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Has the Smart Money Turned Stupid?By Jeff ClarkThursday, October 8, 2009 When it comes to gold, it has always been wise to watch the "smart money."
As a group, commercial traders tend to own tons of gold just before the price of the shiny metal bottoms. And they have their biggest short positions on gold right before the price peaks.
Take a look...
 The gold price peaked almost immediately and didn't bottom until November 2008. By that time, commercial gold traders had closed out their short positions and were net long 92,000 futures contracts.
Now, 92,000 contracts may not seem like much when compared to a 250,000-contract short position. But remember, commercial traders also own the gold metal itself. So they often use futures contracts to hedge positions, meaning it's normal to see the smart money with a modest net short futures position. It's a pretty strong commitment for the smart money to be long gold AND long gold futures contracts.
Sure enough, that large commitment marked a bottom in the price of gold.
In February of this year, once again as gold approached the $1,000 level, the commercial traders amassed another large short position. And once again, gold peaked almost immediately.
Two weeks ago, the Commitment of Traders report disclosed the commercial net short position was 285,000 gold futures contracts – perhaps the largest net short position ever recorded. But look at what has happened since then...
The price of gold has gone... up.
Could it be the "smart money" gold traders are wrong at last? After years of being on the right side of the trade, are they finally going to be caught with their shorts down? Is it really going to be different this time?
Or is it possible the commercial traders haven't finished making their downside bets? Are they selling even more gold futures contracts into this week's gold breakout in anticipation of a reversal?
The Commitment of Traders report is published every Friday (you can access it on many gold websites, including www.321gold.com).
I'll be looking to see if the smart money has increased its short-side exposure – meaning the next big decline in gold's price may be just in front of us... or if commercial traders have been frightened into covering some of their short positions – meaning the smart money isn't quite so smart anymore. If that's the case, gold may be on the verge of another surge higher.
We'll know on Friday.
Best regards and good trading,
Jeff Clark
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