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Surging COMEX Gold Open Interest

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Total contract open interest is surging again for COMEX gold. Often this is a precursor of a price rally. Could this be another sign that a late summer rally is pending?

Last week, we wrote about the seasonality trends of gold and silver. Late summer is typically a strong period for gold prices, and that's something all of us should keep in mind as we move into late July and August. If you missed last week's article, the link is below as well as the seasonality chart for prices.

july 15 gold price chart

I bring this to your attention again this week because of the recent surge in COMEX gold contract open interest. Rapidly growing open interest is often a signal of coming price gains. We wrote about this back in early March, and a 15% rally in the gold price soon followed:

From that post, this explanation of what I mean by "volume precedes price":

 

july 15 gold price chart

 

Further, this prediction of the March-April rally that followed, which turned out to be mostly correct: 

 

july 15 gold price chart

 

A Detailed Analysis of Recent Trends and Price Movements

 

So just how much has COMEX gold open interest surged over the past few days?

At the COMEX close on Tuesday, July 2, total gold open interest stood at 454,730 contracts and price finished at $2333. As of the COMEX close on Thursday, July 11—just six trading days later—total gold open interest stood at 556,967 contracts while price closed at $2422. In summary, price had rallied $89 or 3.8% while total open interest had grown by 102,237 contracts or 22.5%.

Contrast that to the price and open interest changes in late February and early March that prompted the initial "Volume Precedes Price" post:

At the COMEX close on Wednesday, February 28, total open interest stood at 411,698 contracts and price finished at $2043. As of the COMEX close on Thursday, March 7—just six trading days later—total gold open interest stood at 506,927 contracts while price closed at $2165. In summary, price had rallied 5.9% while total open interest had grown 95,229 contracts or 23.1%.

Do you see the similarities?

 

Predicting the Next Gold Rally: Insights from Recent COMEX Open Interest and Price Data

 

OK, with that in mind, go back up and look again at the seasonality chart and recognize that late July through August into early September is typically a very strong period for gold prices. Also recognize the recent spate of news headlines regarding a slowing U.S. economy with lower inflation that has prompted an expectation of at least two fed funds rate cuts before year end.

Next, consider what happened to the COMEX gold price between Friday, March 8, and Friday, April 12. Volume (as measured by open interest) did indeed precede price as COMEX gold continued to move higher from $2165 to a peak of $2429. That's a move of 12.2% in the five weeks that followed the initial surge of open interest that we wrote about on March 4.

So, do you see where I'm going with this?

The current setup in COMEX gold is nearly identical to where it was in early March—a setup that was followed by a 12% rally in five weeks. Additionally, the current gold price is entering into a period of strong seasonality and positive monetary policy fundamentals. As such, could price be on the verge of another 10-15% rally? 

The only "fly in the ointment" might be the current structure of the Commitment of Traders report. Back on March 5, the Large Speculators reported a position of 191,300 contracts net long versus a Commercial position of 206,800 net short. As of July 9, the Large Speculators were net long 254,800 contracts versus a net short position of 280,600 contracts for the Commercials. On an absolute basis, the positioning seems a little heavy.

Next let's look more closely, and let's do it on a relative basis:

  1. On March 5, the Large Speculators were net long 191,300 contracts versus a total open interest of 471,616. That's 40.56%.
  2. On July 9, the Large Speculators were net long 254,800 contracts versus a total open interest of 516,324. That's 49.3%

 

From the above, you can see that the CoT positioning is, in fact, a little heavy and this might limit the gains a little during the impending rally. Maybe instead of 12% over the next 6-8 weeks, the COMEX gold price "only" rallies 8%. But do the math. An 8% gain from the current $2420 level takes price up about $200 from here. Would you take that by late August or early September? I would!

So, let's sit back now and see if "volume precedes price" again. That old adage served us quite well earlier this year. It may be about to do so again.

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About the Author

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.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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