What does COT data reveal about gold price trends?

The currently low gold price has been primarily attributed to the strong US dollar. However, there are voices, among them Jörg Bernhard of the German investment-focused website Finanzen.net, that consider the weekly COT reports responsible for the weak gold price. The COT report – COT short for "Commitment of Traders" – provides data on , among other investments groups, the investment behaviour of futures contracts speculators, or more precisely, their current market expectations in the form of their net exposure in gold futures contracts, being the difference between an investor's long positions and short positions. Provided this data actually has an influence on the gold price, are these figures also a good indicator of its future development?

A recurring pattern for COT data with regard to the gold price

Markus Bußler from the German investor information channel "Der Aktionär TV" compared the behaviour of gold futures contracts speculators with the gold price over several years and came across a clear, repetitive pattern: every time futures contracts speculators reduced their gold exposure to a minimum due to a sharp drop in the gold price – for example at the turn of 2015/16, or 2016/17, in July 2017 and at the end of last year – gold prices moved sharply upwards. Financial expert Bußler is convinced that even in the current situation an upward movement of the gold price can be expected, provided nothing completely extraordinary happens on the financial markets or a geopolitical level. Nevertheless, Bußler warns against using the COT data as an indicator for when to buy gold, because one crucial element is missing.

No timing indicator can be derived from COT data

The knowledge that a situation when gold futures contracts are oversold will be followed by an upward movement in the gold price provides no cues for investment decisions as investors do not know when exactly this price reversal will occur and to what extent the gold price will continue to fall by then. Therefore, COT data provides reliable information on the current market sentiment, but is not suitable as a forecasting instrument.