Investor Sentiment And Forecasting Ability

Exploring the information contained in Commodity Futures Trading Commission's (CFTC) Commitments of Traders (COT) reports, this analysis investigates the forecasting ability of investor sentiment index in three major precious metal futures markets, namely, Gold, Silver, and Platinum. A strong contemporaneous relationship between investor sentiment and market returns has been found. In specific, commercial traders' sentiment acts oppositely to the price changes while that of non-commercial and non-reporting traders positively correlated with the market returns. However, the bivariate Granger causality test shows little evidence that investor sentiment index could lead market returns. On the other hand, market returns generally lead investor sentiment. Particularly, commercial traders are trend counters while non-commercial and non-reporting traders are trend followers. Extreme traders' position also fails to display significant forecasting ability of subsequent price movements. In general, the results do not support the use of investor sentiment as an indicator to predict price movements in precious metal futures markets. Nevertheless, we find that investor sentiment could play as a signal of buying or selling and the trading system is highly profitable compared to naïve long position in all of three markets.