COT analysis: will hedge funds stick around this time around?
Note: The COTs report was released on 02/25/2022 for the period ending 02/22/2022. “Managed Money” and “Hedge Funds” are used interchangeably.
The previous Merchant Engagement Analytics showed the influence of Managed Money on the short-term price movement of gold and silver. The table below summarizes this influence by comparing the net positioning of money under management with “Other”, the second largest category. The exchange is not taken into account because it is usually in front of the other two.
Figure: 1 Correlation table
So far in 2022, Managed Money is showing a stronger correlation than ever before at a near-perfect level of 0.97. This compares to Other which is currently pegged at a very strong negative correlation of -0.82. In silver, Managed Money sees a strong correlation of .74 vs Other which sees a negative correlation of -.92!
Basically, these two parties have bet exactly opposite on precious metals this year and the Managed Money (Hedge Funds) group completely dictates this market.
Over the past month, Managed Money Net Longs has grown by almost 30% or 37,000 contracts. Over the same period, Other saw a reduction of 14,000, or about 12.3%. It was only in 2019 and 2020 that the other was on the right side of gold trading, increasing positions with higher prices.
It’s possible that Other will take profits as the hedge funds pile up, but they were early in the move as gold had a very strong February.
Figure: 2 Net notional position
Below is a chart focused only on managed money. Over the past year it has been speculative money, moving in and out quickly. This is responsible for the long consolidation pattern seen since late 2020. No price rise could be sustained as Managed Money is quick to bail out on signs of trouble.
Gold finally broke through a major resistance at $1880. Although it experienced a major pullback after jumping above $1970 on Thursday, it was able to hold above $1880 and close at $1890 for the week.
The coming weeks will show if Managed Money is finally bought on this rally like they were in June 2019 or cooks up another quick exit. If this rally picks up steam, it could really kick off, like the 2019 rally where gold soared 20% in 4 months.
Figure: 3 Net Notional Money Under Management Position
The chart above also shows why recent price action has been so choppy. Over the past few years, a consistent direction has been established in Maned Money’s net positioning. Over the past year, net positions have consistently bounced up and down.
Weak hands at work
The chart below further highlights this trend, showing the week-to-week change over the past two years. The purple bars stand out with the erratic activity, constantly swinging from long to short. It’s good to see three good weeks of sustained buying in Managed Money in the most recent period. Data for the second half of this week won’t be available until next Friday, but it will likely show continued strength, even though the price fell so sharply on Thursday.
Figure: 4 Silver 50/200 DMA
The table below contains detailed positioning information. A few points to highlight:
- Managed Money gross long positions are the highest of all time and 46.5% higher than a year ago
- Shorts rose 13% along with longs during the month from 39,000 to 44,000
- In the most recent week, Mgd Money rose 29%, pushing the price above $1900
- Other Gross Shorts is actually the greatest of all time
- Net positioning in Others is still comfortable for a long time, but there are parties that are clearly not buying this current rally
Others aren’t used to being so high in the short term. This could create a dangerous short squeeze for them if the market continues to consolidate and move higher.
Figure: 5 Summary table of gold
Examining the full historical COT data by month produces the chart below (values are in dollars/notional amounts, not contracts). The chart shows the last price rise in 2011, followed by the slow fall in 2015 until the start of the new bull market in 2016.
This graph also shows how much longer the “Other” category has become. In 2011, Other Long was $8.6 billion in gross long versus $31.7 billion in the most recent period.
It should also be noted that total notional open interest is approaching $100 billion. February 2020 was the last (and only) time gold hit $100 billion. If this market takes off, it could easily explode. Alternatively, traders can also get skittish and jump ship.
Figure: 6 Gross Open Interest
The CFTC also provides options data. This has been mostly dominated by producers, but recently Managed Money has taken a bigger role in the market. The current period shows Managed Money Longs growing from $2.4 billion in November to $3.7 billion in February.
Others dipped back into the options market. Other has held no significant positions in long options since 2016. They now hold $1.25 billion. This is the highest since they held $1.6 billion in August 2011, when gold first hit new all-time highs before a 10-year consolidation ensued. Let’s hope that the current re-engagement is not a bad omen! Is it possible that Other is actually using short futures contracts to hedge its long option contracts?
Options settlement took place last Wednesday, so it will be interesting to see next week if Other stayed in the position until expiration, holding older contracts.
Figure: 7 option positions
The final chart below looks at net notional positioning versus price over a longer time frame. As mentioned, while the money under management correlation is strong, it is not perfect. The long-term bull market continues despite volatile fluctuations in managed currency positioning.
Figure: 8 Net notional position
Silver also saw an increase in net purchases of Managed Money. In September, Net Longs hit its lowest level since June 2019. Surprisingly, Net Longs in Managed Money is below the November high, although the price is below the November high. This indicates that there is more room for Managed Money to increase its silver purchases before they are extended.
Figure: 9 Net notional position
The chart below shows how silver often lags gold. Silver only saw two big increases in silver managed compared to the three weeks seen for gold. It could also stem from the Russian-Ukrainian conflict and silver that doesn’t always act as a pure safe haven.
Figure : 10 Sharp change in positioning
The table below shows a series of snapshots over time. This data does NOT include options or hedge positions. Important data points to note:
- The Managed Money Net Long MoM is indeed down slightly (-6.5%)
- Shorts fell 12% and longs 9.5%. With Longs having a larger position, this resulted in a net decrease
- Last week saw a big recovery, with Net Longs increasing by 47%
- Similar to gold, Other took the opportunity to sell into the rise in price, losing 2k contracts or 23.6%
- Swap briefly turned positive last week before returning to Net Short
Figure: 11 Money summary table
Examining the full historical COT data by month produces the chart below. Even though silver is a more volatile metal than gold, this graph is surprisingly less volatile than the similar gold chart above.
Figure: 12 Gross Open Interest
Also similar to gold, Other returned to the options market with $100 million long contracts.
Figure: 13 option positions
Finally, examining historical net positioning shows the correlation of positioning with price. Similar to gold, the peaks and troughs in the price are reflected in the open interest.
Figure: 14 Net notional position
Managed silver tends to push the price up, but the long-term bull markets in gold and silver persist under this activity.
Astute investors should keep the long-term picture in mind. Short-term gyrations can be extremely frustrating, but gold and silver are do not Bitcoin. They are not get-rich-quick vehicles, as that would disqualify them as safe havens. Remember that what goes up quickly can come down quickly. Stay the course, trust the fundamentals, use CFTC analysis to explain short-term price movements, and understand the protection offered by physical precious metals.
Both PMs have seen strong price action over the past few weeks, breaking through resistance. The best action would be rest and consolidation for a few weeks. Perhaps the next Fed meeting could be the event that would bring them back to recent highs. Traders will certainly be paying attention, and the CFTC will be reporting on their activity (with a 3-day lag!).
The data source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Data update: every Friday at 3:30 p.m. from Tuesday
Last update: February 22, 2022
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