Commercial Traders

Gold commercials (hedgers) is a category of traders specified in the Commitments of Traders Report (CoT report) which represents entities involved in the production, processing or merchandising of gold.

Commercial and non-commercial traders are the classifications used by Commodity Futures Trading Commission (CFTC) to identify Comex traders that use positions in the futures market for commercial or speculative purposes. In the disaggregated version of the CoT report, commercials are divided into producers and swap dealers. These companies use the futures market to offset risk in the cash or spot market, e.g. a gold mine may short gold futures contracts to ensure that it can sell the yellow metal at a fixed price. A gold refiner, on the contrary, may long gold futures to ensure that it can purchase the bullion at a set price. Since commercials are industry experts, they are considered „smart-money”, so it is worth analyzing their positions. However, investors should remember that commercials generally use futures contracts not to speculate on the direction of the prices, but rather to hedge their exposure to gold. Since gold producers are important commercial traders, the group as a whole is usually net short.

From an investment perspective, commercial positions indicate market trends, at times. As one can see in the chart below, commercials are usually net short (they are mostly hedging). Contrary to non-commercials, their positions move in the opposite direction to the gold prices – they actively buy (reducing their short positions) when the market goes down and actively sell when the market goes up (increasing their short positions). For example, commercials were systematically adding short contracts during the 2000s bull market. This is why gold investors monitor gold commercial traders' positions and use the changes in their positions as a sentiment indicator in the gold market – commercials tend to be most bearish just prior to significant price tops and most bullish before significant price bottoms.

Chart 1: The price of gold (yellow line, right axis, London P.M. fix) and the net position of commercials (red line, left axis) from 1986 to March 8, 2016.

The price of gold and the net position of commercials on COMEX based on the COT report

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