The Battle in the Gold Market

There is a major battle brewing between the bulls and the bears in the metal markets. Arguments on both sides are full of conviction and weight. Even more importantly, traders are putting their money behind their conviction. Finally, as the action has heated up, it’s drawn players from both of their respective camps into the fray. This week, we’ll look at the gold market and one of the problems with the Commitment of Traders report’s data.

Gold has rallied approximately 17% since the December lows and now rests atop long-term moving averages that had been seen strictly as resistance dating back to 2013. More importantly, open interest has grown considerably as the market has consolidated its gains above its newfound support in the $1,190 – $1,215 area. In fact, open interest has increased in each of the last five trading sessions and has grown by nearly 10% along the way.

160x600The question obviously becomes, “What’s everyone doing?” Based on the market’s stall combined with the increase in open interest, it’s clear the bull and the bears, in this case the large specs and the commercial traders, respectively are fighting it out. Let’s look at some numbers. The commercial traders have been net sellers in eight out of the last nine weeks for a total of 160k+ contracts sold. This is their most bearish position since February of last year and November of 2013 before that. Gold miners have had an opportunity to hedge forward production at these prices in over a year and they clearly don’t want to miss out. Furthermore, their net short record is more than 300k contracts. Therefore, they still have selling capacity left. They’re far from, “sold out.”

A big part of what we do is transposing the weekly Commitment of Traders data into a useful daily methodology. At this juncture, a big picture look is necessary and the current situation is illuminating. We plotted the daily signals, as they would have been generated on the weekly chart below. Note that the reversals from the weekly overbought and oversold levels have resolved themselves in the direction of the commercial trader position. Furthermore, the recent overbought situation is registering a clear bearish divergence, which is even more meaningful at a weekly resolution. Softness this week would create the reversal the commercial traders are expecting. We’d then be able to cross reference the changes in the net trader positions in the COT report with the CME Group’s volume and open interest reports to see which group is winning the battle.

The Commitment of Traders signals generated at the weekly level are infrequent but, powerful.
The Commitment of Traders signals generated at the weekly level are infrequent but, powerful.

Finally, moving to the daily chart, you can see that the net commercial trader position has been predictive in analyzing future gold prices. You can also clearly see the degree of selling they’ve brought to bear as the rally picked up steam above $1,150 per ounce.

The commercial traders' net position has done a good job of spotting turning points in the gold market.
The commercial traders’ net position has done a good job of spotting turning points in the gold market.

 

468x60We’ll be anxiously awaiting this weekend’s Commitment of Traders report as we try to determine who has the upper hand in the gold futures market at these elevated levels. Our guess is that the gold miners will have more gold to sell than the speculators will want to buy.

 


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