There’s no doubt that gold has had a fantastic and well-deserved run in 2016. The strength of the unrelenting rally has caught many off-guard, myself included.
Every week that I look at my charts, however, there is one thing about the gold chart that literally jumps off the page. It’s the unprecedented moves in commercial hedging and open interest.
Even in the nearly 10-year chart of gold below, you can see that the bottom two sections of the chart are reaching extremes that haven’t been seen in decades … and are doing so very quickly.
Let me take just a minute and remind us what these indicators mean.
The “commercial hedgers” data comes from what is known as the “commitment of traders” data published by the Chicago Board of Trade on the futures markets. The “commercial” component of this data gives an indication of how the actual producers and consumers of each commodity are currently positioned in the futures markets.
You can see in the chart above that the producers and consumers of gold are locking in their future commitments. Producers are very happy to sell at these prices and they’re not waiting around to speculate on possible higher prices to come.
Open interest tells us how many contracts are open in the given futures market. It’s an indication of how many participants there are in this particular market – how much interest there is in the market. Open interest is growing rapidly in the gold market. More people are getting involved.
By the way, not surprisingly, the exact same situation is happening in the silver market as well:
As always, when I see dramatic moves like this, I look to history to find similar set ups from the past to get an idea of what might unfold in the future. I found a few compelling examples for our consideration.
First, platinum. Back in late 2012 we saw similarly sharp selling by platinum producers together with rising open interest. Platinum was in the news a lot back on 2012.
The following chart shows how the situation has played out in platinum since those dramatic moves.
Platinum peaked shortly thereafter and hasn’t recovered since.
Another similar set up occurred in the corn market back in 2011. Producers sold like crazy and the corn market got a lot of attention. Prices rose for a short while longer, dropped, rose sharply a year later, and then finally fell off decisively.
I’ve looked at least a dozen similar setups across various commodity markets … too many to publish here … and they all were followed by peaks in the given commodity within twelve to eighteen months of the bottoms in commercial hedging and peaks in open interest.
Now I know that twelve to eighteen months seems like a lifetime to today’s investors, but it really isn’t that long. The current set up shouldn’t be interpreted by anyone as a signal to run out and sell all their gold and silver today … but it is definitely something to keep an eye on for the not too distant future.
Staying data driven,
Richard M. Smith, PhD
CEO & Founder, TradeStops