As you probably know, I’ve occasionally posted and interpreted the gold Commitments of Traders data noting its high risk signals for months (most recently here). All the while the gold price declined around a hundred bucks an ounce. Normally at the end of a correction to the gold price the CoT would be nice and contrary bullish. Today, it is anything but as large speculative longs and and commercial shorts keep the same pressure on that has attended the entire correction.
To make matters more complicated, gold is now breaking upward from the corrective consolidation during the holiday muted Santa season. Here is the futures view of the gold price as of right now. It never did tap what I thought was the best corrective target, near the rising SMA 200 around 1420. So are the machines just taking gold bugs out for a holiday whirl before before dumping the stale punch from the bowl over their (our) heads and giving them (us) wedgies?
It is mentally draining for me in a way because I am a chart guy. I look at charts, and with caveats I respect charts. But I also respect sentiment and market conditions, like the Santa rally we have going here where the precious metals have recently been rallying right along with the broad markets, which like gold’s contrary negative CoT sentiment situation, are also way over-bullish.
Tom McClellan, who I used to publish over at the old Biiwii site, has an article out on the gold CoT…
Gold prices are seeing a Christmas week pop, getting all of the gold bugs excited again. But the smart money “commercial” traders of gold futures have a different vision of the future.
I do not agree with Tom’s assessment of the commercials as “smart money”, just as I do not agree with a notably erratic gold sector Man Who Stares at Charts and one of the 2 Gold Bears we noted who had flipped from way too bullish to way too bearish * back in November largely due to the CoT (the other did so strictly using charts before flipping bullish again) or the GATA type clowns looking for conspiracy around every corner.
CoT is simply a measure of speculative activity vs. hedging and shorting activity. Within that to whatever degree there is manipulation in commodity markets (there sure is) there are certainly shenanigans afoot. But it’s best not to run your life by them.
The point here is that okay sure, the commercials and hedgers are going to be right in their net shorts at some point. But how long now have the specs been right? Well, if this holiday rally is real (could be Memorex, folks) and that’s a next leg rally starting in the gold price then they’ll have been right since May. That’s nearly 7 months and counting.
Specs will be on the wrong side at the next top, but the smart specs will manage risk by taking profits or hedging or whatever they do. Commercials will be right at the next top, but again… nearly 7 months and counting. That top could be next week or it could be many weeks out. McClellan adds…
One important point to understand about the COT data for gold is that the commercials have long been biased to the short side. Since 2001, there has only been one time that they have actually gone to a net long position as a group, and that was in late 2018, when gold was making a pretty important bottom. The rest of the time, they have been net short to varying degrees, and so the game consists of evaluating their net position relative to their recent range. Even on that basis, their current big net short position is a pretty compelling message that gold prices are too high at the moment, and that an appropriate adjustment is coming.
The question continues to be from what price point will the adjustment come? CoT is not a timer, it is a sentiment risk barometer. But I think it is good to have a discussion about it on occasion to counteract all the crap that is out there (not talking about McClellan) driving up peoples’ emotions over a very matter of fact aspect of the gold market (and other markets).
* Yes, I do casually keep track of the flip-o-holics constantly titillating enthralled gold bugs.
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