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

What is the best platform for gold trading?  In my view it is Metatrader 4.  Download your free demo copy of the metatrader 4 software by clicking on the following link, download metatrader free, and get started today.

So what’s changed? Well I am delighted to say virtually everything, and I hope the following will provide a brief explanation of the changes, what they mean for us as traders, and how we can use the new data sets to provide more detailed and meaningful analysis of all the various markets we trade.

For those of you who have never come across the COT report, or perhaps heard of it but never really investigated it further, it provides and overview of all the futures and options traded by various designated groups, and is issued weekly every Friday afternoon at 15.30 Eastern Time, by the Commodity Futures Trading Commission in the US, which is the regulatory body for all futures and options trading. The data is based on open interest trading volumes up to and including the previous Tuesday of each week, and until recently the report used three crude categories to report, namely large speculators, commercials and small traders. Over  the years these groupings had become increasingly meaningless with many traders discrediting some of these completely, and partly as a result of industry pressure, coupled with Government demands for reporting transparency on speculators activity in the markets ( particularly from hedge funds), the CFTC was finally forced to provide a new and more meaningful report, which came into effect on 4th September 2009 late last year. To use the CFTC’s own words ; “ the new disaggregated data has been produced to increase transparency and promote market integrity,”. For those of you familiar with the old reporting style, these are still available and running in parallel with the new reports which have now been kick started with over three years of historic data.

So, what are the new groupings and how do they differ from the old one’s, and what are the opportunities for us as traders to use this deeper insight into the futures and options world to provide more meaningful analysis and more accurate analysis and trading signals? First let’s start with the new groups which are as follows :

• Producer, Merchant, Processor, User : Examples in this group, for gold for example, would include gold bullion producers, bullion banks, refiners, large bullion users. The CFTC itself explains this group as ” an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage risks associated with those activities”
• Swap dealers : This is perhaps the most contentious and interesting of the new groups, as it is this one alone that has seen spectacular growth in the last few years, with this group accounting for for over 37% of the futures and delta options on NYMEX, an increase of almost 10% from three years ago. For those of you unfamiliar with the term, a swap dealer is the individual who acts as the counterparty’ between two parties involved in a swap contract, generally in commodities, and uses the futures market to manage or hedge these risks. Swap contracts are generally privately negotiated between two parties and therefore an OTC trade with the swap dealer acting for a fee referred to as the spread. The swap dealers counter parties could be anyone from a speculative trader such as a hedge fund, to a more traditional type of trader such as a commercial client managing risk on a physical commodity. (If you would like to read about a real case, then simply follow the link here to a recent article in the Finanical Times which is interesting reading!) It is the rise of this single group that has made previous analysis of the COT data almost meaningless with the commodities and futures market now dominated by the financial players rather than the traditional producers and consumers, making much of the previous analysis meaningless and unreliable. Most of the growth in swap dealers has come from from an increase in volumes of time spreads, rather than more conventional long or short positions, with spread positions being more closely associated with the growth of commodity indices ETF’s and other forms of investment strategies, far removed from the original concept of hedging risk for producers and suppliers. Finally, it is this group that has been responsible for the breakdown in price structure within the commodity markets, with resultant contangoes in crude oil and related products.
• Money Manager : The money manager grouping primarily contains those traders who are registered commodity trading advisers, registered commodity pool operators, or unregistered funds identified by the CFTC, and as a group are identified as managing futures trading on behalf of other clients. In general this group would include portfolio managers, hedge funds and institutional funds.
• Other Reportables : This is basically the ‘catch all’ category for all other large traders that fail to fit into one of the above.

Outside of the above four major groups there are of course the non-reportable traders – these are the small private investors or traders who are not required to report their positions. So, what are we to make of the new report and more importantly how are we going to use the new groupings to obtain better insights for you in your trading, whether in commodities or in forex?

Like many other commodity and forex traders we are still analysing the new data to some extent, and looking at all the possible opportunities that this may present for us as traders. However, those of you who follow my trading regularly will know that I like to keep things as simple as possible, as the more complex an analysis becomes then generally the less insight it provides. As a result I have decided to start my weekly analysis of the new COT data with a comparison of Open Interest volumes against price, which provides a valuable insight into possible turning points and changes in market sentiment. Over the next few months I will be expanding this analysis to look at the new disaggregated groups in more detail, and if you would like to be updated with the analysis direct to your inbox, then simply fill in your details below, and you will receive my weekly analysis regularly, which I hope will prove to be a useful addition to your trading toolkit.

What is the best platform for gold trading?  In my view it is Metatrader 4.  Download your free demo copy of the metatrader 4 software by clicking on the following link, download metatrader free, and get started today.

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.

If you are considering trading in the forex markets it is essential to use the best trading platform and in my view there is only one platform worth considering, and that’s Metatrader 4.  As one of the most advanced, yet intuitive, trading platforms available MT4 offers sophistication combined with simple order entry, execution and stop loss management and can be used with a host of expert advisors.   Secondly, of course, it is so important to have an account with a reputable forex broker who offers ECN execution -  in other words your trades are entered automatically into the market with no dealer or broker intervention, a huge benefit which allows you to scalp or trade in your preferred style, with no worry of slippage or of broker intervention on trading positions.

The MT4 platform from ODL offers all the above with the choice of either mini or standard trading accounts so you can begin to trade with as little as 500 euros so why not download your free demo copy of the metatrader 4 software by clicking on the following link – download metatrader free -  and get started today, and don’t forget to follow my daily posts for updates and analysis of the forex markets to help you with your forex trading – so good luck and good trading.

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.

The most meaningful aspect of the COT index for the Japanese Yen was the shift 3 weeks ago by commercial contract holders from being net short at the point to the current situation where they are net long by some significant margin.   However, as this has happened towards the end of Japan’s fiscal year (ie 31st March) we should really wait a few more weeks to see if this sentiment is likely to continue.  In the spot market there is an increasing struggle at the moment with the 98.50 level providing strong resistance to any move higher by the dollar.

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.

You can keep up to date with fundamental news on the economic calendar by simply following the relevant links.

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 reversal in crude oil prices now seems to be in place, with the COT index moving firmly away from the extreme of two weeks ago, which suggested that we should see bullish trend starting in oil prices, which now seems to be the case in the daily oil price, as it breaks out from the sideways consolidation of the last few months, a moves above the $50 per barrel region. Supported by the moving averages this move now seems to have some momentum, and we should now see this reflected in the COT index for oil over the next few weeks.

The weekly chart for crude oil futures, shows little change in the COT index data, with a very low reading once again, suggesting that we are reaching a turning point for the daily oil price, and it would not be a surprise to see oil prices rising in the near future. The trend of the last three months has been for oil prices to move sideways in a relatively narrow trading range between $35 and $50 per barrel. The longer this trend continues them the more dynamic will be the breakout from this range when it occurs. With OPEC having decided not to cut oil production this week, this could add a bullish sentiment to the market this week, and it would not be a surprise to see a break above %50 per barrel as a result. Whilst the COT index is not a timing tool, it can provide us with a direction, and from the data we have seen in the last few weeks, with the commercial contract holders not selling into the market, we should therefore expect a move higher in due course. You can find the latest daily oil price on the live charts, along with the spot silver price and spot gold prices. In addition an economic calendar is now also available which is updated each day with the main fundamental news.

COT Index Light Sweet Crude Oil - 3rd March 2009

The COT index is still extremely volatile with peaks one week and troughs the next, and with no real direction or indication of a price trend, which in many ways reflects the market at present, with prices consolidating in a relatively narrow trading range in the daily oil price between $35 and $50 per barrel. As you can see from the chart, this week has registered a very low figure approaching zero, and for this to be meaningful we will need to see this confirmed in the index next week, and if so, then this could suggest we are about to see a rise in oil prices in the next few weeks. Clearly we cannot rely on one weeks data to base our trading decisions, but it is an interesting signal for the next period, particularly if the figure from next weeks report is at the same low level. This would suggest that the commercial contract holders have stopped selling futures,  in the expectation that higher prices will follow shortly, so we may be seeing a floor to the current oil price decline from last year. The latest oil prices are now available on the daily oil price live chart, along with an economic calendar, and live news feed.