COTs Report Shows the Most Neutral Precious Metals Market in Years

The technical analysis last weekend highlighted that gold looks to be in a bottoming structure. Despite the sell-off this week, $1800 held, which could be another indication that gold is in the process of bottoming, with some final weak hands getting pushed out of the market.

Please note: the COTs report was published 7/3/2022 for the period ending 6/28/2022. “Managed Money” and “Hedge Funds” are used interchangeably.

Gold

Current Trends

The CFTC further confirms the idea that both metals are closer to a bottom than a top. Managed money net positions in gold continue to fall as more hedge funds fold on their positions.

Figure: 1 Net Notional Position

The next two charts pull important details from the aggregated chart above. First is the total net positioning. Total open interest represents the total number of open contracts where net positioning shows the difference between longs and shorts. While every long contract has a short, the different groups position for a move on aggregate.

For example, Managed Money could be long 100k and short 20k. This results in a net long 80k with a total open interest of 120k. The net long represents an aggregate position in Managed Money to the long side. In a simple market, Swaps could sit entirely on the other side at 100k short and 20k long.

The net positioning represents how different market participants are playing the market. A fall in net positioning represents a neutral stance rather than being net long or short.

All this to say that net positioning has reached a multi-year low. The chart below shows the green line at the lowest point since June 2019. On the flip side, total open interest is still above the lows from June of last year. This further shows the bottoming in sentiment within the gold market. Investors have not taken chips off the table (OI) but they are not taking a strong position in one direction or the other.

Figure: 2 Net Positioning

The Managed Money group is one of the main drivers behind this move. They have massively sold out of their net long position since the peak in March. Their selling perfectly aligns with the price decline seen recently.

Figure: 3 Managed Money Net Notional Position

Weak Hands at Work

Managed money represents weak and speculative hands. They run at the first sign of trouble but scramble back in as soon as they sense a bullish tailwind. Looking at the chart below shows that no group is as active as the Managed Money group (purple bar). Even though Swaps generally sit opposite Managed Money to provide liquidity, they have still not been as active.

Figure: 4 Silver 50/200 DMA

The table below has detailed positioning information. A few things to highlight:

• • Managed Money Net Long was down 27.5% in the last week alone
    • • This was mainly an increase in shorts (up 18%) rather than a decrease in longs (down 2%)
  • Over the month, Producers dropped their short position by 11.5% and their longs by 30%
  • Net positioning shrunk across every group during the month, further highlighting the main point in Figure 2

Figure: 5 Gold Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below (values are in dollar/notional amounts, not contracts). After coming close to $100B twice, the market has retreated to just over $75B.

Figure: 6 Gross Open Interest

The final chart below looks at net notional positioning against price on a longer time frame. As mentioned, while the correlation of Managed Money is strong, it is not perfect. The long-term bull market continues despite the volatile gyrations of Managed Money positioning.

Figure: 7 Net Notional Position

Silver

Current Trends

Silver has seen an incredible collapse in Net Long positioning for Managed Money. Since the 48k peak on March 8, Hedge Funds are now only Net Long by 745 contracts. Net positioning has not gone short again as it did on May 24th but it is very close. Considering this data is from Tuesday and silver got pummeled again this week, it is likely that the CFTC report next week will show a net short position for Managed Money.

Figure: 8 Net Notional Position

The chart below shows that net positioning in silver has been at the lowest since December 2015. This is when metals were in their last bottoming structure and silver was touching $13.74 an ounce! This neutral positioning shows a massive lack of interest in the market which is indicative of a final washout.

Figure: 9 Net Positioning

The chart below shows that Managed Money has plenty of room to go short to push prices lower, but the mood seems one of apathy rather than a strong position in one direction or the other. This is the quietest the market has been going back nearly 10 years (not all shown below).

Figure: 10 Managed Money Net Notional Position

The chart below shows the relentless selling over the last two months from Managed Money. Even after a bounce in the prior week, it was immediately sold in the latest week.

Figure: 11 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:

• • Managed Money activity has been driven by the short side again
    • • Gross Longs have dropped less than 2k contracts since last month
      • Gross Shorts are up 19% or 6k in the last week
      • Net shorts are down 90% in the last week alone
  • Swaps remain net positive
    • • This has been driven by action on the long and short side

Figure: 12 Silver Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below. Unlike gold, the “Other” category has remained surprisingly stable over this time.

Gross longs are now at their lowest level since May 2020.

Figure: 13 Gross Open Interest

Conclusion

Based on the correlation table below there is no doubt the influence of Managed Money on the price of both metals. They tend to push and pull the price around very erratically. The correlation has remained steady in gold but has increased quite significantly in silver. There is no doubt that Managed Money is in control of the price.

Other is pretty much the opposite, with a negative correlation in silver of -0.86 (extreme inverse correlation). This compares to a modest positive correlation for Other gold.

It’s very interesting to note that over a longer period in gold, Other has a much stronger correlation while Hedge Funds show no correlation. This makes sense because Other has more patiently ridden the bull market while Hedge Funds are continuously getting on and off the train.

Figure: 14 Correlation Table

Despite increased short positioning from Managed Money of both gold and silver, the price continues to hold up reasonably well even with some downside this past week. The data shows that longs appear steady while shorts continue to increase. Could further short-selling drive prices lower? While this is certainly a possibility, it seems unlikely given the macro environment. The increase in shorts has pushed the market to a more neutral stance. This is most likely due to the uncertainty around rate hikes and recession.

The Fed’s hawkish tone has probably peaked. Even though inflation is unlikely to return to 2% the damage from Fed tightening is already starting to cripple the economy. Just between Thursday and Friday, the Atlanta Fed GDP Now forecast has dropped from -1% to -2.1%. In a mere two days, the forecast went from 0% to -2%. The economy is in recession while Powell talks openly about the strength of the economy. Will he lose credibility with the market given his denial of the data?

The annual CPI in June is likely to come down as last June’s high reading (0.89%) falls off the calendar. This will allow the Fed to cool its hawkish talk and action at the next Fed meeting (maybe 50bps). Unfortunately, the following three months will see lower CPI numbers fall off the board (.46%, .31%, .41%). This means annual CPI will likely hit a new high in Q3. However, the following Fed meeting is in September and by then the economy will be far too weak for the Fed to continue its aggressive course.

The Fed may not officially pivot in September, but it will likely start to signal a pivot in the near future. When this happens, speculative money will liquidate shorts and come rushing back to the long side, likely taking the price to new all-time highs. Given the substantial dry powder that’s been built up over the last few months, it won’t take much to create an avalanche of buying. Frustrated investors should remember that this is a game of chess and not checkers.

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

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

Last Updated: Jun 28, 2022

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