We are seeing something that’s never before happened in gold futures; commercials (producers, swap dealers, etc.) are getting longer (net long 25,866 contracts or slightly more than US$3 billion), while managed money futures traders (hedge funds, CTAs, etc.) are getting shorter (net short 109,454 contracts or slightly more than US$13 billion net notional):
Gold (Weekly – With CoT Positioning)
This is highly noteworthy because hedge funds and commodity trading advisors (CTAs) are considered to be “hot money” traders in the futures markets – they follow trends and are prone to flip positions very quickly. Whereas, commercials in commodity futures (producers and swap dealers) are known to be value oriented and tend to take the other side of the hot money momentum trade. Given that producers are by definition a natural short in the gold market (producers typically hedge/sell production using futures), it is notable that they have recently moved to one of their smallest net short positions in history.
To paint the picture, heading into Wednesday’s trading session (most recent CoT data is as of the market close on Tuesday October 9th, 2018) we had a massive all-time high short position in place by the hot money trading crowd VS. a significant net long position by the more value oriented commercials (who are typically holding a net short position) – this unusual backdrop helped to ignite a more than 3% rally in gold futures in the span of 24 hours between Wednesday and Thursday afternoon. Gold peaked at $1230 on Thursday afternoon before digesting its gains and dipping back to support near $1220 on Friday, closing the week officially at $1222.00:
Gold (Daily)
Thursday’s short covering binge in gold didn’t generate enough volume for hedge funds and CTAs to even cover 1/3 of their total short position. This means that if gold is still holding above support at $1220 early next week you can bet that there will be more short covering by the hot money traders who are now stuck heavily short in what appears to be a losing position. Above $1230 gold can quickly head up to the $1250 area, with the falling 200-day moving average and previous support near $1275-$1280 offering a longer term upside target for gold.
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