The CoT report enables investors to peek behind the scenes of the gold
futures market and to better understand the psychology of the marketplace
and, thus, get a better idea of futures moves on the market. This is because
the COT report shows the net long or short positions of different types of
traders. The knowledge of how traders are positioned is useful, but
what really matters are changes in their positions. Knowing that,
for example, non-commercials have 175,000 contracts long is meaningless
without the supplementary information whether they are accumulating more or
starting to unload contracts over time.
Therefore, let’s analyze the long-term trends in traders’ positioning and
the link between them and the gold prices. The chart below shows the
historical price of gold and the net (i.e., long minus short) positions of
gold traders in Comex
taken from the legacy version of the report.
Figure 1: The price of gold (yellow line, right axis, London P.M. fixing),
the net position of commercials (red line, left axis), the net position of
non-commercials (green line, left axis) and the net position of
non-reportables (orange line, left axis) from 1986 to March 8, 2016.
What immediately strikes us is that commercials
(red line) are usually net short –they are mostly hedging
– while non-commercials (green line) are usually long, because they use their
positions for speculative purposes and take the opposite sides of the trades
(they offset the price hedging requirements of commercials). Actually, the
line reflecting the non-commercials’ net positions mirror the line
representing the commercials’ net position. Therefore, the non-commercials
are positively correlated with the gold prices, while the commercials move
inversely with the price of gold. The former are trend-followers. They
increase their net long position when prices rise and scale it back when
prices decrease. For example, when a 2000s bull market continued,
non-commercials were adding more net long trades. Consequently, close to the
end of that rally, they had their most bullish positions. In other words,
non-commercials are generally on the right side of the market, but they tend
to become overextended near peaks and bottoms.
Conversely, commercials actively buy (reducing their short positions) when
the market goes down and actively sell when the market goes up (increasing
their short positions). For example, commercials were systematically adding
short contracts during the 2000s bull market.
Regarding non-reportables, or small speculators, they typically move
together with non-commercials, or large speculators (and, just like them,
tend to be wrong at critical turning points) – this is why they often form
one category of “speculators”. Given their relative weak position on the
market (low number of open contracts) we will not analyze their behavior in a
more detailed way. Instead, we will take a look at the chart showing the
price of gold and disaggregated trading positions in the Comex.
Figure 2: The price of gold (yellow line, right axis, London P.M. fixing),
the net position of producers (red line, left axis), the net position of
money managers (green line, left axis), the net position of swap dealers
(purple line, left axis) and the net position of other reportables (blue
line, left axis) from 2006 to March 8, 2016.
As one can see, the money managers (green line) and other reportables
(blue line) are usually net long and tend to follow gold prices (although it
is more clearly visible in the case of money managers), while the producers
(red line) and swap dealers (purple line) are generally net short and move in
the opposite direction to the gold prices (although it is more clearly
visible in case of producers).
How to use the CoT report for trading purposes? Investors can, for
example, monitor speculators (either large or small, but large should be
better), as they tend to be most bullish just prior to significant price tops
and most bearish before the significant price bottoms. Given that
the net positions of commercials reflects net positions of non-commercials,
investors may also watch them, as they tend to be most bearish just prior to
significant price tops and most bullish just prior to significant price
bottoms. This is why data from the CoT reports can be used as a
sentiment indicator in the gold market. However, investors should
use it just as such, not as a timing indicator, as there are no
absolute benchmarks of bullishness or bearishness which could trigger
investment decisions (for example, commercials are often on the long
side of the market before a major rally begins). Moreover, the correlation
between commercials, non-commercials and gold prices may break down during
the small lag, so there is a risk of significant changes in
positioning between the period covered by the report and the date of its
publication. Moreover, there is another – much simpler – way to see when gold
is overbought or oversold without examining the CoT numbers. Therefore, using
them might be helpful, but not necessary when using tools that help detecting
the same situations.
If you enjoyed the above analysis and would you like to know more about
the CoT Report and gold trading mechanics at Comex, we invite you to read the
April Market
Overview report. If you’re interested in the detailed price analysis and
price projections with targets, we invite you to sign up for our Gold &
Silver Trading Alerts. If you’re not ready to subscribe at this time, we
invite you to sign up for our gold newsletter
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Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
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