CFTC CoTs Report: Be Advised – Gold is Overbought Among Hedge Funds

Please note: the CoTs report was published 09/27/2024 for the period ending 09/24/2024. “Managed Money” and “Hedge Funds” are used interchangeably.

The Commitment of Traders report is a weekly publication that shows the breakdown of ownership in the Futures market. For every contract, there is a long and a short, so the net positioning will always be zero, but the report shows who is positioned long or short. Historically, Hedge Funds (Managed Money) dominate the price action in both Gold and Silver.

Gold

Current Trends

Below shows net positioning for the 5 main groups of futures holders. Net positioning is reaching multi-year highs which may make it harder for the rally to continue expanding. Futures traders are the first to bail at any sign of trouble, so there is reason for concern.

Figure: 1 Net Position by Holder

Managed Money is in complete control of the price action, driving prices higher. As shown below, the gold price has climbed in lock-step with the positioning of Hedge Funds/Managed Money.

While this is a sign that Hedge Funds are rightfully concerned about the Fiscal situation in Washington, these funds are not long-term holders with strong hands. No doubt, central bank buying has been a major factor supporting gold prices, with gold reserves even eclipsing Euro reserves, but central bank buying provides long-term support and price growth. The short-term price advance is attributable to Hedge Funds/Managed Money buying in mass (as reflected in the chart). This becomes dangerous because of the leverage being used. If prices drop futures traders may be forced to liquidate, creating a downward spiral.

Gold prices have reached new all-time highs so it is very unlikely prices drop too far, but don’t be surprised if there is a big exit at the first sign of trouble that has gold retest support in the $2300 range. This would clear out a lot of the Hedge Funds and be a healthy pullback before moving higher. Think of it like a healthy forest fire to clear out the brush, it needs to happen. The longer it takes to happen the more dangerous the fire can become. The chart below is begging for futures traders to be liquidated which will drive prices lower.

Figure: 2 Managed Money Net Position

Weekly Activity

The overall activity has seen several weeks with large increases in long positions for Hedge Funds. They have not faced any type of outflow which has kept a strong floor under the gold price and helped propel it higher.

Figure: 3

The activity in the options market is starting to pick up some, reaching multi-year highs.

Figure: 4 Options Positions

Silver

Current Trends

Silver total net positioning has not followed the same trajectory as gold. It moved up back in April but has been mostly static since. This is probably why silver has failed to make new highs until just like recently. Compare this to gold that has been going straight up for months.

Figure: 5 Net Position by Holder

Just like gold, the price of Silver is overwhelmingly dominated by Managed Money positioning.

Figure: 6 Managed Money Net Position

Weekly Activity

Also similar to gold, the activity has been mainly on the long side for Hedge Funds.

Figure: 7 Net Change in Positioning

The options market has really come alive in recent months, indicating the speculators could be a driving factor behind recent price moves.

Figure: 8 Options Positions

Conclusion

The table below shows the correlation of price action to positioning for Managed Money and Others (presumably non-institutional). You can see how Managed Money dominates the price action except for 2020. At some point, the price action will not be driven by futures traders, but by physical demand. That appears to be happening in silver, but gold is still overwhelmingly driven by Managed Money/Hedge Funds.

Figure: 9 Correlation Table

A healthy consolidation is needed after this recent move up. It will clear out the deadwood and make room for prices to keep going higher. When the gold price starts advancing without support from futures traders, but purely from physical demand, that is when you will know gold is truly off to the races. That day is coming, but we are not there yet.

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