ATLANTA – In this special edition of the Got Gold Report we take a look at a new reporting format from the CFTC in graphs you (and we) have never seen before, and we call attention to GATA’s lawsuit against the U.S. Federal Reserve Board. Our next full report will likely be the second weekend of January, depending on how the first week goes.
New format for COT reporting makes for interesting new graphs
The Commodities Futures Trading Commission or CFTC recently “disaggregated” the data it reports in its weekly Commitments of Traders Report (COT) for some markets, including gold and silver. Basically what the regulator has done is to further divide the reported data into five categories of traders instead of the previous three categories. We COT mavens could easily get spoiled with the new reporting format. A description of the changes can be sourced at this link.
It is still new, so we are not really sure yet how to analyze all the new data. We are glad the CFTC has given all of us about three years of back data reported in the new format to get used to the change while continuing to report the “old” method alongside it. Luckily that time period includes some of the most interesting and traumatic events of the last decade for precious metals, so we view the new trader data sets as potentially very useful going forward.
For those who aren’t familiar with even the old reporting format, the CFTC used to class reportable (read large) futures and options traders as either “commercial” or “non-commercial.” We’ll leave the descriptions of what that meant to the CFTC at this link. The new reporting plan further divides the reportable players into the following categories:
- Producer, Merchant, Processor, User (Examples include bullion producers, bullion banks, refiners, large bullion users, etc.)
- Swap Dealers (Self explanatory.)
- Managed Money (Portfolio managers, hedge funds, institutional funds, etc.)
- Other ‘Reportables’ (Other large traders the CFTC doesn’t include in the first three.)
- Non-reportable Positions (Small traders or traders which are not required to report positions.)
Over the next few months we intend to get more familiar with the new reporting scheme. We have been using the new data for about three months now. We have already developed some theories that have apparent predictive value using the new format, but until we get some more “mileage” with the new ideas we intend to continue operating on the basis of the “old” methods for at least the next few months.
There really is a great deal more in the COT reports than just the analysis we tend to chart in Got Gold Report from week to week. In essence, in our published reports we tend to focus on just one aspect of the old COT reporting format: The net positioning of the large commercial traders. As long-time readers know, over the years we have become comfortable with the signals of that one aspect of the COT report, especially when compared relative to the total open interest. We usually call that the “LCNS.TO” or the collective net short positioning of the commercials relative to the total COMEX open interest. Here is what the silver version of relative commercial net short positioning looks like as a reminder and as a benchmark for the graphs to follow in this special report.
The idea behind LCNS:TO is basic and simple. We’ve covered it so often in the past, it’s not necessary to re-cover it in depth here. In a nutshell, however, as the metals move higher in price it becomes more attractive for the players on the commercial side to sell short or to hedge, and vice versa. But it is very large changes to those veteran trader’s positions from week to week that often sends timely, more short-term signals to us as speculators. That is what we currently focus on at Got Gold Report.
With the new CFTC reporting, there is even more data to crunch, with perhaps a bit more transparency. We’ll be reporting more about that in the coming weeks and months, but for now we thought readers might be interested to see graphically just how much information is available in the new COT reports.
Below is just a very small sample of what an experienced trader might look at using just one series of the CFTC’s new “disaggregated” COT reports. Please note that all of the charts below are from just one market -- silver.
Before we begin, just a quick word about the simple chart template. It is a standard two-axis comparison chart found in most spreadsheet software. We use the cash market closing data for silver in all the charts for comparison. We are using the CFTC data raw, with no adjustments, however in some cases net positions are calculated using the gross long and short positions with spreads ignored.
First , how about something simple to get used to the graph template. Let’s compare silver with the COMEX silver open interest. Remember each open contract is a promise to deliver 5,000 ounces of silver at a future date and price certain.
Can we see a correlation? Yes, clearly the open interest tends to rise as the price of silver rises and vice versa. We still don’t have a good explanation for the big drop in open interest in April of 2008 although some analysts have tied it to the Lehman or Bear Stearns “take-unders.”
Next, let’s look at something in the new CFTC format. Let’s examine the Producer/Merchant/Dealer/ User (PMDU) net positioning relative to the silver price. Obviously this is the bulk of what used to be the “commercial” category and it includes the largest of the largest hedgers and short sellers of futures today.
Can we see a correlation in this simple comparison? Well, very generally yes. When the PMDU net positioning is extremely net short (low on the graph means a higher net short position) can we agree that it is generally, but not always a less interesting time to take new silver positions and vice versa? Perhaps what is most notable are the exceptions, such as in November of 2007 among others. Caution, we barely have three years of data, but in this case it is similar to the old “commercial” category.
Next, using the new format we can look at the positioning of the new category called Swap Dealers. Removed mostly from the previous “commercial” category, Swap Dealers report long, short and spreading positions. Spreading positions are basically what they sound like -- positions that offset each other. If we eliminate the spreading positions we can use what’s left over long and short to arrive at a net position to see which side the Swap Dealers are exposed to. Here’s what it looks like graphically:
For most of 2006 Swap Dealers held more exposure on the short side, but notice that, as a group, they actually went slightly net long in exposure just as silver plumbed its lows in August of 2007. Perhaps that is a “tell” we might want to file away for later consumption. Note also that once silver fell off 2008 Panic Cliff, the Swap Dealers tended to show a modestly net long exposure to silver, especially after September 2. Perhaps more importantly, notice that as silver recovered back up to the early 2008 trading range in the back half of 2009, the Swap Dealers have yet to take on any significant net short exposure. Chart wonks like us find that interesting, but it may or may not be predictive.
Next, using the new data, we could look at the net positioning of the group the CFTC now calls “Managed Money.” Once again we ignore the spread positions and focus on the net between long and short positions. What emerges is the net exposure of portfolio managers, hedge funds, and other very large players who have been mostly on the long side. However, as with other large categories it is always important to remember that these positions likely represent the collective actions of a number of traders acting through, and taking advantage of, the largest actors in the market. (As opposed to these very large traders merely trading for their own accounts.) It is highly unlikely that any one of the very large traders actually controls their entire positioning.
Can we see a correlation here? Yes, several, but the most obvious is that the better times to buy silver have been when managed money has already been driven away from the long side – after being “run to cover” by the hedgers and short sellers, if you will. Perhaps not as apparent at first glance, see if you can see periods of very large, spiky changes to this indicator and the near-term effects of the changes playing out in the silver price. (Hint: Both to the upside and the downside.)
Next we might examine the new category the CFTC calls “Other Reportables.” These are traders that are large enough to be required to report positions, but don’t fall specifically under the first two broad categories. We could look at the long positions, or the short positions or the spread position size in isolation if we wanted to, but today let’s look at the net positioning with the spreads taken out. (The long positioning less the short positioning to arrive at the net exposure.)
We caution not to rely too much on this particular graph because of its relative size to the others. Having said that, we find it interesting, if not predictive, that the net positioning of the Other Reportables remains well under its 2008 near-top congestion and it appears to still be rising just lately even though silver has corrected harshly.
What about the net positioning of the “little guy,” the traders too small to fall into any of the other categories? The CFTC lumps all the rest of the trading into a category called “Non-Reportable Positions” and basically imputes the positioning of smaller traders together after accounting for all the reported long and short positions.
The graph just above shows the net positioning of the smallest traders on the COMEX. Although we have personal experience that says that some of the non-reportable traders are indeed quite large, an overwhelming majority of this category usually trades less than 100 contracts. (Most non-reportables trade fewer.) There is no reason we cannot use this category as a proxy for what small futures traders are up to.
The most striking feature of this graph is, of course, the panic-driven exodus from the silver market by small traders in 2008. To quantify the blue line during that period, on July 15, 2008, smaller traders showed a net long position of 21,866 contracts, or about 15.2% of all contracts open. By November 11 they were only net long 8,338 contracts or 62% less nominally, and down to just 8.8% of all contracts open. (A spectacular buying opportunity if ever there was one.)
Notice also that only just recently have small traders had net long positioning in the same general neighborhood as before the 2008 panic. In hindsight, perhaps it is remarkable that small traders actually returned to the silver futures battlefield inside one year given the devastating carnage of 2008.
How about a different metric to look at in isolation? One can surely do that with the new CFTC data. For example, what if we wanted to see the number of spreading contracts held by Swap Dealers? Maybe someone has a theory that swap dealers tend to put on more spreads near turning points or maybe they do so when prices have gotten too high in their expert opinions.
No problem, we can chart that too:
A higher number of spreading contracts means that there are a larger number of offsetting positions IN FUTURES taken by the Swap Dealers. We have no idea what the Swap Dealers are buying futures to hedge, long or short, or in what market (London, OTC, Japan, etc.). We don’t really even know the size of those off-bourse positions. That same opacity goes for some of the other large traders too, but isn’t it interesting that with three or four glaring exceptions, most of the spikes higher in the size of the Swap Dealer spreading contracts presaged at least a significant dip, if not an outright plunge, for silver?
Maybe that’s another “tell” we need to file away for future utilization.
These simple comparison graphs each tell a story to an experienced trader. Although there are probably dozens of other ways to look at and compare the data in the new COT reporting format, including comparing the various individual data categories to each other, let’s look at just one more single metric today.
The graph below shows just the nominal short position of the “little guys.” The Non-Reportable short positions. One quick take-away is that we usually hear how the small trader always gets the shaft while the big guys hammer them. Well, take a good look at the graph below. See if you see what this author sees…
That’s right, at least some of the small traders have been nicely on the short side ahead of all but a few of the big price plunges for the second most popular precious metal. And at least a few of them seem to uncannily cover their shorts just ahead of or right after major turning lows too. That’s fun to see graphically, but again it may or may not be predictive.
Even though the chart above is a weekly look, there is a bit too much “noise” for some folks. We added a seven-week moving average to the short position data to smooth it and as a suggestion for others to watch.
GATA sues the Fed
Finally, before signing off we want to mention that the good people over at the Gold Anti-Trust Action Committee (GATA) have filed a lawsuit against the U.S. Federal Reserve Board “seeking a court order for disclosure of the central bank's records of its surreptitious market intervention to suppress the monetary metal's price,” according to a GATA press release.
Having met both Secretary/Treasurer Chris Powell and GATA chairman Bill Murphy, and having followed numerous constitutional court cases in the press that were handled by GATA’s first rate law firm of William J. Olson P.C. of Vienna, Virginia, this GATA lawsuit just might NOT get the customary brush-off lesser opponents or counselors might face.
For those who are unaware, William J. Olson P.C. has been at the vanguard of the fight to preserve our Second Amendment constitutional rights. Most National Rifle Association members will know their name well.
Although we often find ourselves at respectful odds with a number of GATA supporters from time to time, whether or not one agrees with everything each and every GATA supporter believes is really quite irrelevant. Here at Got Gold Report we support GATA’s tireless efforts to promote freer and fairer precious metals markets, transparency and open, honest, accountable governance.
GATA is very well run by dedicated, diligent and capable people of integrity. They are fighting the “good fight” and they have chosen a superb champion in Olson to send into the battle.
But it won’t be cheap. Those interested in helping GATA financially should follow this link.
Please note: Gold Newsletter (GNL) subscribers received this issue of the Got Gold Report Monday morning, January 4. GNL subscribers enjoy access to all Got Gold Reports, technical charts, analysis and information, as well as Brien Lundin’s timely and actionable analysis of specific resource related companies. For more information or to subscribe visit the Gold Newsletter home page.
That’s it from Atlanta this week. We’ll be back with a full Got Gold Report in the near future.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a net long position in SPDR Gold Shares, net long iShares Silver Trust, long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last year: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Gold Port Resources (GPO.V), Victoria Gold (VIT.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V), and currently holds various (approximately 10) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).