The COT report
The CFTC (Commodity Futures Trading Commission) reports major players’ positions in the futures market through its COT (“Commitment of Traders”) report. The report comes out every Friday and shows open interest on the previous Tuesday.
Short positions widen further
According to the COT report for the week ended August 24, detailing holdings as of August 21, money managers were net short on gold for the ninth straight week. This net short position in gold is unprecedented.
The already bearish sentiment for metal turned even more bearish. In Investors’ Positions as Gold Drops to 19-Month Low, we saw how the unprecedented short position in gold could trigger a rally. Short positions for the week extended further as net short contracts rose to 90,028, an addition of 6,704.
Gold prices rose ~1.7% on August 24 after the Federal Reserve chairman’s speech, which was construed as slightly dovish. In the wake of such a surge in gold prices in a single day, we could expect to see some of these short positions covered.
Short squeeze rebound?
Historically, whenever this kind of net short position has developed, gold prices (SGOL) have rallied. When the net short position emerged in gold in November 2015, prices bottomed out soon after, and a rally ensued. The SPDR Gold Trust ETF (GLD) gained nearly 30.0% in the following seven months.
As Bloomberg reported, TD Securities analyst Ryan McKay believes that if the current metal rally continues, the shorts will need to cover, which could lead to an explosive rally. The managing director of RBC Wealth Management, George Gero, believes “it’s too early.” He sees a gold price level of $1,225 per ounce, after which the short squeeze could kick in. While market participants might differ on the timing of the short squeeze, most agree that the massive short position will unwind, leading to a gold price rally.
According to this logic, investors may consider adding gold (JNUG)(NUGT) 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 benefit gold prices (IAU).
For a detailed analysis of gold’s outlook, see Is It a Good Time to Look at Gold?