-- Published: Tuesday, 7 August 2018 | Print | Disqus
By Craig Hemke
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:
1. 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?
2. If this is the case, do traditional market metrics such as the Commitment of Traders report have any current significance?
For the sake of this post, we're going to assume that the answer to question #2 is "yes", despite the two charts below.
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 positioning...
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 recovery.
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 find:
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 positioning.
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 term.
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.