COT Update: the Shorts Bring Lots of Rocket Fuel to a Nascent Gold Rally

COT Update: The shorts bring lots of rocket fuel to a nascent gold rally

As discussed previously on these pages, the COMEX Commitments of Traders (COT) report published weekly by the CME is one of the best indicators for the western speculative sentiment that tends to drive gold prices in the short term. The report for the week ending Tuesday, December 1, 2015 made a very bullish situation even more so.

The Commercial net short position collapsed a further 76% to just 2911 contracts as of last Tuesday, the smallest net short position for these traders since 2001. The Large Speculators net long position dropped by 42% to only 9,750 contracts, very close to being net short. The only time the Large Speculators have been net short was for a couple of days in early 2000, right before the bull market in gold was launched.

The Small Speculators are now more net short at 6,839 contracts. Going back to 1993, this category has been net short more than 5,000 contracts only three times. None of those occasions turned out well for them.

Going into the sub categories in the Disaggregated COT report, as of Tuesday, December 1, the Managed Money category (largely hedge funds) reported a new, record net short position of -20,566 contracts, an increase of 23%. It is very rare for the Managed Money funds to run a net short position. Since the CME began disaggregating the COT report in 2006, the Managed Money funds have only been net short on two occasions – currently and July/August of this year when they were caught offside by an 11% move in gold in August.

As previously noted, the speed of the shift in Managed Money positioning is even more significant than its size. On October 27, these funds had a net long position of 114,092 contracts. On December 1, five weeks later, the Managed Money category is net short 20,566 contracts, an unprecedented swing in positioning of 134,658 contracts in 23 trading days—we think the main reason gold went down about $100 in that time period. Most of the swing was accomplished by increased shorts which more than quadrupled in the five weeks to 110,548 contracts. Most of this shorting was done at prices under $1100 which makes these positions vulnerable to a rally. We continue to think these speculators are stretching too far for a year-end bonus.

There is good reason to believe the gold market has begun a rally. On Friday, gold closed forcefully above $1080, the price where gold bottomed in August of this year before rallying.  Furthermore, the gold shares have sharply diverged positively from gold for much of the latest downturn…a reliably bullish signal. GDX, a gold stock ETF, did not make a new low with gold in November while the GDX/gold ratio held above its September low and has now broken decisively above its 50dma. The pressure is now on the record short position.