Hedge Funds Have Room to Push Gold Higher

There is a correlation between Managed Money activity and the price of gold. Managed Money net longs str down from their March peak. This indicates there is money on the sideline that could rush into the market if gold breaks through current resistance

Please note: the COTs report was published 4/1/2022 for the period ending 3/28/2022. “Managed Money” and “Hedge Funds” are used interchangeably.

Gold

Current Trends

Since the peak on March 8, Managed Money has reduced its Net Long positions in the market by nearly 40k contracts or 27%. Despite an uptick in open interest from Other and Producers, the action of Managed Money has a far greater impact. Hence the price has dropped from its peak. The final table (Figure 12) below shows that the gold price correlation to Managed Money open interest is an incredible .88.

Figure: 1 Net Notional Position

The chart below focuses on only Managed Money. It shows how closely the price of gold follows the activity of Managed Money. It’s not perfect though. For example, in November 2021 Net Long reached 142k as gold touched $1870. In March, open interest reached 148k yet the price exceeded $2050.

Still, it’s impossible to ignore the obvious correlation between Managed Money activity and price. Furthermore, with Managed Money net longs down from their March peak, it indicates there is money on the sideline that could rush into the market if gold breaks through current resistance ($1950-$1960) and especially if gold is able to get back above $2000.

Figure: 2 Managed Money Net Notional Position

The chart above also highlights why recent price action has been so choppy. In past years, a steady direction was established in Managed Money net positioning. In the latest year, net positions were constantly bouncing up and down.

Weak Hands at Work

The chart below further highlights this trend, showing the week over week change for the past two years. The purple bars stick out with the erratic activity, constantly swinging from long to short. Manage Money has actually gone 4 consecutive weeks with a reduction in Net Longs. This ties for the longest trend over the last two years (the other being in November after Powell was renominated).

Will the Managed Money crowd make it 5 weeks in a row (as potentially indicated by selling on Thursday and Friday), or could the market be set for a rebound next week?

Figure: 3 Silver 50/200 DMA

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

• Managed Money gross longs are down 20% or 40k contracts over the last month
  • Shorts have reduced by 14% or 6k contracts
  • In the most recent week, shorts increased while longs decreased
  • The gross longs have made major liquidations relative to shorts which again suggests there is dry powder that could push prices back up
• Other Gross Shorts are down 50% or nearly 30k contracts

Another major takeaway from this table is again the influence of Managed Money on price. Other net longs have more than offset the reduction of Managed Money net longs over the past month, but the price has still been trending down.

Figure: 4 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). 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.

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 $34.6B in the most recent period.

It should also be noted that total notional open interest is approaching $100B. The market took a shot at it in Feb 2020 and came close again last week only to see a reduction in the latest week.

Figure: 5 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. The current period shows Managed Money Longs increasing from $2.4B in November to $4.2B in March.

Figure: 6 Options Positions

The final chart below looks at net notional positioning against price over 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 also seen an increase in Managed Money net longs since the last report in February. There has been some profit-taking in recent weeks, but overall net long Managed Money is still higher than it was pre-Russian invasion of Ukraine.

Figure: 8 Net Notional Position

This can be seen more clearly in the weekly chart below where money came rushing in from Hedge Funds and has had more staying power than gold. Silver has seen three very modest weeks of outflows, but this pails in comparison to the massive inflow seen in the prior 4 weeks.

Figure: 9 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 Net Long MoM is up 64% or 17k contracts
  • This has come a long way since September when Managed Money stood at net long of 1,310 contracts
  • This was driven by a combined effort of falling gross shorts and increasing net longs
• Other is up 2k contracts with Non-Rep flat over the last month
• Swap net short position is up 900% in the last month!
  • Increasing from 1,825 to 18,390. This was driven pretty equally from the long (-8k) and short side (+10K).

Figure: 10 Silver Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below. Even though silver is a more volatile metal than gold, this chart is surprisingly less volatile than the similar gold chart above.

Figure: 11 Gross Open Interest

The Option market is significantly smaller than gold with Non-Rep dominating the group with 282M long and 193M short. The next biggest long is half the size with Producers running at 142M.

This is much smaller than gold where the option market is nearing $10B in gross longs.

Figure: 12 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 of Managed Money.

Figure: 13 Net Notional Position

Conclusion

Based on the correlation table below there is no doubt about the influence of Managed Money on the price of both metals. They tend to push and pull the price around very erratically.

Figure: 14 Correlation Table

Astute investors should keep the long-term picture in mind. However, for those curious about the short-term picture, take comfort in the fact that Managed Money in gold is not overextended. These numbers do not even include the sell-off in the latter half of this week which likely further reduced net-long positioning.

The market is definitely in consolidation, and unless the Hedge Funds have a good reason to liquidate longs or even increase shorts, the gold market has likely found support in the current range. The right catalyst could quickly bring that money back into play and push prices to new all-time highs.

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

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

Last Updated: Mar 29, 2022

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