A Commercial Short Squeeze In Gold

Why Buy Gold During Commercial Short Squeezes?

There's been a lot of talk lately about gold being "overbought" and "crowded". However, there's nothing in the latest CFTC data to suggest this is the case, so this week, let's dive into the numbers to see what's actually been driving price higher. We got into this notion of "overbought and crowded" last week, and maybe that's a good starting point for this week. If you missed last week's column, here's the link for Is Gold Really Overbought?

Why Commercial Short Covering Drives Gold Spot Price?

The focus this week is the latest Commitment of Traders (CoT) report from the CFTC. This report was surveyed last Tuesday, April 22, and released late last Friday, April 25. Over the course of the holiday-shortened week, the price of COMEX gold rose by a whopping $179 with total open interest rising by 8,723 contracts. Anyone who follows the COMEX gold market should be able to anticipate the details of a CoT report that's surveyed just after a 5%, four-day rally. We would expect a significant increase in the Large Speculator and Hedge Fund NET LONG position, countered by a similar significant increase in the Commercial and Swap Dealer NET SHORT position. This is how it has worked since time immemorial, but it is NOT how it worked last week. Instead, the complete opposite happened! While price was soaring on average about $45/day, the Large Speculators were shedding longs and adding shorts while the Commercials were the ones who were adding longs and covering shorts. It's as if the world was turned upside down. See for yourself in this helpful table from Goldseek:

Should You Buy Silver And Gold Now?

So, clearly, what drove price substantially higher and all the way to $3509 in the wee hours of Tuesday morning, April 22, was NOT some massive rush of speculative buying in a blowoff top of bullish hysteria. Instead, it was short-covering and long-buying by the Commercial sector. This completely betrays the heavily-promoted idea of "overbought and crowded". Ah, but this is just one week, you say. That's nothing but anecdotal evidence over just four days. Price has rallied over 25% year-to-date so this must be some sort of massive rush, where buying from every shoeshine boy and cab driver has driven a Tulip-level mania. Nope. To dispel that notion once and for all, let's look at some of the recent history of the CoT report. What do we find? Let's start with a chart. Below you'll see the price action in COMEX gold since the start of the year. Be sure to note the arrow that points to February 4.

Price of Gold

Commercials Lead The Gold Spot Price Rally

What's the significance of February 4? Well, that was a Tuesday...which means there was a CoT survey on that day. You might also note that price closed that day at $2901 versus the April 22 close of $3419. What was the summary positioning back on February 4? See for yourself:

So, let's add it up... Over the period February 4 - April 22, as the price of COMEX gold rallied $518 or 17.8%, the NET LONG position of the Large Speculators FELL from 302,508 contracts to 175,378. That's a REDUCTION of 42%! That's unprecedented! An 18% rally in price while the Large Speculators were NET SELLERS of 127,000 contracts! On the flip side, the Commercials reduced their NET SHORT position from 328,175 contracts to 202,268. That's an almost contract-for-contract reduction of about 126,000. So this entire period from early February—as price surged through $3000 and continued to $3500—HAS NOT BEEN DUE TO SPECULATIVE BUYING. Instead, this latest surge in price has been almost entirely driven by Commercial short-covering. Can you say, "short squeeze"? As such, this entire notion of a "crowded" trade is disproven. Oh sure, price can get overbought from time to time and a short-term pullback can smooth out the edges. However, going forward, anyone making the claim that this rally has been driven by speculative excess is simply ignoring the facts and, perhaps, covertly talking their book and promoting an agenda.

Invest In Gold As Commercials Accumulate

But wait. There's more! And here's where it gets really interesting... Look again at those Large Speculator positions as of last week. As a whole, they were:

• GROSS long: 258,896
• GROSS short: 83,518
• NET LONG: 175,378

And this was on a day where price closed at $3419. You want to know the last time the Large Speculator GROSS and NET positions were that small? You have to go all the way back to February 27, 2024, to find a time when they were smaller:

• GROSS long: 214,948
• GROSS short: 73,312
• NET LONG: 141,636

Now, why is that important? Because that's the last survey taken before price finally broke out above $2100! You may recall that the breakout came on Friday, March 1, 2024, and price hasn't looked back since.

Price of Gold

So, you could say that the current structure of the CoT report is as "clean and washed" as it has been since this rally began over a year ago—and price is now about $1300 or over 60% higher!

As such, let's put to bed this notion of the current rally being a crowded trade that is driven by speculative excess. The only data we have to measure the market internals are the weekly Commitment of Traders reports, and as we've shown in this post, the reports reveal that the opposite is true...at least as of late. Speculators, both Large and Small, have been NET SELLERS of gold futures while the Commercials have been NET BUYERS and made uncomfortable in a short squeeze. Let's hope that the pain of the Commercial short squeeze worsens and that price continues to stair-step higher in the months ahead.

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