Looking at this week’s Commitments of Traders Report, changes in speculator positioning across major currencies and commodities are limited. The only changes worth highlighting can be seen in Canadian dollar and gold positions. Following the successful conclusion of USMCA (formerly NAFTA) negotiations, speculators reduced their short positions against the Canadian dollar by a significant degree. Looking at gold, speculators reduced their long positions in the precious metal this week, causing the overall net short position to rise to a new record for 2018.

Turning to extremes in positioning, the long US dollar net position is no longer at a bullish extreme. In last week’s analysis of the COT Report, we noted that positioning in the US dollar was looking extended based on 12-month averages and the current net position relative to total interest. This week, the only speculator positions that look extended include the short Australian dollar and the short gold position. Both look extended based on the current net position when compared to 36-month averages. When the net speculator position is more than two standard deviations smaller or larger than the trailing 12-month or 36-month average, we flag the position as an extreme.

The purpose of this weekly report is to track how the speculator community is positioned across various major currencies and commodities. When net long positions become crowded in either direction, we flag extended positioning as a risk. Crowded positions do not suggest an imminent reversal, but should be considered as a significant risk factor when investing in the same direction as the crowd. This is shown below:

CFTC COT speculator positions (futures & options combined) – October 9, 2018

Source: CFTC, MarketsNow

Notable extremes, significant changes in weekly positions, and large net positions as a proportion of open interest are highlighted in gray above. Extremes in net positions are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages. Weekly changes are highlighted when they are significant as a proportion of open interest. Finally, net positions as a proportion of outstanding interest are highlighted when they are large relative to historical averages. 1-year and 3-year z-scores are visually represented below:

1-year and 3-year z-scores based on net speculator positions

Source: CFTC, MarketsNow

Thanks to accelerating US growth and inflation over the past few quarters, markets increasingly expect the Federal Reserve to continue raising interest rates. In turn, both the US dollar and US Treasury bond yields have been surging, weighing on gold prices. As a precious metal, gold prices are sensitive to monetary policy expectations. When markets bet on higher interest rates, gold tends to weaken as a result.

This phenomenon can also be seen in speculator positioning. After net positions in gold futures and options peaked at +211,878 contracts in late March, speculators have cut their gold long positions aggressively. After moving to a net short position in early August, speculators have since increased their bets against the precious metal.

Whether or not gold continues to weaken remains to seen. While the dollar’s continued ascent is likely to continue weighing on gold prices, decelerating inflation is a positive factor for the precious metal. For traders looking to buy gold, we suggest waiting for a bullish trend and for more attractive entry prices.