When it comes to the price of gold and silver, the only thing that matters is the Commitment of Traders (COT) Report. The market is controlled by only a handful of “bullion” banks and in the words of George Carlin: “It’s a big club and you ain’t in it!” The good news is that you may still be able to profit from this if you can understand the rules.
It begins with the open interest on the Comex (CMX). As of last report open interest stood at around 1.2 million contracts, at 100 troy ounces a contract and a $1,500 USD gold price per oz., this is a 9-figure market! There are various ways to read a COT Report, but to simplify for readers let’s use the “legacy” format. Reference this link for the chart below from the Quandl website.
Don’t be intimidated, like everything in life once understood it becomes simple:
- The market is controlled by the “Commercials,” or the smart money/bullion banks, you can see the blue line below.
- They will always have a short position and they will always win in the trade, i.e. they are never wrong. If you browse online and search various YouTube videos you will find reports that JP Morgan maintains a perfect trading record.
- In the last 20 years, the commercials always held a net short position (i.e. more shorts than long vs. the non-commercials who always had a net long position (i.e. more longs than shorts). To reiterate, the commercials are always “right” while the non-commercials are always “wrong” in terms of predicting the price of gold and silver.
- Look for extreme positions to indicate when a shift is about to happen. You may only get a big trade a few times a year but the gains may be considerable. You can use this not only to predict the price of the metals but also in terms of speculating in gold or silver mining stocks.
The “trick” is to understand where all traders’ positions are in relation to each other and in relation to the price of gold. Per the above futures chart, around December 2015 open interest (orange line) was at the lowest it’s been since 2009. At the same time commercial short position also decreased (blue line), while non-commercial short position (purple line) increased. This was the time to buy.
Compare this to the gold price chart (see chart below) around December 2015 to see that gold was at a low point at less than $1,100 USD. (This coincides with the chart above with low open interest, low short position for commercials and high short position non-commercials). The price of gold then increased for the following 6 months to around July 2016 to over $1,3000 USD, which coincided with an all-time high open interest, high short position for commercials and low short position non-commercials. This signalled the top and was the time to sell.
Commercials, or smart money will always have a short position. When their short position starts trending lower it likely means the price is about to go lower. While they will gradually increase, the short position and the gold price will start to climb up to a point, at which they will start reducing their position again, and the price of gold will fall. This ebb and flow (or peak and nadir on the COMEX) and price of gold, the extreme position such as all-time highs or lows, and the technical analysis of the price of gold should all be factored into your understanding of gold’s price. There will always be the non-commercial traders who are always wrong and bet against the bullion banks. Therefore, bet with the commercials and against the non-commercials.
December 2016 and December 2017 also offered a low point in gold as well, but to continue the illustration let’s look at the mid to end 2018 time period as another low in gold at around $1,2000 USD. The mid-2018 COMEX chart looks similar to the extreme positioning on around December 2016, with a low open interest, low commercial short position and high non-commercial short position; this was another time to buy.
As of last week, March 10, 2020 the COT report showed that open interest and commercial short position were both at new all-time highs, while the non-commercial short position is once again considerably low. Another way to think about this is to say that the bullion banks (who are always right) have an enormous short bet on gold versus everyone who thinks gold will rise.
The latest COT positioning looks very similar to how it did around July 2016 when gold peaked. It looks like “extreme positioning,” which is exactly what we are looking for. If the open interest decreases and the price of gold continues to decrease then it’s likely that the gold price will continue to decline. When you combine that with technical analysis, such as the RSI falling below 50 and the breaking of the MACD (black line breaking below the red) and various other underlying weaknesses, it looks like the gold price is headed lower. There are numerous ways to analyze a chart, those are only a few of them.
Of course, it’s possible that the gold price will increase, the gold chart will turn over, and the open-interest and short position will also increase; anything is possible. This is about making an informed decision with the most information you can obtain, nothing more. No one will be able to “predict the price of gold” with pinpoint accuracy and if anyone tries to sell you on that, you know how they are making their money. Some will say a high interest rate is good for gold. Some will say low interest rates are good. Others will say “fear trade,” “safe-haven assets” and a whole slew of fake economic terms; The truth is that only the bullion banks know the direction of the price of gold and silver, and nothing else comes anywhere close to knowing what they know.
If you’re not “in the club,” the best you can do is follow their trading behaviours.