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Gold's Not Done Yet

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Demand pushing yellow metal to new heights.

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Based on the amount of misunderstanding regarding the Commitments of Traders, or COT, report for gold, I thought I'd try and clear something up. I see many people citing the large COMEX speculative net long position in gold as a reason to be bearish on the yellow metal. These individuals do not fully understand the gold market.

Nevermind that the GLD gold ETF continues to inhale physical metal at current prices, which is obviously investment demand. The spec long position, however, is also investment demand, and not merely "trading demand." And investment demand is what drives big bull markets in gold.

Prior to 2005, large spec net long positions vs. large commercial net short positions in gold were a sign of "toppiness" in gold, while large commercial net long positions vs. large spec net short positions were signs of bottoms in gold. This was the case because producer dehedging and jeweler-type buying were still the primary drivers of the gold market (i.e.- the commercials determined the price of gold).

However, there was a big shift in 2005 when investment demand became the primary driver of the gold market and the "specs" (i.e. - "investors" in gold) became the primary driver of the gold market. As you can see in the chart below, the spec net long position exploded in mid-2005, but that was not a "top" in gold and instead was merely the beginning of a rally into mid-2006.

If one didn't pick up on the shift in market behavior, one was bearish all the way up and wrong. What in fact happened in 2005-2006 was that commercials were squeezed by the specs until they were finally forced to cover. As you can see in the chart below, the peak in the gold price in 2006 came well after the peak in the net spec long position. Commercials buying back shorts as specs liquidated into the buying drove gold from $450 to $700, which accounted for the majority of the move at the time.


Click to enlarge image


Along those same lines, note that today the spec net long position is still hitting new highs, suggesting that the majority of the current intermediate move in the gold price still lies in front of us, not behind us as many seem to believe.
Position in Gold, GLD

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