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

Allen Sykora reports for Kitco:  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; [email protected] 

Thanks Allen.