Has the Smart Money Turned Stupid? By Jeff Clark, Editor, Market Minute In the world of commodities trading, it’s usually best to follow the smart money. Commercial traders are the smart money. They’re the banks, institutions, and merchants that have a vested interest in the underlying price of the commodity. Commercial traders are active in the futures markets where they trade contracts in an effort to hedge their risks and/or lock in a favorable price for the commodity. Commercial traders are called the “smart money” because at major turning points, these traders are always right. Speculators, on the other hand, are called the “dumb money.” Speculators almost always get it wrong. They tend to hold record-sized long positions just as the price of an asset peaks and starts to decline. And, they tend to hold record short positions right as prices bottom and start to rally. For the past month, though, the world has been flipped upside down – especially in the gold market. Near the end of January, speculators had amassed the largest long position in gold since the price of the metal hit a short-term peak last October – just before it declined 10% over the next two weeks. Also in January, commercial traders were holding their largest net-short position in over a year. Since then, gold has continued to rally. It’s up more than $200 per ounce. Speculators are making money on their long-side bets. And the smart money? Well… the smart money looks stupid. I suspect that’s temporary.
I’ve traded gold and gold stocks for more than 40 years. I haven’t made money on every trade in the sector. But I can tell you, without any hesitation, that I have made far more money trading gold stocks than trading any other sector in the market. And, much of those profits have come from following the smart money – and being patient enough for those trades to work out. In other words… the smart money was right. The smart money didn’t time the gold market bottom perfectly. But, it timed it close enough that patient traders could have made a lot of money following their lead. The CFTC Commitments of Traders report (COT) released last Friday – which showed positions as of Tuesday, February 4 – showed the “smart money” net-short gold position was over 335,000 contracts. That’s the largest net-short exposure since last October. Keep in mind, the commercial traders are usually short gold futures contracts. That makes sense, since most commercial short positions are hedges against future declines in the price of the metal. But it’s unusual for that net-short position to reach over 300,000 contracts. That’s a warning sign – which often leads to an important short-term top in the price of gold. Yet, gold has continued to press higher. I think that’s temporary. As much as I love gold for the long-term, the commercial traders are signaling a short-term top. Gold will likely be lower two or three months from now than where it is today. In other words, the smart money will be proven correct once again. Best regards and good trading, Jeff Clark
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