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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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.

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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 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 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 COT index for silver show little change on last week, with a small change in the contract positions as as result of the decline in the spot silver price last week. Unless this decline continues for the next few weeks, then I would suggest that this is only a temporary reversal in the longer term bullish move in spot silver prices, which have mirrored the rise in the gold market. In my view we still have along way to go for silver before reaching a major top reversal, and until the COT index starts to register at one of the extremes ( either 5-10, or 90 – 95 ) then the trend in the chart will remain in place.  All the latest economic data is now available live on the economic calendar, along with the latest spot gold prices, spot silver price, and the daily oil price.

COT Index Silver - 6th March 2009

Much the same applies to silver as to gold, with the index suggesting that silver has further to run in the current bull rally, despite the pullback that we saw in the candle spot silver price charts last week. With the index in the low 30′ and rising, this is suggesting that the commercial traders are beginning to start selling into the rally, which should therefore continue for some time. What does seem likely from the current index is that gold prices may peak more quickly than silver. We have added an economic calendar for all the fundamental news, along with a live news feed for the latest breaking news.

COT Index For Silver - Week Ending 20th February 2009

Just like the gold index,  the COT index for silver has begun to climb heading back up from the low of 18 weeks ago which suggests that the commercial contract holders are increasingly seeing an opportunity to sell into the rising prices in spot silver, which has been following gold in the bull rally of the last few months reaching just under $15 per ounce last week. From the above we can assume that we are some way from the peak for spot silver prices, and as I have been suggesting for some time, silver is an excellent prospect for a long term buy and hold, with the commercial contracts just starting to sell into the rally. From the above picture I would suggest that silver has a great deal further to go in the rally than gold on a percentage basis which is normally the case when prices are rising. The converse of course is that when prices fall, the silver will fall faster than gold on a percentage basis. If you would like to keep up to date with spot silver prices on a daily basis, then please just follow the link.

COT Report - Silver Index 27th January 2009

Silver and gold will always tend to follow one another, with gold prices often performing better in a bullish  move then gold, but conversely they tend to perform worse in a bearish market. Last week we saw a rise in the Silver Index to 20, and this suggests that we are now starting to see a rise in silver prices in the short to medium term, with the low of 15 weeks ago providing a turning signal. As many of you may know I am bullish on silver so this is good news. If you would like to follow my daily posts on spot silver prices, then please just follow the link.