The gold market is reaching an extreme tipping point as the commercial traders like the miners sell their forward production to the blindingly bullish speculators who’ve now set a second net long position record already this year. The Commodity Futures Trading Commission’s weekly Commitments of Traders (COT) report breaks down the market’s open interest into a few manageable categories. We are particularly interested in the net and total positions data of the commercial trader and large speculators. This breaks the market into producers and processors versus the funds and public ownership. This relationship currently stands at a record imbalance, which leaves the gold futures ripe for a correction lower.
The story on the chart below begins in December. This is the last time the commercial traders, the processors in this case, were net long. This action helped forecast higher prices heading into the New Year, which we clearly have. Once the market climbed above $1,200 per ounce, the commercial trader action began to shift from processors buying gold futures to gold miners selling forward production. The shift towards a negative fundamental sentiment as tracked by the MACD in the third pane below, began to put us on the lookout for rallies to sell, rather than breaks to buy. It appeared this action had climaxed in May as the large speculators began to get washed out of their first record, long position of the year. The rebalancing was brief, although it was reactive enough to catch the Memorial Day COT buy signal.
The recent rally from the June lows and the Brexit vote has seen the both of these trading groups reassert themselves in the marketplace. Commercial traders began selling in earnest as gold climbed above $1,350 heading into the vote. The post vote analysis has shown this selling has intensified further. The gold producers have increased their forward hedges, as stated in their total position by more than 23% since June 10th. They clearly don’t believe that they’ll be able to achieve these prices in the cash markets by the futures contracts’ expiration dates.
The chart setup is as follows:
- The second pane is a momentum trigger based on gold futures.
- The third pane is commercial trader momentum. We only take trades inline with their momentum. We want to buy breaks when it’s positive and sell rallies when it’s negative.
- This is a swing trading method. The momentum indicator tells us when the underlying market is overbought or oversold against the commercial traders momentum.
- The trade is entered on a reversion from overbought and oversold levels.
Once this market reverses, a sell signal will be issued and a protective buy stop will be placed at whatever the swing high turns out to be. Trend line support just under $1,250 would be our first profit objective.