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Position of Gold Futures: Is a Gold Price Rebound Near?

Is This the Right Time to Buy Gold?

(Continued from Prior Part)

What’s the COT report?

The CFTC (Commodity Futures Trading Commission) tracks the net position in the futures market for major players in the futures market. The report that details the positioning of various players is the COT (Commitment of Traders) report. It’s released on Friday every week. It shows the open interest as of the previous Tuesday.

The disaggregated report is more detailed and has four main categories of traders:

  • producers – This category usually uses the gold futures markets to hedge the risk associated with the physical commodity. Their positions usually move contrary to price trends.

  • swap dealer – They’re dealers that use the futures market to hedge the risk associated with swap transactions involving commodities.

  • money manager – These traders are engaged in managing and conducting futures trading on behalf of their clients.

  • other reportables – These traders aren’t placed in the above three categories.

Analyzing the COT report

The main thing to note by investors in a COT report is the actual positions and the changes from the previous report. It’s more likely to show the direction of the trades happening in a particular commodity.

Money managers turn net short

For the week ending July 14, figures from CFTC show that large speculators—money managers—have the net short position in gold. This is the first time ever since the CFTC started collecting the data in 2006. In contrast, the short positions of commercial hedgers—producers that usually hold short positions—reached their lowest levels in the last few years. Producers usually short positions in the future market when they want to lock in a specific gold price for their produce. Fewer short positions could mean they expect the prices to either remain stable or rise. The above chart shows the net positions for the three main categories of traders.

In technical terms, this means that gold seems oversold at this point and could rebound. However, timing the gold market with this is difficult, but directionally gold could rise. In the past, when the net positions of large speculators—managed money—reach an extreme low, gold is near a bottom. As short interest in the market rises, a small positive sentiment could lead to a short covering rally. This would push gold higher.

It was probably this oversold sentiment in the market that led the physical gold buyers in the US, China, India, and other Asian markets to gold. This is positive for gold prices (GLD) and stocks like Barrick Gold (ABX), Franco-Nevada (FNV), and Royal Gold (RGLD). It’s also positive for ETFs—like the Gold Miners Index (GDX)—that invest in these stocks. ABX accounts for 5.50% of GDX’s holdings.

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