The most recent washout was larger in relative size than the Covid washout
This article first appeared on SchiffGold.
The CFTC Commitment of Traders (COTs) report is released once a week and shows a breakdown of open interest by trader category. The CFTC breaks down open interest by:
This analysis looks at positioning of the traders above compared to price movement. Most analysts focus on the Managed Money group as the speculative money that drives the price. The Swaps generally sit on the opposite side of the Managed Money to provide liquidity as a counterparty.
Please note: the COTs report was published 9/3/2021 for the period ending 8/31/2021.
Managed Money bottomed at 35k contracts after the August gold flash crash. Since then, it has more than doubled back to 81k as of Tuesday. Most likely, the next COTs report will show that number has increased further in response to the weak jobs report.
Figure 1: Net Notional Position
The chart below shows that this was the biggest single period washout since March 2020. Shortly after, Gold went on a tear rising from 1500 to 2000 in under 5 months.
Figure 2: Silver 50/200 DMA
Perhaps even more significant is the relative size. In March 2020, Managed Money Net Long position fell from 210k to 154k, about a 25% decline in one week. Between August 3rd and August 10th 2021, Open Interest went from 89.8k down to 35.4k which represents a 60% reduction in Net Long positioning.
While not definitive, this could have represented a final washout which would leave very few sellers in the market. Gold has already rebounded nicely from the August flash crash, but contracts are still almost 10% lower than the end of July. Even more surprising is that Net Long stands almost 60k contracts shy of last August. With the washout complete and room for more contracts to go long, the yellow metal could be set up for a nice run.
In 2020, it did not take much increase in Managed Money positioning to send Gold $500 higher (see purple bar in Figure 1 above). As Q4 approaches the fundamentals and technicals are both looking strong even with disappointing Comex delivery volume.
The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:
Trader Holdings as of Date Indicated | % Change in Current Holdings | ||||||||
Category | Current | 1 Week | 1 Month | 1 Year | 3 Years | 1 Week % Chg | 1 Month % Chg | 1 Year % Chg | 3 Year % Chg |
Long | |||||||||
MngMoney | 136,555 | 126,636 | 131,635 | 145,055 | 105,971 | 7.8% | 3.7% | -5.9% | 28.9% |
NonRep | 43,514 | 44,517 | 48,080 | 66,385 | 45,508 | -2.3% | -9.5% | -34.5% | -4.4% |
Other | 174,449 | 172,448 | 142,053 | 156,504 | 101,399 | 1.2% | 22.8% | 11.5% | 72.0% |
Producer | 13,580 | 14,405 | 13,874 | 21,545 | 26,507 | -5.7% | -2.1% | -37.0% | -48.8% |
Swap | 72,573 | 73,832 | 67,644 | 83,785 | 108,361 | -1.7% | 7.3% | -13.4% | -33.0% |
Short | |||||||||
MngMoney | -54,878 | -51,192 | -41,405 | -58,206 | -181,743 | 7.2% | 32.5% | -5.7% | -69.8% |
NonRep | -19,552 | -20,492 | -18,654 | -20,978 | -34,183 | -4.6% | 4.8% | -6.8% | -42.8% |
Other | -39,576 | -37,239 | -32,895 | -22,315 | -28,690 | 6.3% | 20.3% | 77.4% | 37.9% |
Producer | -66,321 | -69,571 | -70,160 | -114,604 | -67,699 | -4.7% | -5.5% | -42.1% | -2.0% |
Swap | -260,344 | -253,344 | -240,172 | -257,171 | -75,431 | 2.8% | 8.4% | 1.2% | 245.1% |
Total Net | |||||||||
MngMoney | 81,677 | 75,444 | 90,230 | 86,849 | -75,772 | 8.3% | -9.5% | -6.0% | -207.8% |
NonRep | 23,962 | 24,025 | 29,426 | 45,407 | 11,325 | -0.3% | -18.6% | -47.2% | 111.6% |
Other | 134,873 | 135,209 | 109,158 | 134,189 | 72,709 | -0.2% | 23.6% | 0.5% | 85.5% |
Producer | -52,741 | -55,166 | -56,286 | -93,059 | -41,192 | -4.4% | -6.3% | -43.3% | 28.0% |
Swap | -187,771 | -179,512 | -172,528 | -173,386 | 32,930 | 4.6% | 8.8% | 8.3% | -670.2% |
Values show number of net contracts. Hedging/Spread positions are not added into longs and shorts (e.g. a trader who is long 1000 and short 700 will show as long 300 and short 0. | |||||||||
Looking over the full history of the COTs data by month produces the chart below. 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. The response to the Trump election (gold sold off hard) can be seen clearly in the sharp drop off in late 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 31.6B in the most recent period.
Figure 3: 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. Still modest compared to the futures side, 24.7B in long futures vs 3.2B in long options.
Figure 4: Options Positions
Finally, looking at historical Net positioning shows the correlation of positioning with price. The peaks and valleys in price are mirrored in the Open Interest.
Note: The correlation will look stronger because price is half of the Notional value equation
Figure 5: Net Notional Position
Managed Money is still less than half what it was before the Silver flash crash (occurring in tandem with the Gold flash crash). Silver Net Long plummeted from 25k to under 10k in two weeks.
Figure 6: Net Notional Position
Below shows the net change in contracts by trader type week over week. Unlike Gold, Silver had already seen a lot of liquidation after the run-up in May was followed by the “hawkish” June Fed meeting.
The big washout in August did not come close to the March 2020 washout or even the more recent one in June. That being said, the percentage change was nearly the same. Mar 3 2020 saw Managed Money Net Long fall by 53% (33k) vs 54% on Aug 10 2021 (13.5k).
Perhaps even more interesting is that Swap short positioning has plummeted, reaching -315k on Aug 24. This is similar to May 2020 when Swap actually turned net positive for a short period.
Figure 7: 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:
Trader Holdings as of Date Indicated | % Change in Current Holdings | ||||||||
Category | Current | 1 Week | 1 Month | 1 Year | 3 Years | 1 Week % Chg | 1 Month % Chg | 1 Year % Chg | 3 Year % Chg |
Long | |||||||||
MngMoney | 49,008 | 48,094 | 50,846 | 61,800 | 60,430 | 1.9% | -3.6% | -20.7% | -18.9% |
NonRep | 26,835 | 26,586 | 27,330 | 28,165 | 32,197 | 0.9% | -1.8% | -4.7% | -16.7% |
Other | 13,927 | 15,217 | 15,887 | 12,511 | 26,110 | -8.5% | -12.3% | 11.3% | -46.7% |
Producer | 5,197 | 5,294 | 5,698 | 8,029 | 22,526 | -1.8% | -8.8% | -35.3% | -76.9% |
Swap | 37,233 | 36,769 | 36,455 | 42,682 | 53,074 | 1.3% | 2.1% | -12.8% | -29.8% |
Short | |||||||||
MngMoney | -36,735 | -37,470 | -29,920 | -23,720 | -96,135 | -2.0% | 22.8% | 54.9% | -61.8% |
NonRep | -11,199 | -12,321 | -11,638 | -11,720 | -17,016 | -9.1% | -3.8% | -4.4% | -34.2% |
Other | -3,869 | -3,980 | -5,596 | -19,254 | -7,003 | -2.8% | -30.9% | -79.9% | -44.8% |
Producer | -39,826 | -41,069 | -46,203 | -55,058 | -41,538 | -3.0% | -13.8% | -27.7% | -4.1% |
Swap | -40,571 | -37,120 | -42,859 | -43,435 | -32,645 | 9.3% | -5.3% | -6.6% | 24.3% |
Total Net | |||||||||
MngMoney | 12,273 | 10,624 | 20,926 | 38,080 | -35,705 | 15.5% | -41.4% | -67.8% | -134.4% |
NonRep | 15,636 | 14,265 | 15,692 | 16,445 | 15,181 | 9.6% | -0.4% | -4.9% | 3.0% |
Other | 10,058 | 11,237 | 10,291 | -6,743 | 19,107 | -10.5% | -2.3% | -249.2% | -47.4% |
Producer | -34,629 | -35,775 | -40,505 | -47,029 | -19,012 | -3.2% | -14.5% | -26.4% | 82.1% |
Swap | -3,338 | -351 | -6,404 | -753 | 20,429 | 851.0% | -47.9% | 343.3% | -116.3% |
Values show number of net contracts. Hedging/Spread positions are not added into longs and shorts (e.g. a trader who is long 1000 and short 700 will show as long 300 and short 0. | |||||||||
Looking over the full history of the COTs data by month produces the table below. The chart shows the last run up in price in 2011, followed by the slow fall into 2015. The price collapse in silver in 2020 is clearly visible in this chart.
Figure 8: Gross Open Interest
The CFTC also provides Options data. This has mainly been dominated by Non Reportables, exceeding even producers. Options have fallen off significantly from the spike last July and is still well below the peak in 2011.
Figure 9: 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.
Figure 10: Net Notional Position
Many long term investors in gold and silver will point to this market as being the main culprit in suppressing physical prices. Paper supply of gold and silver is far easier to create than the physical. Paper shorts can be created to meet longs without having to source the physical metal. This is the nature of all futures markets, not just gold and silver.
While this certainly affects price discovery of the physical metal, like it or not this market does drive the spot price of gold and silver. Unless there is a run on the Comex, the trader positioning shown above will continue to drive prices. It is important to watch the positioning of speculators to better understand the price action.
Currently, the positioning looks very bullish. In past instances where there have been large washouts, the price goes on to rebound strongly in the months ahead. Furthermore, Net Longs are well below (>50%) the recent highs seen in early 2020.
Given that Gold has held up well near 1800 and Silver has stayed comfortably above $20 since last July, if traders were to re-position in Gold/Silver it could drive prices very quickly. With a few more inflation reports, jobs numbers, and Fed meetings on the horizon, it’s not impossible the metals run-up into year end.
Data Source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Data Updated: Every Friday at 3:30 PM as of Tuesday
Last Updated: Aug 31, 2021
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/