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Could Unprecedented Short Interest in Gold Mean a Bullish Future?


Aug. 17 2018, Published 5:54 p.m. ET

The COT report

The CFTC (Commodity Futures Trading Commission) reports the position of major players in the futures market through its COT (Commitment of Traders) report. This report specifies the positioning of various players in the market. The report is released every Friday and shows the open interest recorded on the previous Tuesday.

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Shorts get bolder

According to the COT report for the week ended August 10, detailing holdings as of August 7, money managers were net short on gold for the eighth straight week. This net short position in gold is unprecedented.

The already bearish sentiment for metal turned even more bearish. In Why the Risk-to-Reward Ratio Could Favor Gold Bulls Now, we saw how the unprecedented short position in gold could trigger a rally. The short position for the latest week got shorter as speculators added 22,195 contracts to the net short position. This short position is largest on record in the COT history.

A gold rally to ensue?

Historically, whenever this kind of net short position has developed, gold prices have rallied. When the net short position emerged in gold in November 2015, prices bottomed out soon thereafter and a rally ensued. The SPDR Gold Trust ETF (GLD) gained nearly 30.0% in the following seven months.

The current speculative positioning in the gold market is ripe for a contrarian position. A short squeeze rally from these levels is expected to result in a rally in gold prices.

According to this logic, investors may consider adding gold (JNUG)(GLD) to their portfolios, not only as a safe-haven bet against growing global concerns but also to reap the potential benefits of any upcoming rally. This trend would be beneficial for gold prices (GLD)

This trend would also benefit equities Franco-Nevada (FNV), Newmont Mining (NEM), Goldcorp (GG), and Royal Gold (RGLD), which have returned -17.3%, -15.2%, -15.7%, and -5.9%, respectively, year-to-date through August 15.


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