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Looks Like The COT Report Wins Again, As Gold And Silver Fall Sharply

Eventually physical demand for precious metals will swamp the games being played in the paper (i.e., futures contract) markets. So every time the commitment of traders report (COT), which tracks those paper games, turns bearish while gold and silver continue to rise, the precious metals community watches hopefully for signs that fundamentals are at long last about to ignite a massive bull run.

The past couple of months followed this script (see Lightening-Fast COT Reversal: Now Fairly Bearish For Gold And Silver) as gold and silver kept rising for a while in the face of growing resistance in the paper market.

Here’s a more detailed explanation from Hebba Investments via Seeking Alpha:

The latest Commitment of Traders (COT) report, showed another rise in speculative longs for the EIGHTH straight
week. This two-month streak with the net speculative position of gold traders rising every week, has just tied the record-longest gains streak achieved – in the history of the COT report (going back to 2006) it has never risen for NINE consecutive weeks. History for COT nerds (like myself) could be made next week if gold speculators continue their torrid streak.

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.

There are many 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 exports 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.

Moving on, the net position of all gold traders can be seen below:

Source: GoldChartsRUS

The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, we saw the net position of speculative traders increase by 18,000 contracts to 250,000 net speculative long contracts. We are now approaching some of the all-time highs in gross and net speculative positions – so gold investors need to be wary.

As for silver, the action week’s action looked like the following:

Source: GoldChartsRUS

The red line which represents the net speculative positions of money managers showed an increase in the net-long silver speculator position as their total net position increased by around 10,000 contracts from a net speculative short position to a net long position of 62,000. Silver speculators are a bit further away from their all-time highs than gold speculators, but are still moving up strongly.

We have been Extremely Bearish the last few week and have been dead wrong in our short-term call. When that happens, you have to re-evaluate your call and make sure that the logic is still valid to the situation.

Our bearish thesis was primarily based on the fact that speculative positions are extremely bullish levels, while physical demand remains at some of the lowest levels seen in the last few years. Additionally, the Federal Reserve seems to be tightening monetary policy, while some of the risk-on events (North Korea, US Debt Ceiling, etc.) seem to be calming down. None of this has changed.

The above was written yesterday. And today gold and silver are getting whacked.

So, alas, it appears that the paper players will live to manipulate another day, and gold bugs will have to wait for that sustained run to $5,000. Which is okay; the longer it takes the more time there is to stack.

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