As Precious Metals continued to sink last week we saw expected further Fund shorting and Commercial buying. On a 18month Relative Basis Comms now score 100% and Funds are max bearish at 0%. The 5yr score is 99% for Comms and 0% for Funds - so we are at true extremes in positioning.
There has been quite a bit of chatter on blogs/social media with how bullish the Negative Fund position is for price - but does this really hold true when we analyze the data?
The first thing we'd note is that whenever you see/hear that sentiment is at a "all time" extreme, that should basically be thrown out as a data point - We want to eliminate the largest and smallest values so as not to have a few data points skew our results.
So in order to understand price performance given participant positioning, we must do so on a Relative basis which is why we Score activity on a 18month + then 5year basis. Once we have these scores we can then measure price distribution given the setup.
Regarding extremely negative Fund positioning, we have seen scores of 5% or lower 52 times going back to 2008. 20 days forward the average max price move was $60 vs average decline of $55 - While this does offer 11:10 odds and a slight improvement over baseline of 1:1, we really don't have much edge here.
The 70th percentile movements 20 days forward are 24 up vs (21) down or 12:11 odds - again, a shade over coin flip odds.
For Bullish Commercial positioning we have seen 95+ readings 5 times this year and the 70th percentile results 20days forward are:
Datetime 20D Max Mvmt 20D Min Mvmt
7/17/2018 8.00 (36.00)
7/24/2018 9.80 (64.10)
7/31/2018 0.00 (62.30)
8/7/2018 6.80 (48.20)
8/14/2018 (4.90) (31.60)
So the moral of the story here is twofold:
1 - COT or other sentiment readings are setup tools only, and shouldn't trigger a entry in and of itself.
2 - When the market is in panic mode due to some extreme fundamental reasons such as trade war and collapsing EM currencies, statistical data and reversion to mean go out the window! - For all of the sentiment indicators calling for bottoms, we have to ask, has there ever been instances we can measure where the fundamental backdrop is the same as today? i.e. crashing Yuan & INR & Lira during trade tensions? The answer is no.
Due to the collapsing currencies in countries where most of the physical gold buying takes place, they are simply not seeing the price sale we are seeing in USD - So there is no rush to buy.
Final Thoughts
We are approaching the favorable seasonal period for Gold, and this is occuring with a $200 price sale and a extremely stretched Fund short position - So you very well may see a snapback rally - but, the technical damage has been done, and continued EM weakness can continue to press prices lower.
Traders would be wise to stay patient and wait for some constructive price action before entering. If you are buying Gold here, we'd hedge this 4 months out with ATM puts. Gold simply has not performed in USD terms during this EM turbulence, so a gold bet here is really a bet on a EM rally.