Last week, we focused upon signals that might
betray a PBOC effort to manage a lower price for COMEX gold. This week, let's
simply review the latest Commitment of Traders report on an absolute basis.
By any traditional sense, the positioning of
Speculators and Banks in the COMEX gold market are at extremes that often
precede price bottoms. The overriding question, though, is two-fold:
Is the People's Bank of
China intervening either directly or indirectly to "devalue" the
dollar price of certain commodities at the same pace as they devalue the yuan
versus the dollar in response to U.S. trade tariffs?
If this is the case, do
traditional market metrics such as the Commitment of Traders report have any
For the sake of this post, we're going to assume
that the answer to question #2 is "yes", despite the two charts
First, notice that the current decline has been
ongoing for nearly four months, and it has followed a uniformity that is rarely
seen in a randomly-derived and "free" market. On the second chart,
the value of the yuan versus the dollar is represented in candlesticks, and it
is overlaid with the price of COMEX gold, which is shown as a solid blue line.
So, back to the latest Commitment of Traders
In the precious metals "markets",
analysts often follow trends within the CoT report in an effort to foresee
price bottoms and tops. Generally stated, when The Large Speculators (hedge
funds, managed money accounts, technical trading funds, et al) move to extremes
on the long side, price is poised to move lower. Why? Simply put, all those who
want to be long have already bought. This sets up a situation where there are
more future sellers than buyers and, eventually, down goes price. The same is
true at price bottoms where the Large Speculators are moving to short COMEX
gold or silver. At some point, the selling exhausts itself and price begins a
So where are we at present, and how does the
current CoT positioning stack up historically?
As of the survey dated last Tuesday, July 31 we
LARGE SPECS long 209,255 COMEX gold
contracts and short 173,918 for a NET long position of 35,337 contracts.
COMMERCIALS long 145,254 contracts and
short 193,172 for a NET short position of 47,918 contracts.
Are these numbers potentially significant? Only
when viewed through the prism of history.
With a position of 173,918 contracts, the
Large Spec GROSS short position is an all-time high, well in excess of the
previous all-time high levels seen during the summer of 2015.
A NET long position of just 35,337
contracts is the smallest the Large Speculators have maintained since the
report of January 8, 2016.
The specific category of "Managed
Money" on the disaggregated report reveals a NET short position of 42,528
contracts, also an all-time high.
The Commercial NET short position of 47,918
contracts is the smallest since January 22, 2016.
If we plot these positions with a price chart,
you can see the pattern of price lows mentioned above. Note that as the red and
green lines converge, price is almost always approaching a major low.
But that's just the past five years. If we go
back a full twenty years, notice that the only period where the tables were
turned with the Large Speculators NET short and the Commercials NET long was at
the previous bear market lows near the turn of the century. In fact, the
absolute low in price seen in 1999 coincided with a peak in this extreme of CoT
In summary, by any traditional measure, the COMEX
gold price is oversold and ripe for a rebound as Speculators are heavily
grouped into the short side and are ripe for a margin call-induced short
squeeze. However, the current and ongoing linkage of the dollar price of COMEX
gold with the yuan-dollar exchange rate may preclude this rally in the near
At TFMR, we aggressively supported the idea of a
summer 2018 rally that would drive COMEX gold toward $1400. So far, we could
not have been more wrong, and this yuan-gold linkage appears to be the culprit.
However, as the historical CoT and price charts indicate, our expected rally
has only been postponed, and the Commitment of Traders positioning will likely
manifest itself in higher prices soon.
The challenge for traders is to avoid any
attempt at "catching the falling knife" before the next rally begins.
The challenge for stackers is to remain resolute against this current onslaught
of bearishness in the digital gold futures market.
Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.
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