Gold and Silver Bulls Finally Show Up
This article first appeared on SchiffGold.
Please note: the COTs report was published 10/29/2021 for the period ending 10/26/2021. “Managed Money” and “Hedge Funds” are used interchangeably.
The Commitment of Traders analysis last month highlighted the potential over-extension of the shorts leading to a rebound. This proved to be the case in a big way. As the data below shows, Hedge Funds closed shorts and went long in October. Unfortunately, the momentum lost steam and the $1810s presented too much resistance. As discussed last week, $1800 was a critical line that had to be held to keep momentum moving. A failed attempt early this week showed there was still selling pressure in the market. It opened a trap door for the bears to show up on Friday. No doubt, the COTs report next week will show positions unwound from what is presented below.
Regardless, gold held above $1780 which is not terrible. If it can turn upwards from here (possibly driven by the Fed meeting next week), then it means higher lows continue to be put in place. The bulls had a missed opportunity this week, but it’s possible one will present itself again in the near future. The technical market still looks setup for a big move higher. Additionally, the bullish activity outlined below is a good indicator of market sentiment even if some of the positions unwound on Friday.
Managed Money Net Longs increased 180% from 31k to 86k during the month of October. In the last week alone, positions increased by 30k. “Other” saw a modest decrease in Net Longs of 6.8% from 137k to 128k. Almost all of this move occurred in the last week.
As the chart below shows, the latest increase in longs did not see the same price appreciation as earlier this year. For example, in June of 2021 aggregate Net Longs were reaching 250k and the price of gold was at $1898. The chart below also shows the multiple failed attempts for gold to cross through $1800 since the June sell off. The tight range continues to get tighter. 1750-1830 has become 1770-1810. This type of consolidation usually means a bigger move is coming.
Figure 1: Net Notional Position
The chart below shows the week over week change by holder. The two big spikes over October can be clearly seen. No doubt the Fed meeting this week could be the catalyst to break the tight trading range. Expect more “hawkish” talk with more dovish action. The Fed needs to try and tamper down inflation expectations without actually doing anything. The reaction to the Fed in the gold market could be a big indicator of whether the market is still paying attention to words or has started watching actions.
Figure 2: Silver 50/200 DMA
The table below holds interesting data points. A few things to highlight:
The increase in Shorts last week in “Other” could expecations that $1800 would continue to prove tough resistance for gold.
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 | 141,280 | 124,560 | 118,923 | 149,140 | 80,105 | 13.4% | 18.8% | -5.3% | 76.4% |
NonRep | 47,707 | 46,194 | 44,821 | 70,778 | 48,870 | 3.3% | 6.4% | -32.6% | -2.4% |
Other | 172,366 | 175,322 | 174,891 | 176,923 | 88,649 | -1.7% | -1.4% | -2.6% | 94.4% |
Producer | 13,505 | 12,474 | 18,460 | 16,885 | 36,057 | 8.3% | -26.8% | -20.0% | -62.5% |
Swap | 72,885 | 76,694 | 72,672 | 78,297 | 102,321 | -5.0% | 0.3% | -6.9% | -28.8% |
Short | |||||||||
MngMoney | -54,918 | -66,761 | -88,062 | -47,265 | -135,628 | -17.7% | -37.6% | 16.2% | -59.5% |
NonRep | -22,613 | -20,353 | -23,069 | -22,950 | -30,859 | 11.1% | -2.0% | -1.5% | -26.7% |
Other | -44,168 | -39,772 | -37,353 | -30,164 | -19,932 | 11.1% | 18.2% | 46.4% | 121.6% |
Producer | -64,600 | -63,126 | -60,320 | -110,953 | -97,111 | 2.3% | 7.1% | -41.8% | -33.5% |
Swap | -261,444 | -245,232 | -220,963 | -280,691 | -72,472 | 6.6% | 18.3% | -6.9% | 260.8% |
Total Net | |||||||||
MngMoney | 86,362 | 57,799 | 30,861 | 101,875 | -55,523 | 49.4% | 179.8% | -15.2% | -255.5% |
NonRep | 25,094 | 25,841 | 21,752 | 47,828 | 18,011 | -2.9% | 15.4% | -47.5% | 39.3% |
Other | 128,198 | 135,550 | 137,538 | 146,759 | 68,717 | -5.4% | -6.8% | -12.6% | 86.6% |
Producer | -51,095 | -50,652 | -41,860 | -94,068 | -61,054 | 0.9% | 22.1% | -45.7% | -16.3% |
Swap | -188,559 | -168,538 | -148,291 | -202,394 | 29,849 | 11.9% | 27.2% | -6.8% | -731.7% |
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 (please note 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. 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 $30.9B 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. The current period shows a similar trend with Managed Money Longs increasing from $1.9B to $2.8B during October. The big move came in producers who more than doubled their longs and shorts.
Figure 4: Options Positions
Finally, looking at historical net positioning shows the correlation of Managed Money positioning with price. The peaks and valleys in price are mirrored in the open interest. The correlation did strongly diverge last year after the March 2020 sell off. Hedge Funds continued reducing net long positions even while the price rose dramatically. This was probably due to strong ETF buying which won’t show up in the futures.
Note: The correlation will look stronger because price is half of the Notional value equation
Figure 5: Net Notional Position
Silver had been absolutely pummeled by Hedge Fund selling from June to September. On Sept 21, Hedge Funds had almost gone Net Short silver with a Net Long position of only 1,310. Since then, Hedge Funds have reversed in a big way, with Net Longs increasing 726% over the month, reaching almost 30k. This is the highest amount since July 2021 when net longs stood at 34k. The silver price was north of $26 at the time.
Figure 6: Net Notional Position
The weekly chart shows how much Hedge Funds added in the most recent two weeks. This was the biggest two week long move by Hedge Funds going back to Dec 2019. The action well exceeded that of the July price spike. Given this activity, it’s hard to understand how silver did not explode even higher over the month of October.
Again, the market had probably been preparing for a very dovish Fed this coming week given all the negative market data (GDP, Jobs) released in the past month. However, given the hot inflation readings, the Fed is going to have to talk tough or risk losing control and potentially the confidence of the market. Enough people are talking “stagflation” that the Fed cannot keep pumping the “transitory” story. Unfortunately for the Fed, they can’t actually do anything.
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 | 52,646 | 50,040 | 47,442 | 63,091 | 50,387 | 5.2% | 11.0% | -16.6% | 4.5% |
NonRep | 26,376 | 27,203 | 24,795 | 26,008 | 33,724 | -3.0% | 6.4% | 1.4% | -21.8% |
Other | 14,031 | 16,532 | 17,048 | 13,561 | 25,666 | -15.1% | -17.7% | 3.5% | -45.3% |
Producer | 3,361 | 3,747 | 5,245 | 7,927 | 16,058 | -10.3% | -35.9% | -57.6% | -79.1% |
Swap | 33,115 | 34,045 | 36,790 | 39,476 | 53,389 | -2.7% | -10.0% | -16.1% | -38.0% |
Short | |||||||||
MngMoney | -23,514 | -30,603 | -43,918 | -21,459 | -75,563 | -23.2% | -46.5% | 9.6% | -68.9% |
NonRep | -12,404 | -12,979 | -12,852 | -11,553 | -15,494 | -4.4% | -3.5% | 7.4% | -19.9% |
Other | -5,631 | -5,613 | -3,867 | -10,562 | -8,960 | 0.3% | 45.6% | -46.7% | -37.2% |
Producer | -45,213 | -42,051 | -36,380 | -58,587 | -45,872 | 7.5% | 24.3% | -22.8% | -1.4% |
Swap | -42,767 | -40,321 | -34,303 | -47,902 | -33,335 | 6.1% | 24.7% | -10.7% | 28.3% |
Total Net | |||||||||
MngMoney | 29,132 | 19,437 | 3,524 | 41,632 | -25,176 | 49.9% | 726.7% | -30.0% | -215.7% |
NonRep | 13,972 | 14,224 | 11,943 | 14,455 | 18,230 | -1.8% | 17.0% | -3.3% | -23.4% |
Other | 8,400 | 10,919 | 13,181 | 2,999 | 16,706 | -23.1% | -36.3% | 180.1% | -49.7% |
Producer | -41,852 | -38,304 | -31,135 | -50,660 | -29,814 | 9.3% | 34.4% | -17.4% | 40.4% |
Swap | -9,652 | -6,276 | 2,487 | -8,426 | 20,054 | 53.8% | -488.1% | 14.6% | -148.1% |
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. The price collapse in silver in 2020 is clearly visible in this chart. As can be seen, gross longs are still well above the 2020 lows.
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. Again, the latest pop did not generate the price increase that would have been expected given the magnitude of the move.
Figure 10: Net Notional Position
Many indicators are pointing to a big move higher. It looks like the Hedge Fund market is also positioning for such a move even with the sell off on Friday (gold rebounded off the lows and held up well). Hesitation in the market is being driven by more “hawkish” comments by the Fed.
Despite the negative economic data, the Fed needs to stay on track and taper in November or December. If they so much as blink and hesitate, the market could turn very quickly. They have to appease the inflation hawks. Unfortunately, this could have major implications on interest rates which could blast the economy back into recession. Then what does the Fed do?
The Fed is trying to walk a very tight rope with zero room for error. Too lose and the market loses confidence, too tight and the economy heads into recession. It’s hard to believe they won’t slip at some point. Either outcome is very bullish for precious metals. The new few COTs reports heading into year end could be a leading indicator of where the market is headed. This latest report is showing a bullish stance from the Managed Money group. If this holds and continues moving up, it could send prices higher in a hurry.
Data Source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Data Updated: Every Friday at 3:30 PM as of Tuesday
Last Updated: Oct 26, 2021
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/