Gold Short Position For Banks Reaches All-Time Record

As veterans of the gold and silver markets are already well aware, the prices of the metals are set on the COMEX, where gold and silver contracts are traded, and those commodities are priced based on that activity. Which can often be divorced from what’s happening in the actual physical market.

Now if that doesn’t sound to you like the ultimate best way to set the system up, I can understand. But given that this is the world we live in, there is one metric that just reached an all-time high that’s worth taking a look at.  

Because the latest COT report released by the CFTC shows that the collective short position for the market making banks in gold just reached a record high last week of 252,511 contracts.

(the green line in the highlighted box represents the bank short position, with the lower the line goes representing the more short the banks are)

Why that’s relevant, is that the bank short position has been one of the more consistent indicators of shorter-term price movement over the past 2 decades.

Typically, as the price rises, the bank short position increases. Then when that short position gets bigger, it often precedes a price decline. 

And as the gold price has continued to reach new all-time highs this year, the banks have just set a new record for their largest net short position since the data has been collected.

Now keep in mind that this isn’t an absolute. 

The banks did have one of their larger short positions in gold back in 2020 as the price was rising from $1,450 up to just below $1,700. The price did then fall in the infamous crash of 2020 as COVID broke out (and the banks bought back a lot of those short contracts), before then soaring to over $2,000 per ounce for the first time later that summer.

The bank positioning in silver is also at the extreme end of the spectrum, as the banks are currently short 36,682 contracts.

(again, the green line in the highlighted box represents the bank short position, with the lower the line goes representing the more short the banks are)

This is a reduction from the 43,187 contracts they were short in late July before the price dropped from $32 to $27 by early August. Prior to that, the record bank short position in silver came in July of 2016 at a level of at 45,095 contracts. 

Which happened after the price had rallied from $14 to $21 in the first half of the year. Then after the banks accumulated a record short position, the price fell back down to $16 by the end of the year.

So where does that ultimately leave us?

It suggests that the probability of a correction has increased.

Of course there is also the possibility that the banks are overrun by the physical market. And we have seen some short covering by the banks this year, even at higher prices during a few points in this year’s rally.

Yet perhaps a better way of phrasing the situation is to say that there’s an increased probability of a somewhat binary outcome. 

Where we could well see that correction. Yet there’s also the possibility that it goes the other way, and the banks start to cover shorts at higher prices. Which could drive the price even higher, and leave the banks with large losses, similar to what happened in 2020.

This is possible, especially if the central banks continue to accumulate gold at record levels. And even more so if the BRICS do make a formal announcement about their reported plans for a settlement currency that involves a gold-backing at their upcoming meeting in October.

Ultimately, while the bank short position isn’t a perfect indicator (does such a thing truly exist in the markets?), it does indicate that there’s pressure building. 

So be on the watch for the resolution, likely sooner than later.