Gold COT report: hedge funds cut longs, add shorts

Key points

• Managed money's net long in COMEX gold fell 9,331 contracts to 110,987 as of Tuesday 6 October, the CFTC report shows
• Hedge funds sold 4,610 long contracts and added 4,721 shorts, lifting their shorts by 41% in a week
• The net long has shrunk for six straight weeks and is down 23% since late August
• At about 345 tonnes, it is worth about $46bn, roughly a sixth of what the big US gold ETFs hold

The latest gold COT report shows hedge funds cut their bullish COMEX bets for a sixth straight week and added short bets for a second. Managed money held a net long of 110,987 contracts as of Tuesday 6 October, down 9,331 on the week, the Commodity Futures Trading Commission said on Friday.

Why it matters: A shrinking net long shows fast money leaving gold. Fresh shorts are different: they must be bought back to close, so they become future demand whenever their owners decide to exit.

What did hedge funds do in the week to 6 October?

Managed money is the CFTC's label for hedge funds and commodity trading advisers. In the week to Tuesday they cut long positions by 4,610 contracts to 127,101 and raised short positions by 4,721 to 16,114. Both moves point the same way, so the net position fell by more than either: 9,331 contracts, the largest weekly cut in the seven weeks we tracked.

Each COMEX contract covers 100 troy ounces. By our conversion, the net long now equals about 11.1 million ounces, or about 345 tonnes. Six weeks earlier it was about 450 tonnes.

Source: CFTC disaggregated futures-only reports for COMEX gold (code 088691). Rows for 1, 3 and 6 weeks earlier are worked back from the official weekly change figures.

The shorts are the new part. They had been falling through early September, bottoming at 8,310 contracts two weeks ago. They have nearly doubled since, and the latest figure is the highest in the series.

Was it a price story?

Not really, on our data. Gold closed at about $4,163 on Tuesday 29 September and about $4,165 on Tuesday 6 October, almost unchanged across the reporting week. The biggest cut of the run came in a flat week, not a falling one.

Nor was it panic. Gold's one-month realised volatility, the annualised swing in daily closes, was about 16% on Tuesday by our calculation. That is a third below its average of about 25% over the past year, and in line with its norm since 1970.

Over the whole six weeks the price did fall. Gold is down about 10% from about $4,615 six weeks before the latest report, and it sits about 23% below its January record of about $5,426 on our price data.

Our read: this is funds steadily taking risk off with rate hikes back on the table after the Fed minutes kept hikes in play, and with US inflation data due next week. It looks like trimming, not a rush for the exit.

Who took the other side?

Swap dealers, the banks that sell gold exposure to clients and hedge it on COMEX, cut their short positions by 4,909 contracts to 239,630. They are still by far the largest short holders, with 60.5% of all open interest on the short side.

Producers and merchants, the miners, refiners and dealers who hedge physical metal, trimmed shorts by 1,102 contracts to 38,361 and added 660 longs. The other reportables group, large traders who fit none of the named categories, lifted its net long by about 1,000 contracts to 99,348.

Is money leaving the gold futures market?

Some of it. Open interest, the number of contracts still open, stood at 396,109 on Tuesday. That is down 16,691 from two weeks earlier and about 19,100 below the figure at the start of September, a fall of about 4.6%.

Managed money's share of all long positions has slipped from 36.1% to 32.1% over the same five weeks. Hedge funds are a smaller part of a smaller market.

How does this compare with ETF buyers?

This split has shaped gold since the summer. While hedge funds were cutting, fund investors were buying: as we reported, gold ETFs took in a record $31bn in the third quarter on World Gold Council figures, and added 67 tonnes in September alone.

Size matters here. At Tuesday's close, managed money's net long is worth about $46bn by our calculation. The nine largest US gold ETFs in our gold ETF flows tracker held about $263bn between them at the end of September. SPDR Gold Shares alone held about $145bn, three times the hedge fund net bet.

So the fast money is now the smaller pool. It still sets the tone week to week, because it can move 9,000 contracts, or about 29 tonnes, in five trading days. But six weeks of selling have taken about 105 tonnes off the managed money net long, about one and a half times what ETFs worldwide added in September.

What would change our read?

A smaller net long does not say where gold goes next. It does say there is less hedge fund length left to sell than in August, and 16,114 short contracts that will need buying back at some point.

Since Tuesday, gold dipped to about $4,110 at Wednesday's close and recovered to about $4,196 by Friday on our data. If next week's report shows shorts rising again into that bounce, funds are leaning against the rally. If shorts fall and longs return, the six-week cut is over.

What to watch

• 14 Oct: US CPI for September, the next test of Fed hike bets and of hedge fund appetite for gold
• 16 Oct: CFTC report with positions as of Tuesday 13 October, the first to capture the late-week bounce
• 23 Oct: CFTC report covering Tuesday 20 October, the first full week after the CPI release