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Could Traders’ Long Positions on Gold Suggest a Pullback?

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Commitment of Traders report

The CFTC (Commodity Futures Trading Commission) releases the Commitment of Traders (or COT) report every Friday. It presents a breakdown of the open interest positions of all major contracts in the futures market up until the Tuesday prior. It has four main categories of traders:

  • producers
  • swap dealers
  • money managers
  • other reportables

While producers hedge the risk associated with physical commodities, swap dealers hedge the risk associated with swap transactions. Money managers conduct futures trading on behalf of their clients. This report should, however, be used with caution, as it is issued with a three-day lag. Moreover, it can’t be used as a timing indicator.

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Long bets increase for a fifth consecutive week

According to the latest COT report, speculative traders lifted their net long positions in gold for a fifth consecutive week. They increased their bets by 8,000 contracts from the previous week after a rise of 40,000 contracts the week prior. Market participants still believe that since net long positions comprise only 38% of total open positions, they could rise further.

Positioning getting too extreme?

At the same time, some analysts have started talking about investor positioning being too long and the possibility of a correction in the short term. For the week ended January 16, 2018, net long positions increased, and hedge funds increased their gross short bets.

While other fundamental factors could drive gold prices in the long term, there could be a short-term pullback in prices. A negative sentiment would be detrimental for gold prices (GLD) and gold equities such as Newmont Mining (NEM), Franco-Nevada (FNV), Goldcorp (GG), and Royal Gold (RGLD), which have gained 10.8%, -2.1%, 16.8%, and 9.0%, respectively.

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