For a number of years the market presence of commercial traders has dictated the direction in the price of gold and silver. With deep pockets and by trading contracts in the futures market without having to back up their contracts with metal, commercial traders acting in concert, can raise the price after a pullback, and cap a rally when their computer trading programs signal that price is ripe for a quick drop. 

While no group of traders can change a long-term trend, they can control the short-term trend.  We saw a clear example of this in June 2013, when out of nowhere and starting early in the morning, (before US markets opened), someone or a group of people, dumped 12,000 gold contracts (totalling about 1.5 billion dollars of gold), on a thinly traded market in the space of hours. At the same time a large number of silver contracts were dumped as well. It was obvious that no one owned this much physical metal – it was simply a case of sellers of contracts smothering physical demand with ‘paper gold and silver’. No trading system can predict the type of market action we witnessed in June 2013. Nevertheless, by studying the COT reports, we can synchronize our trading with the commercial traders, and reduce our risk of being blindsided.

The challenge facing us, is how to harmonize our trading in line with that of the commercial traders. We do this by studying the COT reports.

(Charts courtesy Stockcharts.com unless indicated).

This chart courtesy Cotpricecharts.com shows the current position of commercial gold traders (bullion banks for the most part), to be ‘net short’ (short positions minus long positions) at 78,000 contracts. The COT ‘net short’ total reached a bottom on May 5^th at 74,000.  We are now looking for the next top, as this is where commercial traders do most of their selling. The last five tops came in at 108K, 206K, 105K, 166K and 146K. The average of the last five is 146,000. At the current level on the chart, commercials are buying. As the price of gold rises, these commercial traders tend to sell into the rally, and if we want to trade along with them, (instead of selling to them at the bottom and buying from them at the top), we need to buy near the bottoms on the chart, in order to sell near the tops. (We offer our analysis on the COT reports in our weekend report for both gold and silver).