Prices for silver bars and gold bullion have struggled to reach new highs.

by Lakhwinder Singh Bullion seller

Prices for silver bars and gold bullion have struggled to reach new highs, and there are a number of reasons why resistance continues to hold. Even though the dollar hasn't been able to hit new lows, inflation is starting to creep in, which should boost prices for precious metals. The fact that large speculators, such as hedge funds and large traders, are already extremely long and that there do not appear to be additional incremental buyers willing to purchase a and silver coins in order to raise futures prices is another issue that is more pronounced. By looking at the Commodity Futures Trading Commission (CFTC)'s weekly commitment of the trader's report (COT), we can determine the positions hedge funds hold. What exactly is the Trader's Commitment Report? A weekly account of futures and options held by commercials, swap dealers, managed money, and small traders are provided by the CFTC in the COT report.

Commercials are regarded as producers and refiners of gold and silver, while swap dealers are investment banks that facilitate over-the-counter trades. Small traders are retail traders, while managed money is large traders or hedge funds that speculate in the precious metals market. Even though the gold bullion futures and silver bullion futures that are traded on the Chicago Mercantile Exchange (CME) only represent a small portion of the gold bars and silver coins that are traded all over the world, they do provide a valuable snapshot of the trading in precious metals.

How do the Report Categories stack up?

There are four sections in the COT report. Most of the time, commercials are protecting themselves by selling future production. For instance, a gold producer that is expected to produce 100,000 ounces of gold in six months might think about selling 1,000 futures contracts for delivery in six months to secure future prices. Because they are long the physical gold that they are producing and intend to deliver that gold into the short futures contract, the producer would probably maintain their short futures positions even if prices rise. Swap dealers assist commercials and speculators in establishing risk. Over-the-counter trades typically offset the positions they hold in futures and options on the futures market. Retail traders typically take insignificant, non-moving positions. It is essential to evaluate large traders or managed money. Managed money takes risks to make money, and the risks they take can help you figure out how the market is doing. During adverse market conditions, managed money traders are also likely to quickly exit their positions.

How to Look at the COT Position Managed money can be used as a contrarian indicator to figure out if prices are too stretched out or can't go in a certain direction. Prices struggle to maintain their current trend when positions held by managed money reach extremes. The level of futures and options held by commercials (producers) and swap dealers is also depicted on the chart of gold bullion futures prices. The amount of futures and options contracts held by managed money is depicted by the blue line. Although this isn't always the case, gold bullion futures prices struggle to continue rising when these levels reach extremes (shown by the blue arrows on the chart).In fact, managed money is the first to look for the exits when a triggering event causes a selloff, which can make the selloff even worse. This report is used by many as a contrarian indicator to determine whether managed money is overextended. Summary The overextended long position held by managed money in futures and options may be one reason why gold price and price of silver are struggling to rise. Before prices can reaccelerate higher, this could result in a prolonged liquidation.