Trader Positioning Signals Potential Rally in Gold

Trader Positioning Signals Potential Rally in Gold  

As discussed previously on these pages, the COMEX Commitments of Traders (COT) report published weekly by the CME is one of the best indicators for the western speculative sentiment that tends to drive gold prices in the short term. The report for the week ending Tuesday, November 24, 2015 is among the most bullish ever.

The Commercial net short position collapsed 58% to just 11,983 contracts, which is even lower than the 14,820 low in August and the lowest since 2001. That's as of last Tuesday, which means the current short position is likely even lower and may have turned net long for the first time since 2001, when the gold bull market was just beginning.

The Large Speculators are net long only 16,302 contracts as of last Tuesday and are probably net short as of today. There was one other time when the Large Speculators were net short, and it was only for a couple days: early 2000, right before the bull market in gold was launched.

Small Speculators remained net short for a second straight week. Going back to 1993, this category has been net short more than 5,000 contracts only three times. None of those occasions turned out well for them.

Going into the sub categories in the Disaggregated COT report, as of Tuesday, November 24, the Managed Money category (largely hedge funds) reported a new, record net short position of 16,664 contracts. It is very rare for the Managed Money funds to run a net short position. Since the CME began disaggregating the COT report in 2006, the Managed Money funds have only been net short on two occasions - now (including also the week of November 17) and July/August of this year when they were caught offside by an 11% move in gold in August.

The speed of the shift in Managed Money positioning is even more significant than its size. On October 27, these funds had a net long position of 114,092 contracts. On November 24, less than one month later, the Managed Money category is net short 16,664 contracts, an unprecedented swing in positioning of 130,756 contracts in 19 trading days-the main reason gold is down about $100 in that time period. Most of the swing was accomplished by increased shorts which more than tripled in the four weeks to 107,723 contracts. Most of this shorting was done at prices under $1100 which makes these positions vulnerable to a rally. See the chart below. Are these speculators stretching too far for a year-end bonus?

Note also that the Open Interest has contracted sharply over the last month, another development supporting an imminent rally. After deducting out Spread Trades, in the four weeks from October 27 to November 24, Open Interest has dropped 49,768 contracts or 12.3% to just 354,506 contracts.