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Comex Gold Open Interest Hits 5-Year Low; Some See This As Sign Market Could Be Bottoming

By Allen Sykora of Kitco News
Wednesday August 6, 2014 12:05 PM

Editor's Note: Updating earlier story to include data from CME Group that open interest hit five-year low.

(Kitco News) - The number of open positions in U.S. gold futures fell to a five-year low in recent weeks as the metal meandered in a sideways trading range.

Some analysts see this as potentially supportive since it might be signaling a bottom in prices and therefore a reversal higher, while others say don’t read too much into it since speculators also could establish short positions whenever they jump back into the market.

Data on the CME Group website show open interest in gold futures on the first day of August fell to 358,996 contracts. A CME Group spokesman said this was the lowest level since February 2009.

By contrast, open interest was 427,744 on March 17 when the currently most-active December futures contract hit its high for the year of $1,390.80 an ounce. Open interest was still as high as 416,799 on July 10, when gold hit a nearly four-month high of $1,347.50.

Open interest then fell back by 13.5% through Aug. 1, although it bounced slightly during the early part of this week. Open interest is the number of open positions at the end of a session.

A run-up in gold prices occurred in July largely on speculative-type buying during geopolitical tensions such as those surrounding Ukraine, said Kevin Grady, president of Phoenix Futures and Options LLC.

“Once the market started selling off, that’s when open interest took a hit,” he said. “A lot of the short-term longs, which we call the weaker longs, just liquidated those positions. They got out. When we broke $1,292.60, which was a very good support level for gold, we saw a tremendous amount of liquidation.”

Phil Flynn, senior market analyst with Price Futures Group, suggested the range-bound nature of the gold market lately also may be deterring some participation. “Both the bulls and bears have been frustrated with the market,” he said. Additionally, he suggested big banks might be scaling back positions under pressure from regulators.

Jim Wyckoff, analyst with Kitco, said open interest has fallen in a number of commodities that have been in a downtrend, citing grains and softs markets, excluding cocoa. In particular, he pointed to the downdraft in commodity bellwether crude oil since earlier this summer.

“There’s a lack of speculative participation in the raw commodities sector right now that you haven’t seen in some time. That’s because most of them are in bear markets,” he said. “The speculative or retail public likes to be bullish and go long markets. When they see prices in a downtrend, they tend to stay away from them.”

Additionally, money was flowing into record-setting stocks before a pullback since the end of July. The strength in equities was taking away money that otherwise might have gone into commodities, said Wyckoff and George Gero, precious-metals strategist with RBC Capital Markets Global Futures.

“Open interest was low because the stock market performance siphoned a lot of gold money out of the futures,” Gero said. “So we had year-low open interest of (around) 358,000….It shows you the funds have been under-invested in gold.”

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Equities have fallen back over the last week, and Wyckoff said he suspects the stock market may have put in a top. If so, this could lead to a flow of money back into commodities, he said.

Overall, he outlined both bearish and bullish ramifications for gold from low open interest.

“On a near-term basis, it’s bearish because you don’t see the retail investor interested in trading gold. That’s bearish because most people like to be long (in) markets, the speculators especially….But the very low open interest suggests that we’re in a cyclical low in gold. You probably have seen most of the bearish news factored into the gold market and at some point…you’re going to see that cycle turn and prices start to go higher.”

Flynn also suggested the recently soft open interest could hint at a change in trend.

“My thinking is it means we’re closer to a bottom,” he said. “I think we’re seeing some of the safe-haven money has moved out of gold and into bonds. But you can only do that play for so long. At some point, rates (yields move inversely to bond prices) get so low. So my feeling is we’re getting closer to a bottom and perhaps a pretty sizeable move perhaps back to $1,340 or $1,350 soon.”

Gero described the low interest as potentially supportive for gold.

“Ultimately, it’s bullish because that means there are less people looking to sell and take profits on the way up,” he said. In fact, he said, this is part of why gold rose so sharply on Wednesday’s rally, since there were limited sell offers as prices rose sharply.

Grady, however, said he did not see the low open interest as having either bullish or bearish ramifications. There is potential for speculators to return on the long side of the market, but they might also go short, or place bearish bets.

“A lot of times what happens is…people may get out, but then the (markets) break key support levels and…they get short and reverse those positions,” Grady explained. Open interest then might rise as a market falls.

He did note, however, that many traders might be reluctant to establish short positions with a number of geopolitical hotspots in the world. As an example, he pointed to gold’s sharp rise on Wednesday on worries about Russia building up troops near the border with Ukraine.

“There is a big difference between being flat or neutral in a market and being short the market,” Grady said. “A lot of longs said ‘let me liquidate these positions. I want to get out of these positions because I’m not comfortable with what’s going on and the way the market is trading.’ But with everything going on in the world, they did not want to get short in the market.”

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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