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Feb. 8, 2008 Commitment of Traders (COT) Index: Background

In this site the Commitment of Traders (COT) is tracked simply as the net short position of "commercials".

The choice of "commercials" ( market insiders i.e. market makers, Gold producers) is based on the simple concept that to ensure the normal functioning and liquidity of the market, "commercials" must take positions opposite to those of "large speculators" (outside investors, mostly institutional players). Large speculators accumulate long Gold positions, thereby pushing prices up, during "bullish" Gold moves and periodically must liquidate at least part such positions in order to take profits (mostly for capital gains distributions), thereby temporarily depressing prices. Commercials accumulate short positions against purchases by large speculators and periodically use such short positions (by "covering" them) in order to absorb the liquidations by large speculators and make these liquidations possible. By this means, orderly markets are maintained and Gold's prices are allowed to decline/rise in orderly fashion. Since the operations of commercials and large speculators comprise the bulk of futures trading and are basically complementary and symmetrical to eah other, it is possible to use data from only one category to construct a simplified COT index as a measure of the balance of buying or selling.ofGold futures.The balance could then be interpreted in terms of being bullish or bearish for Gold: increasing short positions by commercials would be bullish, whereas declining short positions would be bearish.

Historically, these alternating directions in the operations of commercials and speculators have occurred within fairly stable and consistent limits. In the chart of the COT Index these limits can be identified in the form of turning points in the ups and down of the indicator.
It is important to note that for the purposes of Charting the negative numbers normally obtained from the reported net commercials’ short positions have been inverted in order to make their direction coincide with that of Gold prices and thereby facilitate visualization of their correlation.