What will ignite a precious metal rally to new all-time highs?
We often discuss the dollar and real yields as critical catalysts for a sustained uptrend for gold and silver. It’s simple: These shiny rocks will struggle if the dollar and rates continue to rise.
But there’s more.
I want to share another crucial piece of the puzzle – commercial positioning.
We analyze the Commitment of Traders (COT) report generated by the Commodity Futures Trading Commission (CFTC), which updates the positions of the largest speculators and commercial hedgers weekly.
We publish a table with this data in our commodities post every Friday.
Our focus lies solely on the commercial hedgers for one reason – they represent the largest short sellers for any given market. By monitoring these players, we discern the attitudes of the strongest hands.
Think of the COT as a sentiment gauge.
Commercial hedgers reached extreme levels in gold last fall, coinciding with significant troughs in price in 2016 and 2018:
Strong hands move markets. And the strongest hands were extremely bullish as gold printed year-to-date lows last fall.
Most recently, an unwind in bullish positioning set off the rally off the Q4 2022 lows. But will it continue?
Gold bugs want to see a similar flip in positioning to the 2019-2020 unwind that led to new all-time highs. This would act as another pivotal catalyst for the next leg higher.
It’s not just gold. Commercial hedgers maintain a comparable stance regarding silver:
Notice how hedgers’ positioning rose to levels that marked key pivot lows during the past decade, much like gold.
The COT profile for silver paints another bullish picture for precious metals. No doubt the conditions remain ripe for a rip-roaring rally despite near-term selling pressure.
I like to add another layer to the analysis of commercial hedgers to better estimate the likelihood of an unwind.
Check out the cumulative open interest in the lower pane of the silver futures chart…
Remember, commercials are the largest short sellers in the market. So when open interest rises, they’re adding new shorts positions (new buyers and sellers create new contracts). That’s bearish.
It’s not a coincidence an increase in open interest accompanied the decline into the 2015 lows. The biggest players with the deepest pockets were plunging the market.
On the flip side, declining open interest signals commercials are covering shorts (old sellers transact with new buyers). That’s bullish.
And that’s what we’re witnessing right now. Commercials continue to cover shorts while price churns sideways. Think about it. They’re making the bet price will resolve higher, not the other way around.
The stage is set.
Sentiment readings based on the COT report reverse from excessive levels. The US dollar pulls back to a key shelf of former highs. And real rates chop sideways.
These are the three catalysts that will rocket gold, silver, and the entire precious metals space to new heights.
But these shiny rocks are stuck in limbo until these pivotal factors make a decisive move.
