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What Smart Money Positioning Tells Us about Gold’s Future

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Updated

The COT report

The CFTC (Commodity Futures Trading Commission) tracks the position for major players in the futures market. It issues a report known as COT (Commitment of Traders) report, which details the positioning of various players and is released every Friday, showing the open interest recorded on the previous Tuesday.

The disaggregated report is more detailed and uses four main categories of traders:

  • Producers, who usually use gold futures markets to hedge the risk associated with the physical commodity
  • Swap dealers, who use the futures market to hedge the risk associated with swap transactions, which involves commodities
  • Money managers, who are engaged in managing and conducting futures trading on behalf of their clients
  • Other reportables, who aren’t in the above categories
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Analyzing the COT report

In a COT report, investors take note of the actual positions and 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

According to the latest COT report, large precious metal speculators continued to increase their bullish bets on gold futures. Speculative gold bets headed higher for the eighth-straight week (ended September 12, 2017). Net-bullish bets rose 18% to reach the highest level since September 27, 2016.

According to a trading note from Saxo Bank, the ratio between the net long and short positions has jumped from one to ~19. This is the highest ratio since December 2012. This ratio depicts the bets at which gold can be bought back more cheaply in the future. The current ratio shows that the market continues to be bullish.

Notably, a positive sentiment would be beneficial for gold prices (GLD) and equities like Franco-Nevada (FNV), Newmont Mining (NEM), Goldcorp (GG), and Royal Gold (RGLD).

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