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Gold - COT Report
By: Tim Taschler | January 8, 2020

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Every time I write about my concerns with the Commitment of Traders report (COT), I get a lot of pushback about it not being worthwhile or not predictive of price action. Yesterday, I met with a couple of hedge fund managers that are very bullish on gold; they told me that my COT concerns are unwarranted. Like all prognostications with asset price predictions, time will tell.

Today, I thought I would lay out my COT concern. First of all, I care not about the commercial short position as a standalone data point. The commercials are price takers, have deep pockets, know their industry and tend to not be "market movers." The managed money is the group that concerns me. Whether it is hedge fund money or CTA money (Commodity Trading Advisor), it tends to be trend-following money. And trend followers are usually wrong at the trend change.



Source: Software North, 1/6/20

But what really concerns me is the leverage. Commercials have very deep pockets and are mostly hedging, so their net risk isn‘t nearly that of managed money. As of the latest COT data, managed money is net long 263,170 gold contracts, which is 26 million ounces. At $1,560 per ounce, that is a $41 billion notional value of gold. To control that $41 billion, managed money only needs to put $1.1 billion in equity (gold futures margin is $4,500 per contract). Think about that for a minute. $1.1 billion to control $41 billion is roughly 35x leverage.

Why do I care so much about managed money? Because they are price makers. It is their buying and selling that moves markets. So, when they reverse course, they sell or buy aggressively and are, to a large part, why you see some large red or green candles on a gold chart. It's not the commercials that push gold prices around, contrary about what the "market is rigged" crowd will tell you. It's trend-following managed money changing direction. Add to that the fact that a large number of CTAs will operate an SAR program (Sell and Reverse) and you begin to see how price change can come fast and hard. Remember that an SAR is adding 2x the buying or selling pressure because a CTA that is long 1,000 contracts needs to sell 2,000 contracts to SAR – they sell 1,000 to get flat and another 1,000 to get short.

The bottom line is that I am more worried about the downside in gold than missing the upside. We are at record open interest with managed money at a historic long position. If the managed money crowd decides that they want to lock in some profit and that moves the gold price enough to trigger an apparent trend change, selling can beget selling and gold could easily correct back under $1,500 or lower. Time will tell.



Source: StockCharts.com, 1/8/20

Questions and comments are always welcome: [e-mail].

Tim Taschler, CMT

Sprott USA

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