Gold, Silver Open Interest Is Exploding

As a follow-up to yesterday's look at the exploding interest in gold, we've been asked to look at open interest in precious metals futures.

Open interest is simply the number of futures contracts that have been opened (long or short) and are still outstanding. Typically, if open interest is rising along with prices, it suggests new speculators entering the market.

Total aggregate open interest in gold and silver futures is very close to setting a new all-time record, nearing the previous peak in late 2010. But if we look at what happened the other two times that open interest exploded higher to a new record high during a gold rally, it didn't lead to an immediate drop in gold. Both times, the rally accelerated before collapsing.

The rally in 2008 lasted about 2 months while the one in 2010 lasted 9 months before the gold market caved in (silver topped about 5 months before gold in 2011). There are a lot of indicators lining up that show extreme positions in the metals at the moment, and that usually means lower prices in the medium-term. Looking at this open interest data, it suggests a similar ultimate outcome but it has been difficult to use for timing.