Open interest contracts from 1st Jan. 2008 to 11th Feb 2010 - Gold Contracts

The chart above indicates the weekly change in open interest for spot gold over a two year period with the first week of 2008 on the far right of the chart and with last week’s open interest on the far left.  Last week’s open interest  for gold was 466,905 contracts, having fallen from the previous week’s 480,860, the fourth fall in a row from the high of mid January where the short term top was 528,924.  The broader picture for the data clearly indicates the peak which approached 600k contracts in early 2008, down to a low of 261k towards the end of 2008.  Whilst the last four weeks is a relatively short time scale, it does indicate falling open interest coupled with falling prices which could suggest that the gold bulls are either offsetting or squaring off.  This combination is usually taken as a sign of strengthening as once these positions have been squared off then the recent decline in gold prices should come to an end as the longer term bullish trend resumes.   How far this will run in the future is difficult to forecast but the 600k upper limit at least provides us with a guide for future analysis.   Our technical analysis of the spot chart has supported the view that gold is currently in a longer term bullish trend.   One further point to note from the 2 year open interest chart is the first quarter of 2008 where we saw falling open interest against a backdrop of rising gold prices which is normally considered a bearish signal and indicative of a potential reversal in the market which indeed was the case in late March when prices collapsed dramatically.  At the time many market commentators were forecasting a long bull run for gold!!

Spot gold price - Weekly from 1st Jan 2008 to 17th Feb 2010

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With Japan’s fiscal year end now passed, we can begin to focus with more confidence on the COT index for the Japanese yen.   However, as always we need to bear in mind that the COT index must be viewed as a sentiment indicator and not a timing indicator and cannot always be correlated with the spot market.   All the index is telling us at present is that the commercials are continuing to build long futures positions in the Japanese Yen and that this will translate into Yen strength at some point in the spot forex market.

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The COT data for this week shows an increase in the cot index which is now starting to climb away from the extreme lows of the last few weeks, suggesting that we are now seeing the long awaited reversal in the Australian dollar, a move which is reflected in the spot market against many other currencies, of which the US dollar is typical. A look at the weekly chart for the Aussie dollar, reveals a double bottom over the last 6 months, with a breakout from this trading range now imminent, and with a wide spread up bar, the AUD/USD pair are poised to break through the resistance level at 0.7090.   However as always we need to bear in mind that the COT index is a direction indicator only, and not a timing indicator, and should only be used to reinforce or support our view of the spot market.

All the latest fundamental news is now available on the economic calendar, and if you are looking for the latest live price for the AUD/USD currency pair, then just follow the appropriate link. Finally, if you are looking for a good ECN broker I have provided some details on what to look for when choosing your broker.

No real change since last week other than commercials still selling into a rising market, although the volume of contracts has substantially reduced in the futures market since this time last year.  As an example this time last year  the total number of positions was 141k whereas last week the total number was close to 95k and with commercial short positions having fallen from 100k last year to 64.5k this year.

In the spot market the trend is still bullish longer term although we are currently seeing some sideways consolidation in the market at present due to the economic climate and present round of quantitative easing and financial bail outs.   The perceived wisdom of the stock markets is that the rally of the past few weeks is merely a temporary bull rise which, in due course, is likely to classified as a dead cat bounce.  This in turn could lead investors back to gold and silver as safe havens in uncertain times.

As with silver the futures’ positions of the Commercials shows an expectation of further increases in the price of gold, a position which is likely to remain unchanged until we reach an extreme on the COT index approaching anywhere close to 100, assuming the current trend continues to build as we have seen over the past 20 weeks.   Again I must emphasise that this index is not a timing tool but merely reflects the sentiment of some of the biggest market players and you trade against them at your peril.

The Australian Dollar Cot data is very interesting this week as there appears to have been a major transfer of future contracts by the commercial holders who are now net short.  This is not unprecedented and happened at the end of last year.  This does not necessarily signal a long term change in sentiment, merely a response to current market conditions and does not alter my bullish long term of the Aussie Dollar, confirmed to some extent by the weekly chart which is now showing a double bottom. However, in the short term we may see prices continue to fall this week following the shooting star of last week.

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As with the gold COT index, so the same picture appears with silver, with the bullish momentum now in place, and whilst we have seen a pullback in the last two weeks which is reflected in the spot silver price chart, unless we see a fall back to the extremes of 5 and below, then COT index should move higher as we see the bullish move continue in the spot market. In the longer term we should see the bullish momentum continue provided the chart does not retrace back into the extreme, but allied with the technical analysis of the chart, and supported by my view of gold prices, I think this is unlikely at present.

The bullish momentum of gold seems to have remained in place with the COT index for this week showing only a minor fall back from the last two weeks, which reflects the pull back in spot gold prices. Assuming the trend continues, then we should see higher prices in gold over the next few months, and until we reach an extreme point which may indicate a longer term reversal.

The COT index for the Canadian Dollar is extremely interesting on several levels and in particular teaches us an important aspect of the patience required when interpreting the chart.  A quick comparison between the COT data and the spot market chart for the usd/cad highlights the fact that for the last 3 to 4 months we have seen sideways consolidation in the spot market with futures positions being built up at an extreme of the index.  It is clear from the COT chart that we are going to see a strengthening of the Canadian Dollar at some point but what is less clear is the actual timing of this event and as we can see we have had to wait several weeks for this view to emerge.  With the data now rising and seeming to build away from the extreme of the last 2 to 3 months we may finally be seeing the strengthening of the Canadian Dollar that has been threatening to take hold for some time.  In the spot market this has been translated into several failed attempts by the US dollar to penetrate the 1.3 region and more recently this has been coupled with a series of bearish signals.  So combining our spot market analysis with the COT index confirms the view that longer term we will see US dollar weakness and Canadian Dollar strength return.

All the latest fundamental news is now available on the economic calendar.

The COT data chart for the Japanese Yen paints an interesting picture especially as we are approaching Japan’s year end.   In the last 2 weeks we have seen the index approach an extreme with values below 5 which always tend to suggest a turning point based on the commercial traders’ futures contracts and this would suggest that we are about to see a strengthening of the Japanese Yen in the spot currency markets and in particular in the dollar yen pair.  Whilst we have to be careful not to use the COT index as a timing signal it does provide excellent background information to the direction in which to trade in the medium to long term.  All the latest fundamental use can now be found in the economic calendar.