COTs Report Shows the Most Neutral Precious Metals Market in Years

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by Peter Schiff, Schiff Gold:

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 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.

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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 of long 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 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.

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