Commercial and Non-Commercial Market Participants

The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn’t it obvious? Superficially, it sure looks that way.

 

kilogold-pamp-3

 

As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended level:

 

1-gold hedgersNet position of commercial hedgers in COMEX gold futures – i.e., the inverse of the total net speculative position. Similarly large net positions were only recorded in late 2009 and late 2010 – click to enlarge.

 

However, as we have stressed many times, the interpretation of this indicator is not as straightforward as many observers seem to assume. As an aside to this, the often made assertion that commercial hedgers represent the so-called “smart money” doesn’t make much sense. It would be much better to refer to them as “completely neutral market participants”.

Most commercial traders aren’t betting on market direction at all. This category of traders comprises producers, merchants, processors, users and bullion banks, including arbitrageurs such as swap dealers. They are either hedging a physical inventory, future physical production or deliveries, or offsetting financial positions, including producer forward sales in which they act as intermediaries, carry trades and other arbitrage activities.

Carry trades often involve physical inventory, but even a calendar spread in futures contracts alone can be seen as a variation of a carry trade. In gold’s case, carrying inventory can be an enticing proposition, especially in a ZIRP or near-ZIRP environment, as Keith Weiner reminds us every week in his update on gold basis spreads.

Trades that involve holding warehouse inventories offset by futures positions so as to capture the spread between spot and futures prices are in principle possible (and are indeed undertaken) in all sorts of commodities. Precious metals have the advantage though that their stocks are extremely large and that they don’t take up much space, so they invite a lot of arbitrage activity. Note that arbitrage is also an essential characteristic of open-ended ETFs backed by bullion such as GLD – which is why they don’t develop large premiums, resp. discounts to NAV.

 

A Holistic Approach

The only thing that matters about the commitments of traders are actually the activities of speculators. When their position becomes very lopsided – which is currently indeed the case – the market becomes at least vulnerable to a sizable short term correction. Speculators in futures as a rule follow strict technical and money management guidelines, thus there will always be layers of stops both below and above current market prices. These stops will exacerbate selling, resp. buying pressure when these levels are violated.

Here is a more detailed depiction of the positions of the three main groups of market participants over the past three years:

 

2-CoTs 3 yrNet positions of commercial hedgers (blue bars), big speculators (red bars) and small speculators (line), plus open interest in gold futures (green bars) – click to enlarge.

 

So yes, the current size of the speculative position suggests that the market has become vulnerable to a correction in the near term. However, as we have pointed out previously, in order to properly interpret the situation, a more holistic view is required. It is not enough to simply say “the position is very large, and therefore X will happen” – which is precisely what many gold market analysts have recently done.

One noteworthy detail we have mentioned in the past is e.g. the fact that small speculators (non-reportable positions) have been far less enthusiastic about the rally than they have been back in 2009-2012. Their net position has recently increased, but has still only made it back to the lower boundary of the range it inhabited back then. This can be seen a bit more clearly in the following chart:

 

3-gold small specsSmall speculators have yet to display the degree of enthusiasm seen in 2009-2012 – click to enlarge.

 

That is however not all there is to it. As can be seen in the second chart above, open interest in gold futures has soared recently. This is a very important detail, as Jordan Roy-Byrne points out here (as an aside to this, JRB’s gold market-related analysis strikes us generally as being of outstanding quality). We reproduce one of his charts below, which shows the speculative long position as a percentage of open interest. This is a lot more informative than the “naked” figures are per se.

 4-May62016GoldCoTGold, the net speculative position as a percentage of open interest and open interest – click to enlarge.

 

As this chart illustrates, the speculative position as percentage of OI is no larger today than it was back in 2001, right at the beginning of a huge long term rally. Consider also the open interest changes JRB has highlighted with yellow circles. It is a recurring feature of large-scale advances that the trend in open interest strongly reverses from down to up. In order for the market to rally, an increase in speculative activity is actually a sine qua non precondition – both open interest and the net speculative long position actually need to rise, otherwise there will be no bull market.

At the same time, the chart suggests that caution is increasingly warranted in the short term, as the percentage reading is now entering the region which denotes speculative long positioning extremes. This should also be brought into context with Keith’s recent fundamental price calculation, which indicates that speculative buying of futures is currently not sufficiently supported by physical demand. Naturally this doesn’t mean that there cannot be even more short term upside – but it certainly constitutes a “heads-up” type of warning sign.

Here is a look at the disaggregated commitments of traders report, which breaks the three main groups of traders in the legacy report down further. We have highlighted two important details:

 

5-Disaggregated ReportTable showing disaggregated positioning data in COMEX gold futures. Note the highlighted data – click to enlarge.

 

First of all, the gross positions of the “managed money” category – which consists mainly of trend-followers such as CTAs – are currently skewed approx. 9:1 in favor of long positions. These traders will hold on and add to their long positions as long as the market’s technical condition suggests it remains appropriate to do so. But they will also sell immediately when certain technical thresholds are violated.

Secondly, the net short exposure of the 4, resp. 8 largest traders is by now relatively large as well. Again, both data points suggest caution is warranted in the short term, but they could still expand further before the market actually reverses.

 

Rising Investor Interest in Gold

Lastly, we want to briefly address why interest in buying and holding gold has recently intensified so significantly (the positioning of futures traders mirrors a general increase in investor interest in gold). We have previously already mentioned the fact that faith in the policies of central banks is increasingly coming under strain – deservedly so.

Many investors are presumably also worried about the extreme overvaluation of the stock market, as well as that of most government bond markets and are turning to gold as insurance. The state of the banking system, especially in Europe and China, is undoubtedly also cause for concern (see “The Walking Dead” and “Drowning in Bad Loans” for some color on the situation in Europe).

However, one aspect that hasn’t yet received a lot of attention in this context is the ongoing concerted assault on financial privacy by Western regulatory democracies.

There is e.g. the barrage of propaganda on banning cash currency  – accompanied, as it were, by actual restrictions on cash transactions and the recent bizarre withdrawal of the 500 euro note by the ECB under what is clearly a spurious pretext (one has to be incredibly naïve to believe that this will actually suppress criminal activity – evidently, Europe’s socialist political and bureaucratic elite thinks of the citizens of the euro zone as complete morons who will believe anything).

 

6-CoTs-9yrCommitments of traders over the past nine years – both open interest and net positions have soared to levels close to previous highs. This mirrors a general resurgence in investor interest in gold – click to enlarge.

 

There is also the recent release of the so-called “Panama papers” (we will soon discuss this event in greater detail in a separate post), which has hastened the implementation of the global version of “FATCA”, nicknamed “GATCA”. This wholesale destruction of financial privacy has been heavily promoted by the OECD  – an extremely costly bureaucratic stronghold of central planning, socialism and globalism if ever there was one.

 

mossack fonsecaOffices of Mossack Fonseca in Panama

Photo credit: Carlos Jasso / Reuters

 

Moreover, in the wake of this extremely dubious theft and subsequent publication of private data (which is normally considered a crime, unless it serves the globalist agenda of course) financial privacy rights that have existed for hundreds of years have been wiped away in one stroke, as the Daily Bell points out. Similar to all government interventions, this will have “unintended consequences”.

As Dan Mitchell of the Cato Institute explains in a video we have posted in “The Attack on Tax Havens”, an enormous amount of investment has flown into developed economies from anonymous investment trusts bases in low-tax jurisdictions. It is a good bet that quite a bit of these investment flows will now dry up – instead, capital will go even deeper into hiding (we will address the legitimacy of hiding assets elsewhere, here we are merely concerned with what is likely to happen).

One of these hiding places will be gold, which is not depending on anyone’s promise to pay and can be stored outside of the wobbly financial system. This will help a number of private fortunes to survive, but gold held in vaults for the purpose of preserving privacy and providing insurance is also inert. It isn’t going to fund the next Google, that much is certain.

 

Conclusion

Net speculative positions in gold (and silver) futures are becoming quite stretched in the short term, which makes a correction ever more likely. However, one must always keep in mind that this position cannot be properly interpreted in isolation – a holistic analysis is required to come to correct conclusions about it.

Lastly, it should also be pointed out that the “goal posts” for these data series are moving over time. It is highly likely that if a longer term advance in precious metals prices has indeed begun, new record highs in futures open interest and speculative net long positioning will be seen in coming years.

 

Charts and tables by: SentimenTrader, Sharelynx, Jordan Roy-Byrne / StockCharts, CFTC

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “Gold – The Commitments of Traders”

  • numeflua:

    Would it be fair to say that at the beginning of major (secular) bull markets, there’s usually an episode of unusually intense bullish sentiment? And that this spike in sentiment usually fools a lot of market participants into thinking a major correction is at hand–but which turns out to be either minor or non-existent? In other words, people are looking at the range of sentiment of the prior bear market…but that no longer applies because a new bull market is at hand.

    A similar phenomenon seems to be happening with Bitcoin. To me, it looks like we’re on the cusp of a secular bull market after nearly three years of a painful bear market. Bullish sentiment is high.

    Weekly log chart:
    http://bitcoincharts.com/charts/bitstampUSD#igWeeklyztgSzm1g10zm2g25zl

    Sentiment:
    https://bfxdata.com/swaphistory/totals
    (USD margin funding = longs. BTC margin funding = shorts. Switch time scales to “All” to get big picture view.)

  • vfor:

    It is striking how much OI has risen this early in the cycle. Rising IO dampens the advance as newly issued paper is bought rather than existing paper and still gold is up this much. The current shakeout will be telling. So far it has achieved nothing and thus indicates committed longs given that IO not has fallen substantially. We will see.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Russian Gold Rush - Precious Metals Supply and Demand
      Goldfinger Strikes, Sort Of This week, we saw a tweet from a prominent goldbug. He said, "Russia added another 9 tons of gold to its reserves in March. The hits just keep coming." How many errors in this short quip? We count six, exactly one error for every two words.   This one's got everything: Smersh, Spectre, Putler and Pussy Galore! [PT]   One, we call this the fallacy of the famous market actor. Russia is famous. Its purchase of 9 times is therefore imbued with...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist