In the gold market, the Commercials are NOT the proverbial “smart money” with respect to forecasting price direction. If they were then they wouldn’t have been net-short gold futures, to one degree or another, during the entire 2001-2011 upward trend in the gold price.
The Commercials are also not the “dumb money” with respect to forecasting price direction. This is because, as a group, they do not bet on price direction. Instead, they generally attempt to make money on spreads and commissions, regardless of price direction. Furthermore and as previously explained, the Commercial position in the futures market is simply the inverse of the Speculative position. In order for speculators, as a group, to increase their long exposure and drive the price upward, the Commercials, as a group, MUST increase their short exposure. A rise in the Commercial net-short position to a high level is therefore a function of basic mathematics — a necessary offset to a rise in the speculative net-long position to an equivalent high level. We realise that this assessment has the disadvantage of being nowhere near as interesting as the idea that Commercial traders are conspiring to keep a lid on the gold price, but it has the advantage of being factually correct.
Recently, the relatively high speculative net-long position (and the offsetting relatively high Commercial net-short position) in gold futures has been acting as a bearish hook. The problem for the short-term bears who are ‘hanging their hats’ on the COT data is that while it is correct to view a sharp rise in the speculative net-long position as a sign that the market is short-term ‘overbought’ and vulnerable to a significant pullback, there are no absolute benchmarks when it comes to the COT sentiment indicator (that’s all it is: a sentiment indicator). So, although the recent peak of 166K contracts in the total speculative net-long position in Comex gold futures is high relative to where this indicator has been over the past year, it could be low relative to where this indicator goes over the next two months. It’s possible, for example, that a rally in the gold price to the low-$1400s within the next two months will be accompanied by a rise in the total speculative net-long position to 250K contracts. Imagine how bearish the COT-focused analysts will be if that happens!
About Steven Saville
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