Commitment of Traders Shows a Potentially Bullish Setup in Gold and Silver

The CFTC Commitment of Traders (COTs) report is released once a week and shows a breakdown of open interest by trader category. The CFTC breaks down open interest by:

• Managed Money (e.g. Hedge Funds)
• Producers (e.g. gold mining companies)
• Swaps (e.g. banks)
• Non-Reportable
• Other

This analysis looks at the positioning of the traders above compared to price movement. Most analysts focus on the Managed Money group as the speculative money that drives the price. The Swaps generally sit on the opposite side of the Managed Money to provide liquidity as a counterparty.

Please note: the COTs report was published 9/3/2021 for the period ending 8/31/2021.

Gold

Current Trends

Managed Money bottomed at 35k contracts after the August gold flash crash. Since then, it has more than doubled back to 81k as of Tuesday. Most likely, the next COTs report will show that number has increased further in response to the weak jobs report.

Figure: 1 Net Notional Position

The chart below shows that this was the biggest single-period washout since March 2020. Shortly after, gold went on a tear rising from $1,500 to $2,000 an ounce in under 5 months.

Figure: 2 Silver 50/200 DMA

Perhaps even more significant is the relative size. In March 2020, Managed Money Net Long position fell from 210k to 154k, about a 25% decline in one week. Between August 3rd and August 10th, 2021, Open Interest went from 89.8k down to 35.4k which represents a 60% reduction in Net Long positioning.

While not definitive, this could have represented a final washout which would leave very few sellers in the market. Gold has already rebounded nicely from the August flash crash, but contracts are still almost 10% lower than the end of July. Even more surprising is that Net Long stands almost 60k contracts shy of last August. With the washout complete and room for more contracts to go long, the yellow metal could be set up for a nice run.

In 2020, it did not take much increase in Managed Money positioning to send gold $500 higher (see the purple bar in Figure 1 above). As Q4 approaches the fundamentals and technicals are both looking strong even with disappointing Comex delivery volume.

The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:

• Managed Money is climbing back (81k) but still below where it was 1 month (90k) ago and 1 year ago (86k)
• The current Non-Reportable (24k) is lower than all other period comparisons except 3 years ago (11k)
• At 187k Net Short Contracts, Swap is at its largest short position since Feb of this year
• Other has regained momentum, rising to the highest level since March of this year and up 23.6% since last month alone.

Figure: 3 Gold Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below. The chart shows the last run-up in price in 2011, followed by the slow fall into 2015 until the new bull market started in 2016. The response to the Trump election (gold sold off hard) can be seen clearly in the sharp drop-off in late 2016.

This chart also shows how big the “Other” category has become on the long side. In 2011, Other Long had $8.6B in gross long vs $31.6B in the most recent period.

Figure: 4 Gross Open Interest

The CFTC also provides Options data. This has mainly been dominated by Producers, but recently Managed Money has played a larger role within the market. Still modest compared to the futures side, $24.7B in long futures vs $3.2B in long options.

Figure: 5 Options Positions

Finally, looking at historical Net positioning shows the correlation of positioning with price. The peaks and valleys in price are mirrored in the Open Interest.

Note: The correlation will look stronger because price is half of the Notional value equation

Figure: 6 Net Notional Position

Silver

Current Trends

Managed Money is still less than half what it was before the silver flash crash (occurring in tandem with the gold flash crash). Silver Net Long plummeted from 25k to under 10k in two weeks.

Figure: 7 Net Notional Position

Below shows the net change in contracts by trader type week over week. Unlike gold, silver had already seen a lot of liquidation after the run-up in May was followed by the “hawkish” June Fed meeting.

The big washout in August did not come close to the March 2020 washout or even the more recent one in June. That being said, the percentage change was nearly the same. Mar 3, 2020, saw Managed Money Net Long fall by 53% (33k) vs 54% on Aug 10, 2021 (13.5k).

Perhaps even more interesting is that Swap short positioning has plummeted, reaching -315k on Aug 24. This is similar to May 2020 when Swap actually turned net positive for a short period.

Figure: 8 Net Change in Positioning

The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:

• Since July 27, Managed Money has decreased net positioning by almost 8.5k contracts (21k to 12.2k)
• In the latest week, Net Longs continued to rebound from the Aug sell-off, rising 15.5%
• Net positioning is 26k lower than in July 2020
• This activity shows why silver has been struggling of late
• Swap was on the other side, with short positions falling to -351k
• “Other” has been far more stable over the last several weeks, even adding to positions in the face of the large selloff

Figure: 9 Silver Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the table below. The chart shows the last run-up in price in 2011, followed by the slow fall into 2015. The price collapse in silver in 2020 is clearly visible in this chart.

Figure: 10 Gross Open Interest

The CFTC also provides Options data. This has mainly been dominated by Non-Reportables, exceeding even producers. Options have fallen off significantly from the spike last July and are still well below the peak in 2011.

Figure: 11 Options Positions

Finally, looking at historical Net positioning shows the correlation of positioning with price. Similar to gold, the peaks and valleys in price are mirrored in the Open Interest.

Figure: 12 Net Notional Position

Conclusion: the setup looks Bullish!

Many long-term investors in gold and silver will point to this market as being the main culprit in suppressing physical prices. Paper supply of gold and silver is far easier to create than the physical. Paper shorts can be created to meet longs without having to source the physical metal. This is the nature of all futures markets, not just gold and silver.

While this certainly affects price discovery of the physical metal, like it or not this market does drive the spot price of gold and silver. Unless there is a run on the Comex, the trader positioning shown above will continue to drive prices. It is important to watch the positioning of speculators to better understand the price action.

Currently, the positioning looks very bullish. In past instances where there have been large washouts, the price goes on to rebound strongly in the months ahead. Furthermore, Net Longs are well below (>50%) the recent highs seen in early 2020.

Given that gold has held up well near 1800 and silver has stayed comfortably above $20 since last July, if traders were to re-position in gold/silver it could drive prices very quickly. With a few more inflation reports, jobs numbers, and Fed meetings on the horizon, it’s not impossible these metals run up into year-end.

Data Source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

Data Updated: Every Friday at 3:30 PM as of Tuesday

Last Updated: Aug 31, 2021

Gold and silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/