Gold has been
deeply out of favor lately, languishing in its usual summer doldrums. This
sentiment wasteland is driving traders to flee wholesale, including the
futures players. Their mass exodus from the gold market is readily apparent
in futures data. But provocatively such behavior is a powerful contrarian
indicator, heralding the birth of major new uplegs
in gold. Bearish futures traders are a bullish omen.
This truth is
easily demonstrated through the granddaddy of all futures reports, the
Commodity Futures Trading Commission’s Commitments of Traders. The
giant CoT is released every Friday afternoon, with
data current to the preceding Tuesday. It details the futures positions
currently held by several classes of traders in nearly all US futures markets.
When analyzed over time, these yield many trading insights.
basic piece of data the CoT reports is open
interest, or the total number of futures contracts currently held
by traders. Each contract is a single trade between two individual traders,
one betting the underlying price will rise (long) with the other betting it
will fall (short). Before the contract expires, it will be settled with cash
flowing from the trader who bet wrong to the trader who bet right. This
As you can
imagine, open interest is generally correlated with the popularity of the
underlying market. When a price is rallying and generating excitement,
trading activity in that market usually swells as traders rush to
participate. But when a price is falling or drifting, demoralized traders
gradually abandon that market to seek greener pastures elsewhere. So open
interest directly reflects prevailing sentiment.
In gold, each
futures contract represents 100 troy ounces. So with this metal trading
around $1600, each contract controls big money. If you multiply the
gold-futures open interest by 100 ounces and the gold price, it gives you an
idea of how much capital futures traders are risking in gold at any time.
Like any market, the better that gold is doing the more capital flows in to
chase these gains. And vice versa.
chart looks at the CoT’s open interest for
gold futures since 2001, when gold’s current secular bull was born. The
gold price is superimposed in blue. Since the CoT
is only published weekly, the gold data is sifted through the same weekly
filter. Low open interest in this metal, like we are seeing today, is very
bullish. When futures traders wax too bearish and give up on gold is exactly
when we want to buy it.
interest has been in a strong secular uptrend since 2001, which makes sense.
The longer gold’s bull persists, and the higher it drives gold’s
price, the more traders are interested in participating in this market.
Nothing attracts capital like rising prices, which soon form a virtuous
circle. Traders buy gold because its price has risen, and their buying pushes
it even higher, which entices in still more traders.
For the great
majority of gold’s bull, its futures open interest has meandered within
the uptrend channel rendered on this chart. A couple times it broke out above
resistance after powerful gold uplegs sparked
exceptional excitement in the yellow metal. But as you can see, these upside
breakouts were short-lived. Gold soon corrected, bleeding off excessive greed
which led open interest to collapse back into trend.
And a couple times open interest broke down below support. The first
was during 2008’s once-in-a-lifetime stock panic, where even gold got
sucked into that extreme fear maelstrom. All anyone wanted was cash, even
gold wasn’t good enough for most during that epic selling event. But
the sub-support journey of gold open interest was short-lived,
it soon surged back up into trend in 2009 as gold recovered.
gold-futures open interest has once again fallen below its uptrend’s
support. Back in late April it actually plunged to its lowest levels since
September 2009, when gold was trading near $955. While futures traders have
driven a slight uptick since, open interest is still very low relative to
recent years. And this very phenomenon has proven wildly bullish throughout
gold’s entire secular bull.
similar gold-open-interest lows with red bars on this chart. When open
interest falls far enough to hit its secular uptrend’s support, or is
dragged even lower occasionally, this psychological ebb marks the birth of
major new uplegs. When futures traders are the most
bearish or apathetic about gold, giving up on it, is exactly when this metal
is transitioning from correction or consolidation to upleg
Back in early
August 2005, gold-futures open interest collapsed to 244k contracts. Since
2003, gold had been trapped between $400 to $450 or
so. And after any long consolidation, a sideways grind with no new upside,
traders capitulate and walk away. But as you can see above, gold soon
launched a mighty rally out of those summer doldrums. By May 2006 it was
trading way up near $700 on a weekly basis.
These summer doldrums are actually very important today.
Global gold demand spikes are very lumpy, driven by income-cycle and cultural
factors around the world that always arrive around the same times of any calendar year. The only period totally
devoid of big gold demand spikes is summer, leading this metal to grind
sideways this time of year. Gold usually drifts lower, driving widespread
But out of
these summer-doldrums lows likely in late July or early August, gold’s
big seasonal autumn rally launches. Traders who can fight the crowd and buy
low in late summer when everyone else has given up usually win big gains in
gold’s following strong season. And when other indicators like gold-futures
open interest are also bullish at this same time frame, gold’s odds for
a large rally balloon.
corrected sharply after that May 2006 peak, leading open interest to collapse
as futures traders fled. On a weekly basis this metal fell back down under
$565 as open interest hit support. White it wasn’t a great time to buy
seasonally, gold still recovered back up to its recent highs after that
open-interest support approach. The next major one wasn’t seen until
August 2007, a great time to buy seasonally.
futures traders were giving up on gold and moving on, it started surging to
major new bull-market highs. This metal rocketed from around $655 to $950 on
a weekly basis by February 2008. Once again the brave contrarian traders who
could step in and go long gold when the futures traders had given up on it
were richly rewarded. Later that year the crazy stock panic arrived,
universally eradicating bullish sentiment.
gold-futures open interest’s secular support line didn’t hold in
such an extreme fear superstorm, their trough still
coincided closely with gold’s major bottom. By December 2008 open
interest had plunged to 261k contracts as gold was trading near $775. But
gold had just begun a huge upleg that would
ultimately carry it to $1400, a new all-time nominal high, by December 2010.
Futures traders were wrong to flee.
in early 2011 drove a plunge in open interest again as futures traders
freaked out. But gold soared from around $1340 at that open-interest ebb in
February 2011 to nearly $1880 by September 2011. As you can see, when futures traders give up on gold so open interest
falls to support or below have proven fantastic times to go long this
precious metal. Buy when the futures guys refuse to.
us to today. Gold-futures
open interest was recently almost as far under support as it was during the
stock panic in late 2008! That was the only other time in this entire secular
bull when open interest bled far enough to hit multi-year lows.
And after that earlier episode of futures abandonment, gold’s greatest upleg of its entire secular bull began marching higher.
Contrarian traders like our subscribers earned fortunes.
similar mighty upleg accelerate in the months
ahead? Probably, as the data is crystal-clear in showing that when futures
traders get discouraged in gold and pare their bets is right when major new uplegs launch. Today’s low open interest relative
to recent history implies poor sentiment. And bearish psychology sucks in all
near-term sellers, leaving only buyers. So it is the spawning ground of major
Commitments of Traders report goes way farther than simple open interest
though, dividing traders into three distinct categories. These are
technically known as commercial traders, non-commercial traders, and nonreportable positions. Observing over time how
gold-futures positions shift among these classes offers even more insights
into where the metal is likely heading in the near future.
single-most important thing to remember about futures is they are a zero-sum
game. A gold futures contract cannot be created until both a
long-side trader and short-side trader are found. Any money won by one side
of the trade is a direct cash loss by the other side. Every long has a
corresponding short counterparty. Thus the total number of longs and shorts
is always perfectly equal, they exactly offset.
these three categories of traders, net-long and net-short positions emerge.
If the commercials are mostly short, the non-commercials are mostly long. A
sizable cottage industry has grown up over decades attempting to explain the
futures interactions across these groups, and use them to attempt to divine
future price movements. But CoT trader-category
analysis certainly doesn’t have to be complex.
commercials are large traders who are actually producing or consuming the
underlying commodity. In gold they include miners and jewelry manufacturers.
They generally use the futures markets to hedge, to lock in selling prices
(producers) or buying prices (consumers). The only reason they even have this
option to hedge is because speculators are willing to take the opposite side
of these futures contracts.
non-commercial traders are large speculators who are solely in the game for
trading profits. They neither mine gold nor use it in products. The nonreportable positions are small speculators, who also
have no need to take delivery of gold. In pursuing their own profits, these
two groups of speculators provide a great service to the gold market. Their
liquidity is essential to keeping it functioning efficiently.
chart looks at the net-long and net-short positions among all three
categories of traders. While there is some controversy about how these
boundaries are drawn (is a particular trader a hedger or speculator?), the
raw data is still useful for traders to consider. Just like with open
interest, there are particular changes in the net-long-net-short gold-futures
distribution characteristic of major bottomings.
As you can
see, throughout this entire secular gold bull the commercial hedgers have
always been net-short. And this makes business sense. As gold gradually hit
new highs over the last decade, its producers chose to lock in their selling
prices in case those highs didn’t last. Sometimes the miners themselves
wanted to hedge, and other times banks forced them to hedge in return for
Of course in
a secular bull investors hate hedging, and expect gold to keep powering
higher on balance indefinitely. The longer a bull lasts, the more traders
extrapolate the move continuing indefinitely. So speculators, both large and
small, have eagerly taken the offsetting long side of the hedgers’
price-lock trades. They are eagerly willing to accept the price risk the
producers and consumers want to offload.
generally aren’t trying to time the gold market,
they are locking in prices via gold futures for business reasons that have
nothing to do with uplegs and corrections. New gold
mines often take a decade or more to come to fruition, and when they need to
be hedged to win financing has nothing to do with short-term psychology. But
speculators, on the other hand, are dominated by gold’s sentiment.
Since it is
these guys collectively trying to time gold, they act as a contrarian
indicator. Like all traders, they get the most excited and greedy
after gold has already rallied and is hitting a major peak. And they get the
most discouraged and scared after gold has already corrected and is
bottoming. Prudent contrarian traders can capitalize on this groupthink herd
mentality to buy gold cheap before major uplegs.
Generally in CoT analysis, the small speculators are considered the
best contrarian indicator. They have less experience, capital, and
sophistication than large speculators. But as this chart shows, most of the
times that small speculators have the smallest net-long position (therefore
they are the most bearish) the large speculators concur. I highlighted some
of these bearish ebbs for the small speculators in red.
interest naturally grew throughout this secular gold bull, so did the
net-long and net-short positions among the trader groups. So there is a
support line for the large speculators and their longs and a mirror-image one
below for the hedgers and their shorts. When the large speculators scale back
their net-long bets enough to hit this support line, it is usually right on
the verge of a major gold upleg.
You can see
these episodes above, in late 2006, mid-2007, late 2008 during the stock
panic, and again this summer. After each of these past episodes where
speculators greatly reduced their net-long positions because they
didn’t think gold was going anywhere, gold soon started rallying or
even surging. Huge uplegs
were born out of the last two episodes in mid-2007 and late 2008, gold soared
to new heights.
traders, futures guys give up at exactly the wrong time. They pare
their long-side bets the most after gold has either corrected sharply or
drifted sideways long enough to convince traders it is doomed to languish
indefinitely. Such episodes of despair motivate all weak hands interested in
selling anytime soon to dump their positions, which leaves only buyers. So out
of such bearishness new uplegs are born.
again this summer, the net longs of large speculators and even the net shorts
of hedgers have fallen nearly as far below their respective support lines as
they did during 2008’s stock panic. Small speculators’ net longs
are back to 2009 levels, with a major multi-year low recently seen. Hardly
anyone is the least-bit bullish on gold today, instead bearish and giving up
on it after its long consolidation over this past year.
The last time
this kind of sentiment was seen after the stock panic, gold was just
launching its biggest upleg of this entire secular
bull! I suspect we are on the verge of another large upleg
now, as the capitulation and despair today is the perfect breeding ground for
one. When futures traders are the least bullish on gold is when we should be
the most bullish. They always get it wrong at major bottoms.
At Zeal we
are ramping up for this coming major upleg in gold,
which may already be underway. The terrible sentiment in gold reflected among
futures traders has driven amazing bargains in gold stocks, silver, and silver stocks. So we are building up our precious-metals-stock
trading positions ahead of the seasonal autumn rally. Gold is perfectly
positioned to soar dramatically this year for a variety of reasons.
You can get
prepared, and see which high-potential stocks we are buying, in our acclaimed
weekly and monthly subscription newsletters. In them I draw on our
vast experience, knowledge, wisdom, and ongoing research to explain what the
markets are doing, why, where they are likely heading, and how to trade them
with specific stock trades as opportunities arise. Subscribe today! We also
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line is futures traders’ recent ebb in gold trading is a very bullish
omen. They have given up on gold because it has corrected and consolidated
for too long, with speculators dramatically reducing their net-long
positions. This has dragged down gold-futures open interest as these traders
walk away to seek opportunities elsewhere. This is a reflection of
bearishness, despair, and capitulation in gold.
But out of
similar conditions in the past, the mightiest uplegs
of gold’s entire secular bull have launched. When futures traders
capitulate and abandon gold is exactly the time to buy. Like traders in
general, they are a fantastic contrarian indicator. They get greedy and
bullish at major tops and scared and bearish at major bottoms, the exact
wrong times. Today’s sorry state of gold-futures trading means this
metal is ready to surge.