Some comments on the Commitments of Traders report of this week.
Today’s report, detailing the activity of traders through Tuesday, shows a continuation of the recent pattern of speculative long side liquidation in the gold market and a continued drawdown in the net short position of the bullion banks and the swap dealers (sometimes the same entity).
Hedge funds are now down to the lowest net long position since May 5, 2009 when gold was trading near $920. There is a continued come down also in both the “Other reportables” camp and the small speculator or general public (Nonreportables) in terms of their net long exposure. Clearly speculator interest in gold has waned and quite rapidly at that I might add.
That process will need to come to a halt to put an end to the move lower in gold and allow prices to stabilize. We might have seen this occur today but cannot be sure until we get the open interest readings from the exchange Monday morning of next week. A great deal will now depend on developments in Egypt and in the mid-East in general over the weekend.
When a market is trading below its major moving averages, as gold is currently, there is a strong tendency for longs to use rallies to reduce their long side exposure.
To prevent this from occurring, price must at least recapture the downtrending 10 day moving average which comes in very close to today’s session high near $1350. That the bulls were able to get price to close above that critical support level of $1320 at the week’s end is no mean feat.
About that sharp drop off in the open interest as was reported this week and which drew considerable attention. It did come out of the managed money camp ( I had thought some of it might also show up in the “Other Reportables” camp) and in particular in the spreads put on by that group of traders. The number of their spreads fell a huge 65,755 contracts. I am still wondering how in the world a money manager could put on a spread trade and lose the amount of money that was reported to have been lost in the story that came out about this overnight. As a large spread trader myself in various markets, I can tell you that takes some real doing to accomplish a loss of that magnitude. You have to completely disregard sound money management techniques and become totally undisciplined. These markets take no prisoners today – something all would-be and active traders would do well to remember.
Overall, the COT report is pretty much what we have come to expect in this market during times of lower prices in gold. While I would have preferred to see the general public net long position come in lower than the actual numbers, it is the hedge funds (Managed Money) that still hold the key to this market and they are still ditching longs. Once that process halts, the market bottoms. It is that simple.
Click image to enlarge today’s COT chart in PDF format