Decoding Gold’s Cycles: What Retail Traders Can Learn from Commercial Traders

10 Sep 2024

By Eric Lee, Sales Director, Phillip Nova

Every week, various U.S. based market participants report their futures and options positions to the Commodity Futures Trading Commission (CFTC). This information is published every Friday in the Commitment of Traders (COT) report, which can be a valuable resource for retail traders seeking to understand market trends, especially in the commodities market like gold.

The futures market is largely dominated by institutional players, often referred to as “big whales.” By closely monitoring what these institutions are trading, retail traders can gain insights into underlying market trends, potentially improving their trading strategies.

In today’s article, we delve into the activities of a specific group of traders known as commercial traders. But who exactly are these commercial traders? This group comprises producers, merchants, processors, and end-users—essentially companies that need to buy, sell, or stockpile commodities as part of their business operations. These companies often hedge against price fluctuations in their inventories or increase their holdings when they believe the market is mispricing the commodity based on their business outlook.

When commercial traders hold long or short positions that deviate significantly from historical norms, they can tip the supply-demand balance, leading to trend reversals in prices. As shown in the COT chart from barchart.com, commercial traders are represented by the red color. Over the past 20 years, whenever this red line dropped to an extreme low, it was typically followed by a peak in gold prices and a subsequent downtrend.

Another noteworthy observation from the chart is a four-year peak-to-peak cycle in gold prices. Previous peaks occurred in 2008, 2012, 2016, and 2020. Based on this cyclical pattern and the fact that commercial traders are currently holding net-short positions in gold similar to those held in 2020, there is a possibility that gold prices could peak in the coming weeks.

Since October 2023, COMEX Gold has been trending higher, making a series of higher highs and higher lows. Traders considering shorting gold may want to wait for signals from the daily chart, such as the formation of lower lows or a break below the trendline or support level.

Both COMEX Gold Futures and Spot Gold (XAU/USD) are available for trading on Phillip Nova 2.0. If you prefer to trade Spot Gold at zero commission, you may trade the XAU/USD contract on our Phillip MetaTrader 5 platform instead.

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For more insights from Eric Lee, do not miss his upcoming webinar on Tuesday, 24 September 2024 on Navigating the Yen Carry Trade: How the Yen’s Rise is Shaping the Future of the Nikkei 225. In this strategy webinar, Eric will share how the raising of the rates for the Japanese Yen will impact the stock market and subsequently the Nikkei 225 index. Don’t miss his insights, register here.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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More Market Trends

02 Sep 2024

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova Gold Snapshot1. The stronger US Dollar undermines Gold prices as hopes of a larger FED cut

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