Gold and Silver Commitment of Traders (COT) Report: A Beginners Guide

Gold and Silver Commitment of Traders (COT) Report_ A Beginners Guide

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.

Value of managed money gold short position - commitment of traders data

 

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!

 

Gold managed money net long position

“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.”

Source.

 

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.

SentimenTrader-Gold Commercials Futures Positioning - almost net long

Source.

 

Update 3 October 2018: Commercial Traders in Gold Net Long First Time Ever!

Now the gold commercial traders are actually “Net Long”. So for the first time since 2001, the “smart money” in gold is betting on the price rising. Bear in mind these are the industry players who usually hedge their exposure to physical silver by being short silver. This is a very significant change.

Gold Commercials Net Long First Time Ever

 

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.

 

SentimenTrader-Silver Commercials Futures Positioning

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:

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”.

 

Update 3 October 2018: Silver Commercials Net Long Position Has Grown Further

The Silver Commercial Hedgers net long position has grown even larger over September.

Silver Commercial Hedgers Net Long

Silver looks to have bottomed over the past 2 weeks. Making a series of higher lows and higher highs.

Has silver bottomed? Silver Making Higher Highs and Higher Lows

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 now gone net long in both gold and silver. In gold this hasn’t happened since 2001. In silver it never has occurred before.

The former (Managed Money) is usually wrong at the extremes. While the latter (Commercial Hedgers) 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 (i.e. they are betting on gold falling). 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.”

Source.

We will now watch to see if further jumps in the gold and silver price occur.

 

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 in late August, 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.

20181003 NZD Gold Chart

 

20181003 NZD Silver Chart

Visit this page for more information on how to buy gold and silver.

Or see what precious metals products are available to buy here.

Editors Note: Originally posted 28 August 2018. Updated 5 September 2018 with latest silver commercials positioning. And updated 3 October 2018 with Gold commercials now net long chart and NZD gold and silver charts updated.

Get Free Gold & Silver Tips and Deals!

  • Get weekly news and tips on buying, storing, and selling gold and silver.
  • Be the first to know about limited quantity gold and silver deals.
  • Get our free 19 Nuggets on Buying Gold and Silver guide right away to help you become a bullion expert.
Email Address *
First Name
*Required Fields
Note: It is our responsibility to protect your privacy and we guarantee that your data will be completely confidential.

Want to Get the Best Price When Buying or Selling Gold & Silver?

Then you need to time your purchase.

Get a daily price alert every weekday.

You'll receive free charts and analysis of what the price may do to help time your buy or sell and make more profit.

Email Address *
First Name
*Required Fields

You have Successfully Subscribed!