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

Washington  (Aug 6)  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.”

Source: FORBES