CFTC Report: Are the Shorts About to Get Squeezed?

by Peter Schiff, Schiff Gold:

Please note: the COTs report was published 7/29/2022 for the period ending 7/26/2022. “Managed Money” and “Hedge Funds” are used interchangeably.

Gold

Current Trends

As discussed last month, overall net positioning is the smallest it has been since May 2019. Then, on July 12th, Managed Money went short gold for the first time since April 2019.

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As the chart below shows, both of these events in 2019 occurred just before gold went on a massive rally, rising from $1270 to $1550 in 3 months (all pre-Covid).

Figure: 1 Net Notional Position

The last time Managed Money was net short, gold was trading at $1270. Gold closed at $1717 as of Tuesday when traders submitted their positioning to the CFTC. Gold is 35% higher compared to the last time Managed Money was this pessimistic on gold.

How much lower can the shorts take gold? It seems they have run out of gas and been unable to break through solid support at $1680. Does this mean the downside is over? Does it mean the market is set up for a short squeeze?

Another hot inflation report could prompt even more short selling or ETF outflows that could take prices lower. However, the current positioning from Managed Money suggests there is far more risk to the upside than the downside.

Figure: 2 Managed Money Net Notional Position

Weak Hands at Work

Heading into the FOMC this week, Managed Money was clearly betting on a hawkish Fed pushing gold lower. But this was clearly a “buy the rumor, sell the fact” event.

Gold spec shorts were caught off-guard and saw a pretty solid rally in gold after the FOMC and GDP print. As the chart below shows, Managed Money had been piling in leading up to this week but then made almost no changes over the final days.

As shown below, Managed Money tends to be very volatile. However, since March 8th, the shorts have taken one side of the bet and absolutely hammered the price lower. Over the 20 weeks, 16 have led to an increase in net short with only 4 seeing an increase of positioning to the long side.

Figure: 3 Silver 50/200 DMA

The table below has detailed positioning information. A few things to highlight:

  • The net short position in Managed Money was driven by the long and short side
    • Over the month, gross longs fell 16.8% or 18.6k. Gross shorts increased by almost 50% or 36.5k
    • This led to a net change of 55k contracts or -152%
  • Over the month, Other net longs fell by 10k or 8.1% while Non-Reportables fell 35% but only representing 9.5k
  • Producer and Swap both saw meaningful declines in their net short position of 42.5% and 39.8% respectively
    • This came mostly from a decrease in the short side for both groups. Gross longs only increased 5k against gross shorts falling 68k!

Producers and Swap generally sit on the other side of Managed Money and Other, so it’s not surprising to see their short positions fall, but a drop of 68k over a month is a massive fall.

Figure: 4 Gold Summary Table

Despite the large moves, the net positioning continues to fall. Total net positioning represents the combined exposure of the groups once hedging positions are removed. It shows the size of net positions divided by total open interest. As can be seen below, this has dropped to the lowest level since May 2019.

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