CFTC Data Warning Signs

July 10, 2019

Last week we wrote about how The Bullion Banks manage price through COMEX contract issuance. This week, let's take that one step further to see if recent history provides any context for where we are at present in this current bull market for gold.

If you missed last week's post, I strongly encourage you to read it now, as understanding the processes by which The Banks manage price will lead you to a greater understanding of the "metals markets" as a whole. 

• Supply And Demand In Comex Digital Gold

OK, now, before we begin you must understand certain basics:

  1. COMEX positioning and trading is only a small fraction of the global "market" for gold.

  2. The COMEX is owned and operated by The CME Group.

  3. Market participants on COMEX submit position information to the CFTC.

  4. The CFTC compiles this data into the weekly Commitment of Traders Report and the monthly Bank Participation Report.

  5. These CFTC reports are NOT trading tools, as the information is at least 74 hours stale before it is released to the public.

  6. As such, this information is only helpful in the sense that it can be compared to historical data and price patterns.

  7. And even the data itself is not sacrosanct, as many banks (most notably JPMorgan) have been repeatedly fined for deliberately providing inaccurate and misleading data.

So, to the topic of this post relative to point #6 above... What is the current COMEX positioning telling us about the short-term prospects for price? Let's begin with the latest Commitment of Traders survey taken Tuesday, July 2.

According to this latest survey, the CoT data for COMEX gold is the second-worst of all time, with only the CoT report surveyed on July 5, 2016 being "worse". And what does "worse" mean? That The "Large Speculators"—hedge funds, trading funds and large institutions—have built a near-record net long position while the market-making Banks and other "Commercials" have amassed a near-record net short position. 

Anyone who has followed this data and these "markets" for any length of time almost instinctively knows that this type of positioning is a recipe for a price decline. And just how bad is the current CoT positioning? See below:

  • #3 worst, 9/12/17: Large Specs net long 245,000 contracts. Commercials net short 272,000. Price then fell $58 over the next three weeks.

  • #2 worst, 7/2/19: Large Specs net long 258,000 contracts. Commercials net short 287,000.

  • #1 worst, 7/5/16: Large Specs net long 316,000 contracts. Commercials net short 340,000. Price then fell $37 over the next three weeks.

Clearly, if history is any guide then the CoT reports are flashing a short-term warning signal.

However, what about the other CFTC-generated report, the monthly Bank Participation Report? What does it show?

Recall that the BPR is a survey of the holdings of The Banks that participate, and make markets, in COMEX gold. The survey tabulates the summary positions of the five largest U.S. Banks (think JPM and Citi) and the twenty-eight largest non-U.S. Banks (Barclays, UBS, Scotia, et al.). And what does the most recent BPR show? As of Tuesday, July 2:

#3 worst, 7/5/16: U.S. Banks net short 93,370 contracts. Non-U.S. Banks net short 98,464 contracts. Total NET short position of 191,834 contracts or 597 metric tonnes of digital gold.

#2 worst, 7/2/19: U.S. Banks net short 107,222 contracts. Non-U.S. Banks net short 105,459 contracts. Total NET short position of 212,681 contracts or 662 metric tonnes of digital gold.

#1 worst, 9/5/17: U.S. Banks net short 127,483 contracts. Non-U.S. Banks net short 86,263 contracts. Total NET short position of 213,746 contracts or 665 metric tonnes of digital gold.

For additional context, please consider:

1. Just seven months ago, 10/2/18: U.S. Banks net short 22,119 contracts, while the non-U.S. Banks were net short just 1,960 for a total NET short of 24,079 contracts or about 75 metric tonnes.

2. As of year-end 2018, the World Gold Council estimated the entire global gold hedge book to be around 195 metric tonnes. If this were fully hedged through COMEX alone (which it's not), this would require about 62,700 contracts. See this for more information:https://www.gold.org/goldhub/research/gold-demand-...

3. The entire COMEX gold vaulting structure only holds about 7,700,000 ounces of gold. This is only enough gold to physically settle 77,000 contracts. But that's the ENTIRE vault. The amount of gold currently marked as "registered" and thus immediately available for delivery is just 323,000 ounces... only enough to physically settle 3,230 COMEX gold contracts.

But let's not get bogged down in the minutiae of fraudulent fractional reserve and derivative pricing scheme. Instead, let's get back to the point of this post.

The price of COMEX Digital Gold rallied from $1275 in late May to $1440 in early July. That's a move of $165, or about 13%, in less than six weeks. This has led to an overbought excess in speculation and bullishness that's bound to be worked off at some point. Additionally, the area near $1360 held as resistance for nearly six years. Having now broken out, a pullback to test that level as support should be expected. And finally, any objective reading of the CFTC-generated data, when combined with an understanding of market history and dynamics, should give every holder of gold a reason to be a bit cautious at present.

Understand, though, that the year 2019 is playing out almost precisely as we projected back in January. (See here: https://www.sprottmoney.com/Blog/gold-and-silver-2019-price-forecast-cra...) So expect any sustained pullback to be relatively shallow, while providing an opportunity to "buy the dip".

For now, what would be a likely "worst case" downside target? Probably somewhere near the intersection of the two blue arrows shown below. Maybe a low in August between $1320 and $1340? However, a dip to those levels that is followed by a rally would confirm the breakout and back test of $1360, and it would also inspire the renewed bullishness and momentum that would serve to surge price to the next set of higher highs near $1480-$1520 later this year. 

In conclusion, be warned that both CFTC-generated indicators are flashing warning signals for the short-term. However, the conditions that led to the most recent price spike will persist—and will only deepen—in the months ahead. So don't let the next pullback frighten or otherwise concern you. This is just the natural ebb and flow of these Bank-dominated "markets". Higher highs are still pending in 2019 as COMEX Digital Gold posts its best annual gain since 2010. 

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Craig Hemke

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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