February 8, 2019
We just started getting COT data again, and although it is out of date by over a month, it does provide some interesting information.
Starting with Gold. The closing price on December 31 was 1281,
up over $80 in six weeks. Given the rally, it is no surprise that Money
Managers (aka “Funds”) were net long again and the Commercials have increased
their short position.
What is remarkable is the speed with which those positions were added, especially on the short side.
Peaks and troughs in price are often identified by extremes
in total net long or short positions, but extremes in the rate of change, or
delta, in those positions can also signal a pending top or bottom. Swaps (aka
“Banks”) added to their net short position at the second-fastest pace ever on
both a 3-week and 8-week basis. Suffice to say that the so-called smart money was
racing to get short.
Banks have already increased their shorts to the highest
level since September 2017, when Gold peaked at 1363, and higher than when Gold
peaked at 1369 in April 2018.
This was when Gold was at 1281. It rose to 1331 on January 31. It’s a safe bet that those shorts increased significantly during those four weeks. Given the speed with which the Banks were adding to their shorts, they could have increased their net short position to its highest level since 2016. Funds have likely piled on the longs at the same time.
This does not bode well for Gold in the short-term. Although Gold has already fallen back to 1314, it could go lower yet.
The Daily Sentiment Index hit a peak of 80% bullishness on January 31, which signaled the peak in price.
Gold continues to fall back from a negatively divergent higher high at 1331 also.
Support is at 1300, 1280-75, and 1250.
Now back to the COT data with respect to Silver. Funds piled
on the longs in December after the break of multi-month resistance and the
following move up to a $15 handle.
Moreover, they did so at the fastest pace ever on a 3-week
Given the rate that they had been adding new longs until December 31, when the price was 15.54 (and the price has risen to 16.20 since), they have likely reached at least as large a long position as at the prior peaks in June (17.35) and January (17.70) of 2018 or higher.
It is not surprising that we are seeing the mirror image on
the short side. Banks and the broader Commercials have raced to add to their
net short positions. Banks did so at the fastest pace ever on a 3-week and
8-week basis. Commercials added shorts at a record level on a 3-week basis
The worrisome part about this is that on December 31 the
Banks had already exceeded their net short position at the June and January
2018 peaks and matched the September peak position when it reached a high of
18.29. This was when it was at 15.54. The price rose to 16.20 over the next four
weeks to January 31. Although the price has fallen back since, given the rate
at which shorts were being added prior to year-end, it’s highly probable that the
Banks have increased their short position significantly, perhaps to their
highest short position since 2016. This would mean that those shorts and the
price of Silver would have some way to fall.
In order to avoid repetition, suffice to say that the same
conditions apply to the broader Commercials category.
Silver’s Daily Sentiment Index never reached as high as Gold’s, topping out at 64 and falling to 50 since.
It, too, is falling back from a negatively divergent higher high and could have further to fall.
Support is at 15.60 and 15.20-30. If we get through the
latter, Silver could fall all the way back to critical support at 14.50.
In conclusion, while the government was shut down and we were not receiving any positioning data, the prices of Gold and Silver rose, but so did the long and short positions of the Funds and Banks respectively. In particular, the short positions of the Banks and Commercials increased significantly and are very likely to be even higher today, which would support further moves to the downside in both metals.
That said, I still believe that this is the last pullback
before a substantial rally to follow, and it is the last BTFD opportunity before
we break the 2016 high of 1377. The only question that remains is how low do we
go before that rally begins.
David Brady has managed money for over 25 years for major international banks and corporate multinationals both in Europe and the US, with experience in Bonds, Equities, Foreign Exchange, and Commodities
In 2016, he created GlobalProTraders.com, an interactive online community for traders to share their views on financial markets.
The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.You may copy, link to or quote from the above for your use only, provided that proper attribution to the source and author is given and you do not modify the content. Click Here to read our Article Syndication Policy.
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