COMEX Swap Dealers

Swap Dealers is category of Comex traders specified in the disaggregated version of the Commitments of Traders Report (CoT report) published by the Commodity Futures Trading Commission (CFTC), which represents entities that deal primarily in swaps for a commodity and use the futures markets to manage or hedge the risk associated with those swap transactions.

Swap dealers include financial institutions issuing shares of gold ETFs and hedging the sale of those shares in the futures market. Swap dealers are included into the commercial traders category in the aggregated version of the CoT report – this is why when one adds up all the positions of producers and swap dealers from the disaggregated version, they get the number for commercials from the aggregated version.

From an investment perspective, the swap dealers’ positions indicate market trends, at times, but less clearly visible than in the case of producers. As one can see in the chart below, swap dealers (red line) – similarly to producers and contrary to money managers and other reportables – are generally net short and move in the opposite direction to the gold prices – they actively buy (reducing their short positions) when the market goes down and actively sell when the market goes up (increasing their short positions). For example, swap dealers were systematically adding short contracts from mid-2008 until mid-2011, when the bull market ended. This is why investors look at swap dealers and use changes in their positions as a sentiment indicator for the gold market – swap dealers tend to be most bearish just prior to significant price tops and most bullish just prior to significant price bottoms.

Chart 1: The price of gold (yellow line, right axis, London P.M. fix) and the net position of swap dealers (purple line, left axis) from 1986 to March 8, 2016.

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