Has the Smart Money Turned Stupid?

Has the Smart Money Turned Stupid?
By Jeff Clark
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 numbers on this chart display the net futures contract positions of commercial gold traders. In March 2008, as gold powered above $1,000 per ounce and as mom-and-pop investors were chasing the price higher, the smart money was selling. Commercial traders were net short a total 253,000 gold futures contracts. At the time, that was one of the largest net short positions ever recorded.

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?

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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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	Last	Change	52-Wk
S&P 500	1062.98	+1.78%	-12.37%
Oil (USO)	34.51	+1.50%	-59.97%
Gold (GLD)	97.05	+0.05%	+12.02%
Silver (SLV)	15.91	+1.08%	+20.99%
U.S. Dollar	77.11	+0.26%	-0.52%
Euro	1.46	-0.40%	+0.97%
VIX	24.88	-2.85%	-28.38%
HUI	398.09	+0.10%	+20.93%
10-Year Yield	3.30%	-0.03	-0.46

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Company	Sym	Industry
Apache	APA	oil & gas drilling
Baidu	BIDU	online search
Priceline	PCLN	online travel
Everest Re	RE	insurance
CGI Group	GIB	business software
Sybase	SY	business software
Acergy	ACGY	oil & gas svcs
Endurance Spec	ENH	insurance
Apple	AAPL	computers
Prudential	PUK	insurance
Diamond Offshore	DO	oil & gas drilling
Comp Brasileira	CBD	grocery stores
iShares Silver	SLV	silver ETF
Cimarex Energy	XEC	oil & gas drilling
F5 Networks	FFIV	business software
WMS Industries	WMS	electronics
Armstrong	AWI	building materials
Coca-Cola	KO	soft drinks
Kohl's	KSS	dept stores
Alcatel-Lucent	ALU	telecom
Cerner	CERN	health IT
Crown Holdings	CCK	packaging
RenaissanceRe	RNR	insurance
Wyndham	WYN	hotels
Polycom	PLCM	telecom
Dril-Quip	DRQ	oil & gas svcs
Google	GOOG	online search
Gerdau	GGB	steel
Sterlite Industries	SLT	copper
Scripps Networks	SNI	TV shows
PartnerRe	PRE	insurance
Braskem	BAK	chemicals
Wimm-Bill-Dann	WBD	dairy products
Aspen Insurance	AHL	insurance
Silgan Holdings	SLGN	packaging
Goldman Sachs	GS	investment bank
Viacom	VIA-B	TV shows
Discover Financial	DFS	credit cards
Ross Stores	ROST	clothing stores
NET Servicos	NETC	TV shows
Transatlantic	TRH	insurance
AGL Resources	AGL	gas utilities
Encore Acquisition	EAC	oil & gas drilling
Rollins	ROL	business svcs
Allianz	AZ	insurance
Vmware	VMW	systems software
JCPenney	JCP	dept stores
DaVita	DVA	health services
Silver Wheaton	SLW	silver mining
Lazard	LAZ	asset mgmt
El Paso Pipeline	EPB	gas utilities
St. Mary Land	SM	oil & gas drilling
SPDR Gold Shares	GLD	gold ETF
British Sky	BSY	TV systems

Company	Sym	Industry
Select Medical	SEM	hospitals
First Bancorp	FBP	bank
Raser Techn	RZ	electrical equip
Amicus	FOLD	biotech

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