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From 2002-mid 2005 the COT data predicted every major top and bottom and gold. However, as ETFs came onto the scene and precious metals broke free from their inverse relationship to USD in late 2005, the commercials covered for losses and pushed the COT data into a gray area.
March 6, 2006 Once upon a time the COT ruled
After being rendered useless for more than a year, the COT data has been running at a nearly 80% accuracy rate since September 2006, meaning if you can predict when the commercials will increase/decrease their net short position you can call short-term bottom and tops in gold. Remarkably, even the old 20-40 rule seems to be back in play, with last years dip below $600 an ounce taking the net commercial short position (as a % of open interest) down to a low of 18.8%, and this years high seeing the comm shorts max out at 38%.
While it is tempting to revert back to the old COT rules and claim that now is an excellent time to buy gold (the speculation being the commercials have covered more contracts and/or the small specs have been washed out by yesterday’s plunge), there could be a negative COT trend brewing.
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What is potentially ominous about the above chart is the relative ease that the commercials have covered their shorts over the last year. Quite frankly, if the commercials are not being pushed to the edge on a regular basis this suggests that they have acquired the upperhand.
Precious metals traders looking for a reason to bottom pick gold need to look no further than COT, as commercial short interest probably neared the 20% buy-barrier yesterday. Conversely, those that believe the last 5.5-years of data will turn out to be more aberration than long-term trend, may want to wait for a much larger washout to transpire before buying/adding to gold. Indeed, the commercials may have lost many battles from 2005-2006, but they are not about to call an end to the war unless gold collapses below, at minimum, $600 an ounce. The last time the commercials were net long was in late 2001.
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