Why Speculative Money Positioning Hints at a Gold Rally


Aug. 10 2018, Updated 9:02 a.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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Net shorts at multiyear highs

According to the COT report for the week ended August 3, money managers were net short on gold for the seventh straight week. This net short position in gold (at ~42,000 contracts) is unprecedented.

The sentiment for gold has turned extremely bearish, going by the latest positioning of managed money. 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, which is just a matter of time.

Could a gold rally ensue?

As gold prices declined after remaining range-bound for a long time despite increasing geopolitical concerns, money managers cut their long positions in the precious metal. When speculators are very bearish on gold, it typically implies that a trough has been formed and a rally could ensue.

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) and equities like Franco-Nevada (FNV), Newmont Mining (NEM), Goldcorp (GG), and Royal Gold (RGLD).


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