Speculative Gold Shorts Cross The Rubicon
- Speculative Managed Money gold shorts rise by the largest in our records with an increase of over 29,000 contracts.
- This large short increase only resulted in a mere .7% drop in the gold price.
- All of this suggests that we may have just had a "short crescendo" and that there are few shorts left to jump into the gold market.
- This may be an excellent time to make a short-term profit going long gold and gold equities.
The Commitment of Traders (COT) report has been getting more positive for investors long gold as speculative short positions recently crossed the Rubicon and now outnumber gold longs for the first time since August - which marked a bottom in the gold price. This is an important event because it tends to signify an overly loaded short position and tends to mean that there's little more firepower on the short side, and thus gold prices are going to be biased to the upside in the short-term.
We will get a little more into this but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report
The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investor a way to see what larger traders are doing and to possibly position himself accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.
The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it.
What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
This week's report shows speculative traders holding their long positions as shorts significantly increase their short positions as seen in the table below.
(click to enlarge)
With an increase of over 29,000 short contracts, this is the biggest Managed Money short increase in our records that date back to 2006. Long positions only dropped by a mere 1248 contracts, so it was clear that the speculative traders were significantly based on the short side and expect more declines in the gold price.
Even more interesting is the fact that despite this large increase in shorts (the equivalent of 2.9 million ounces), the gold price only dropped by less than 1%. To us this suggests that the downward pressure in the gold price was met by upward pressure elsewhere (maybe physical buying?) to negate the largest speculative short increase in our records.
What Does This Mean For Investors?
We were not too bullish on the COT report from a month ago as speculative positioning was suggesting that longs were "too long" and there was plenty of room for shorts to add to their positions. Now we're taking the opposite view as it looks like shorts are extremely confident and with a record-high amount of Managed Money shorts adding to their positions last week, the result was only a slight .7% decline in the gold price - this smells like a short crescendo that signifies a short-term gold price bottom.
With gold already pricing in a .25% rate hike at the Fed's December meeting despite a lackluster economy and central banks around the world cutting rates, we think that any surprise that causes the Fed to delay a rate hike, will clearly be positive for gold. Additionally with such a high short position, we see significant potential for this zig-zagging gold market to zag higher simply on the basis that there are probably few shorts left to jump into the market.
Thus we think it is an excellent time for investors to aggressively build positions in physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF). Additionally, the miners that have been underperforming gold over the last few months may offer investors considerable leverage to any rise in the gold price. Investors looking for this leverage may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as Tahoe Resources (NYSE:TAHO) (we're not suggesting these companies specifically - only suggesting them for further investor research).
Finally, we are very curious because the Fed announced that it will hold an "expedited closed door" meeting on Monday November 23rd - this may be nothing but it's extremely unusual and in our view it hardly suggests investors should have confidence in the economy. The stronger the economy the less the Fed should be involved - unplanned meetings are not a good indicator for the economy.
In conclusion, we still are very bullish on our long-term gold positions in the ETFs and some of miners and developers, but now our short-term view is very bullish as well. We think now is a time that investors who have the firepower and the courage should be buying gold hand over fist - too many shorts and already a fully priced negative view suggest a short-term bounce in gold.
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