down (short).
That is really an oversimplification. As some like silver and gold miners or users or bullion banks might not actually be betting on the price falling when they “go short” but could just be hedging positions they have in actual physical gold and silver.
But we’ll leave it at that to not overcomplicate things.
What are the Current Positions in the Commitment of Traders Report for Gold?
Managed Money Traders Current Position in Gold Futures
Currently in gold the Managed Money are short (which is very unusual in itself). But not only that, the Managed Money are also at all time record high short levels.
The Managed Money are usually wrong at the extremes. That is, historically their overall long position is usually high at tops in silver or gold (they’re all betting the price will rise). And usually low at bottoms (they’re betting the price will fall further). But currently they are more extreme than that and their overall positions are actually net short. With the gold and silver price already very low.
Another way of looking at this is what is the Managed Money net long position, along with tracking the gold price.
We can see the Managed Money had a negative net long position at gold’s low of US$1051 back in 2015 (24,263 contracts).
They now again have a negative net long position (78,579 contracts), but it is 3.24 times larger than that previous record!
“According to the new COT report, hedge funds as of Tuesday’s settlement were short a record $22.72 BILLION worth of gold, which is a new all-time high and 5.8X larger than their trailing 12 year average gold short position of $3.92 billion. Hedge funds have increased their gold short position for the last 10 consecutive weeks, including 6 straight weeks of new record high short positions!
Hedge funds as of Tuesday’s settlement have a record negative net long position of -78,579 contracts, which is 3.24X larger than the record that was set at year-end 2015 of -24,263 contracts when gold bottomed at $1,051 per oz.”
Commercial Traders Current Position in Gold Futures
Conversely the Commercial traders net short position in gold is currently extremely low historically. So they think prices are likely to rise from here. These producers/end users of gold are usually right at the extremes. The Commercials usually have a higher net short position when prices are peaking as they are hedging themselves against the price falling.
Currently commercials are doing just the opposite. They are now close to a net long position for the first time since 2001!
You can also see that back at the gold low in December 2015 was the only recent time that Commercial traders were close to being net long.
What are the Current Positions in the Commitment of Traders Report for Silver?
Commercial Traders Current Position in Silver Futures
The positioning of the commercial hedgers in silver is not quite as extreme as in gold. However they too are getting close to being net long. Which is a real rarity over the past 24 years.
Update: 5 September 2018
Updated 5 September 2018: The latest numbers out this week now show that the Commercial traders are also net long in silver for the first time ever. Tom McClellan, Editor of The McClellan Market Report, tweeted the following:
The Commitment of Traders (COT) Report data from the CFTC go back to 1986, and in all of that time, the commercial (big money) traders of silver futures have never once been net long as a group. They were always at varying degrees of net short. Until this week. pic.twitter.com/Bsx6XoU0Mv
— Tom McClellan (@McClellanOsc) 31 August 2018
Our favourite newsletter writer Chris Weber shared a comment from one of his readers who closely follows the COT report.
Quoting a 2005 book by Larry Williams: “Trade Stocks and Commodities with the Insiders: Secrets of the COT Report”
The quote was:
“If you ever see the commercials go net long silver, look for a major bull market”.
Silver dipped lower this morning. So it will be interesting to see if this first ever net long position by the Commercials is as significant as the quote from the book reckons it will be. We are still watching to see if a short squeeze will soon occur. More below on that…
What is “Short Covering”?
When analysts and armchair writers such as us talk about “short covering”, this simply means futures traders have closed out their short positions (bets on the price falling). They have to actually “go long” in order to do this. These traders are closing their shorts because they believe the price is moving against them and heading higher.
What is a “Short Squeeze”?
This is how a “short squeeze” can occur. A short squeeze occurs when there is an extreme number of short positions being closed, often at a loss. So as a result the gold and silver price can jump suddenly higher, as the shorts then buy in order to get out before their losses mount. Thereby driving the price even higher.
You can see sharp jumps in the price when a short squeeze occurs.
Is a Gold and Silver Short Squeeze Coming?
The Managed Money has all time record high short positions in gold. While the commercial hedgers have record low shorts dating back to 2001.
The former is usually wrong at the extremes. While the latter is usually right.
But for a number of weeks now gold has continued to fall and the managed money has kept piling on shorts and making more money as the price kept falling.
But at some point this will reverse and there will be no one left willing to go short.
This is when the short squeeze will occur. We’ll see the managed money having to exit their shorts as the gold price rises. They will do this by taking long positions. Thereby boosting the price further.
Has a Short Squeeze Started Already?
This short squeeze may have started last Friday when gold rallied by $19.30 to settle at $1,206.30 per oz.
As noted already, the managed money category now have a record negative net long position. This is 3.24 times larger than the record that was set at year-end 2015 when gold bottomed at $1,051 per oz.
NIA reports that:
“Over the following six months, gold exploded from its low by $316 or 30% to a high of $1,367 per oz. Gold appears to have begun what will most likely become another epic short squeeze!”
…The managed money net long position has now been negative for six consecutive weeks and has never been negative for more than eight straight weeks. Over the next 7-12 trading days, expect to see additional short covering and long buying of approximately 65,749 contracts, to take the net long position back to being even. This alone could be enough to drive gold back up to $1,300 per oz.
Gold is clearly in a new bull market that began in December 2015 when gold bottomed at $1,051 per oz as the Fed began its current rate hike cycle. It’s amazing that despite the negative net long position becoming 3.24X larger than December 2015, gold’s lowest settlement price last week was $1,176 per oz. As recently as January 2017, gold declined as low as $1,128 per oz, with a net long position that was still positive by 38,923 contracts.
This is part of a continuing trend. When gold peaked in January 2018 at $1,363 per oz, its net long position was only 214,595 contracts. Four months earlier in September 2017, gold needed a much larger net long position of 264,934 contracts just to reach $1,347 per oz.
Based on this ongoing trend, when the managed money net long position once again returns to between 200,000 and 300,000 contracts, we could be looking at a gold price of between $1,500 and $1,600 per oz.”
We will now watch to see if further jumps in the gold and silver price occur.
Not Just Record Positions in Gold and Silver Futures
But it’s not just in gold and silver that there are record positions in the futures market currently.
Jason Goepfert at the excellent SenitmentTrader.com reports how the “Smart money” hedgers have established extreme positions in safe haven assets including gold, Treasuries, the yen and the VIX.”
Hiding in safe havens
Other times they piled into the havens, it led to fine performance in stocks, and better returns in the havens themselves.”
In a similar vein Zero Hedge also featured an article from Sprott Money:
What do the banks know?
“Much is being made of the current makeup of the Commitment of Traders report for Comex gold. However, similar historical irregularities are appearing in other assets, too. Thus the question, are The Banks setting the stage for a wildly volatile second half of 2018?
…check this chart from Meridian Macro Research. It shows the combined short positions of Speculators in Comex gold, 10-year U.S. treasury bonds and the stock market volatility index called the VIX. To be short any of these three would indicate that the Speculators expect:
• falling gold prices
• rising interest rates
• quiet volatility and, by extension, rising equity prices.
Check, too, this chart of positioning in the Dollar Index. Note that the Speculators are once again building a massive long position while The Commercials are moving short:
…If the Speculators (the Chumps) as a group are long the US$, short Comex gold, short bonds and short the VIX in record numbers, it can be assumed that the Commercials (the House) are short the US$, long Comex gold, long bonds and long the VIX in record numbers. And this gets back to the argument made earlier in this post. Which side consistently wins, the Chumps or The House?
And to that end, is The House simply betting against the Chumps by taking the other side of their trades or are The Commercials (largely major, Fed Primary Dealer Banks) actively positioning a trap door under the Speculators who expect an autumn of falling gold, rising interest rates and low volatility.
Thus now is not the time to be complacent. The Commercial Banks have positioned themselves to profit handsomely from any combination of a lower dollar, higher gold prices, lower interest rates and/or a crashing stock market. You would be wise to heed their unspoken warning and take action to prepare accordingly.
Record “Dumb Money” Positions Indicate A Good Time to Buy Gold and Silver
Indeed it would be wise to at least take note of what the “smart money” is doing. With gold and silver prices here in New Zealand possibly putting in lows last week, now could be a very opportune time to grab some financial insurance. Just in case the “smart money” is right and the “dumb money” is again wrong.
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Editor: Originally posted 28 August 2018. Update 5 September 2018 with latest silver commercials positioning.