This week, we’re going to take a step back and look at the big picture in the gold futures market through the eyes of the Commitments of Traders report. We’ll discuss how to use it to spot tops in the gold market, specifically but note that the fundamental thesis behind this piece holds just the same for every commodity market we trade. Finally, we’ll look at the current projections for the commercial traders’ most bearish net position since December of 2012 when gold was trading at $1,700 per ounce.
We’ve discussed the first quarter commodity rally in detail over the last two weeks. Our general opinion has been that these rallies are temporary as commodity producers use this opportunity to hedge forward production at decent prices for the first time in over a year. This week, we’ll discuss the metal markets – gold, silver, platinum and copper. We’ll detail how we used the Commitment of Traders report to pinpoint the market’s bias as well as how to factor external shocks into the current picture. Finally, we’ll provide some support levels as we look to take profits on the current decline.
There is a major battle brewing between the bulls and the bears in the metal markets. Arguments on both sides are full of conviction and weight. Even more importantly, traders are putting their money behind their conviction. Finally, as the action has heated up, it’s drawn players from both of their respective camps into the fray. This week, we’ll look at the gold market and one of the problems with the Commitment of Traders report’s data.
Gold bugs always amaze me. Perhaps I’m sensitive to their discovery having grown up finding Goldbug on every page of Richard Scarry’s, Cars and Trucks and Things that Go. All I know they’ll come up with any reason to justify why, “This time it’s different.” I’ve plotted the collective actions of the large speculators on the included chart as well as the actions of the commercial traders. Take a look and tell me which group you’d like to follow.
Many markets have created key points due the increased volatility over the last few weeks. While some of these appear to be opportunities to sell into existing downward trends like the Yen or silver market, we’ll focus on the possible new shoots of a sustainable move in the copper market. We’ll examine the actions of the large and small speculators along with the commercial traders to determine where we are in the current cycle as well as how these cycles typically play out, using the last several years worth of Commitment of Traders data in the copper futures market.
Our trading philosophy is based on short to medium term swing trading. It’s rare that we hold a position for more than a week or, two. Our thesis has always been to side with the commercial traders when recent price action disagrees. In other words, commercial traders have sold the heck out of the recent silver rally. This means that the commercial miners expect prices to fall even though the market in general has rallied substantially. This is the type of tension we talk about all the time. While we’ll review the current situation in more detail, the macro outlook is what we’re after, today.
Most of our trading is based on the consensus opinion of the commercial trader group as reported in the weekly Commitment of Traders report. We track their behavior in a couple of different ways but the simple conclusion is that we want to buy when they’re buying and sell when they’re selling. You’ll see the net commercial trader position plotted in the second pane of the stock index charts, below. We measure their actions on a sum and momentum basis. This allows us to determine how anxious the commercial traders are to get their trades executed at a given price level which, in turn, tells us a lot about the importance of a given area. Obviously, the previous year’s lows are an important area. Based on the collective actions of the commercial traders across the major indices, we’ve issued a COT Buy signal.
As most of you know, we focus on swing trading opportunities both for our own accounts as well as the money we manage. We do this for several reasons and we’ll include a short-term setup at the conclusion of this piece. However, today’s main focus will be on using Commitment of Traders analysis within an existing trend to determine an entry point and time in the current soybean meal market. The lesson, however, works across all commodity markets for which Commitment of Traders data is reported.