Precious Metals COT Positioning Healthy For Metals

Since I have covered currency COT in the previous post, I thought it might be wise to cover the positioning of the futures traders in the precious metals sector. Instead of breaking up the charts for both metals, I will use the CEF ETF (Central Fund of Canada 50% Gold & 50% Silver holding) together with the cumulative commercial net long positions in both metals.

Chart 1: Speculators are shaken out of the Precious Metals positions

Current total net long positioning in both metals is approaching the lows seen in June of this year. One of the interesting aspects of a long term chart, instead of a just a few years of data, is the fact that we can see investor sentiment over a multi decade time frame. We should be able to observe that during a bottoming out phase between 1997 and 2001 (a great time to buy PMs) majority of the hedge funds and other speculators held regular net short positions. Therefore, we have to assume that it might be possible for investors to panic yet again (if further price declines occur) and turn net short the metals.

Chart 2: Longs reduced near 08 lows, while shorts near record highs



Breaking the chart above down into Gross Longs vs Gross Shorts, we can see that investors continue to cut their long exposure. From a contrary point of view, this is healthy for the metals, as lower exposure eventually bottoms the price and tends to increases buying power into the recovery.

Personally, I would like to see longs cut lower then they were during the 2008 correction, which means cumulative gross longs below 200,000 contracts. Will it happen? I am not sure. And as for net short positioning, not much needs to be said. Traders are certain precious metals bull market is over and are betting against it like a herd of sheep. Gross shorts are approaching record high number of contracts. From a contrary point of view, this is setting us up for another buying opportunity, as short squeeze will provide ample buying power, as prices bottom and reverse.