The COT report
The CFTC (Commodity Futures Trading Commission) tracks the net position for major players in the futures market. The report that details the positioning of various players is the COT (Commitment of Traders) report, which is released every Friday. It shows the open interest recorded on the previous Tuesday.
The disaggregated report is more detailed and has four main categories of traders:
- Producers: This category usually uses the gold futures markets to hedge the risk associated with the physical commodity. Their positions usually move contrary to price trends.
- Swap dealers: Swap dealers use the futures market to hedge the risk associated with swap transactions involving commodities.
- Money managers: These traders are engaged in managing and conducting futures trading on behalf of their clients.
- Other reportables: These traders aren’t placed in the above three categories.
Analyzing the COT report
The main items that investors should note in a COT report are the actual positions and the changes from the previous report. This report is more likely to show the direction of the trades happening in a particular commodity.
Money managers’ positions
For the week ended November 1, figures from the CFTC show that large speculators—money managers—increased their long positions in gold for the second week in a row. Speculative shorts, on the other hand, reduced their positions for the second straight week.
While longs increased their positions by 7,903 contracts, the shorts covered 12,830 contracts. Traders are not betting heavily on either side for gold’s outlook. Investors should also note that these were the positions on November 1, when the FBI was still probing the emails related to Hillary Clinton.
Although the FBI has cleared the air around this issue, Clinton did not win the presidential election. However, money could decidedly flow out of gold due to the increased prospect of rate hikes by the Federal Reserve in December.
A rate increase would be negative for gold prices (GLD) and stocks like Barrick Gold (ABX), Franco-Nevada (FNV), Silver Wheaton (SLW), and Royal Gold (RGLD). IA rate increase would also be negative for ETFs like the Gold Miners Index ETF (GDX) that invest in these stocks. ABX accounts for 5.5% of GDX’s holdings.