Home Precious Metals Gold Commitments of Traders (COT) Nonsense

Gold Commitments of Traders (COT) Nonsense

July 13, 2015

A lot of nonsensical commentary gets written about the Commitments of Traders (COT) data for gold (and silver). The information in the COT reports can be used as an indicator of gold-market sentiment. Nothing more, nothing less. It cannot validly be used to support the theory that “commercial” traders (primarily bullion banks) have been conducting a long-term price-suppression scheme.

One of the most important points to understand with regard to the positioning of traders in the gold futures market is that the group known as speculators drives the short-term price trends. This is made apparent by the following chart, which was created by Saxo Bank and linked at the article posted HERE. The chart clearly shows that, with only a few minor discrepancies, over the past three years the net position of speculators in the COMEX futures market (the black line) has moved with the gold price (the red line). More specifically, it shows that speculators start adding to their collective net-long position at price lows and continue to add until the price makes a short-term top, at which point they become net sellers and their collective net-long position begins to decline. The process is self-reinforcing, in that a rising price prompts buying and a falling price prompts selling by the trend-followers within the speculating community. Note that a chart stretching back well beyond 2012 would show the same relationship.

As is the case in any market, the speculators in gold tend to be most bullish/optimistic just prior to significant price tops and most bearish (or least optimistic) just prior to significant price bottoms. That’s why the COT information can be used as a sentiment indicator. And as with most sentiment indicators, the COT’s weakness is that there are no absolute benchmarks. For example, while we can be confident that a short-term price bottom for gold will coincide with a relatively low level for the speculative net-long position in COMEX gold futures, there’s no way of knowing that level in advance.

If we lump large speculators and small (non-reporting) traders together under the “speculators” label, then the “commercial” position is simply the inverse of the speculative position. In order for speculators to become net-long by X contracts, commercials must become net-short by X contracts. This is a function of mathematics, since the futures market is a zero-sum game. Furthermore and as discussed above, we know that it’s the group known as “speculators” that’s driving the process since the price has a strong positive correlation with this group’s net-long position.

Therefore, getting angry with commercials for shorting gold futures — as some gold bulls do — is equivalent to getting angry with speculators for buying gold futures, since speculators, as a group, cannot possibly increase their long exposure in gold futures unless commercials, as a group, increase their short exposure.

Source: Gold Commitments of Traders (COT) Nonsense


  1. Maybe it’s not clear: there are no traders “conducting a long-term price-suppression scheme”. Nor are there individual rogues in basements or ‘fat fingers’ manipulating anything. No convenient media scapegoats.

    When the price of gold is determined solely by completed deliveries of unencumbered physical bullion changing hands at a given price – and not by an inflated supply of paper contracts, uncovered shorting, payouts in cash instead of real bullion and no position limits – then you can claim that the “gold price” is fairly and accurately representative of real supply and demand available at any given price.

    A very, very small pile of metal is pushed from category to category and ‘player’ to ‘player’ in the futures and options markets daily and the existing framework and rules virtually guarantee that this small pile will never be called for delivery. Why the COMEX abomination is allowed to determine price at all is something you can ask government.

    In other words, no one entity, “speculators”, “commercials” or whatever, is “suppressing the price”: the very existence of COMEX and LBMA as price-setters in themselves allows for an infinitely inflatable supply of “gold” and constitutes a systemic ‘manipulation’ opportunity.

    The regulators should shut them both down, but you and I know government needs them.


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