Jeff Clark writes: The smart money was right again.
Last October, we took a look at the commercial traders’ actions in the gold market. We noted that the so called “smart money” had amassed a net short position of more than 300,000 gold futures contracts. And the price of gold usually fell at least 10% on previous occasions when the commercial traders had gotten that short.
In October, gold was trading for $1,785 per ounce. Today, it’s down to $1,610.
We’ve gotten our 10% correction in gold. So it’s time to take another look at what the smart money is doing…
In last Friday’s Commitment of Traders (COT) Report – which includes data through last Tuesday – the commercial traders had reduced their net short position in gold futures from more than 300,000 gold futures contracts to about 160,000 contracts. That’s about half of what the net short position was last October, and it’s in line with the bottom gold has found over the past few years.
Take a look at this chart of gold…
The red circles on the chart indicate the times when commercial traders were net short more than 300,000 futures contracts. The blue circles show when the net short position fell to 165,000 contracts or less. As you can see, the blue circles occurred near important bottoms in the price of gold, just as the red circles occurred near important tops.
Remember… last Friday’s COT Report only shows the data as of last Tuesday – before gold dropped another $65 per ounce. Chances are good that the smart money closed even more of the net short position into that decline. We’ll know more when the next COT report is released this Friday.
We’ve seen gold bottom at this price before. With the smart money net short position below 165,000 contracts, it makes sense for traders to use any further dips as buying opportunities.
Yes, based on history, the price of gold could still fall even lower. Prior to 2009 and the Fed’s massive money-printing programs, gold often didn’t hit a bottom until the commercial net short position was below 100,000 contracts. So it’s probably not time to go “all in” in the gold market just yet.
But as we saw in October, it pays to follow the action of the commercial traders. So with the gold net short position back below 165,000 contracts – and with the price of gold down 10% in the last four months – now is a good time to start adding to your gold holdings.