By: Treasure Coast Bullion Group -

Gold bullion and silver bar prices have been struggling to make new highs and there are several reasons why resistance continues to hold. True, the dollar has been having difficulty making new lows, but inflation is beginning to percolate which should buoy precious metals prices. Another more pronounced issue is that large speculators including hedge funds and large traders are already very long and there does not seem to be more incremental buyers around that are willing to purchase gold bars and silver coins to push futures prices higher. We can evaluate the positions that hedge funds hold by looking at the weekly commitment of trader’s report (COT) released each week by the Commodity Futures Trading Commission (CFTC).

What is the Commitment of Trader’s Report?

The COT report, is a weekly account produced by the CFTC, of futures and options held by commercials, swap dealers, managed money and small traders. Commercials are considered gold and silver producers and refiners, swap dealers, are banks and investment banks that facilitate trades in the over the counter market. Managed money are large traders or hedge funds that speculate in the precious metals arena, and small traders are retail traders. While gold bullion futures and silver bullion futures that are traded on the Chicago Mercantile Exchange (CME) represent only a portion of the gold bars and silver coins that are exchanged throughout the globe, they do provide an important snapshot of precious metals trading.

How is the Report Categories?

The COT report is broken down into four categories. Generally, commercials are hedging their exposure by selling future production. For example, a gold producer that is scheduled to generate 100,000 ounces of gold 6-months from today might consider locking in future prices by selling 1,000 futures contracts for delivery in 6-months. The producer would likely hold on to the short futures positions even if prices rise because they are long the physical gold they are producing and plan on delivering that gold into the short futures contract.

Swap dealers, are facilitators that help commercials and speculators initiate risk. The positions they hold in the futures and options on futures market are generally offset by over the counter trades. Retail traders generally take small positions that do not move the market. Its large traders or managed money that are important to evaluate. Managed money takes positions to generate revenue, and the positions they take can help you evaluate market conditions. Managed money traders are also likely to quickly exit their positions during adverse market conditions.

How to Analyze COT Position

Managed money can be used as a contrarian indicator to determine if prices are overextended or unable to trend. When positions held by managed money reach extremes, prices have a difficult time continuing in the direction of the trend.

The chart of gold bullion futures prices, also shows the level of futures and options held by managed money along with commercials (producers) and swap dealers. The blue line shows the level of futures and options contracts held by managed money. While not always the case, when these levels reach extremes (which are labeled with the blue arrows in the chart), gold bullion futures prices have a difficult time continuing to move higher. In fact, if there is an event that precipitates a selloff, managed money is the first to look to the exits which can exacerbate the selloff. Many use this report as a contrarian indicator looking to see if managed money is overextended.

Summary

Gold prices are struggling to move higher and one of the reasons this could be the case is overextended long position in futures and options held by managed money. This could lead to a long liquidation before prices are able to reaccelerate higher.