Jeff Clark's Market Minute

The Best Time to Buy Gold and Silver Since December 2015

The “smart money” says it’s time to buy gold and silver.

The Commitments of Traders Report (COT) is a weekly report put out by the Commodity Futures Trading Commission (CFTC) that provides investors with up-to-date information on the futures market.

And according to last week’s report, the commercial trader net-short interest in gold futures contracts was down to just about 75,000 contracts. Commercial traders are the so-called “smart money.” They’re the mining companies, the financing banks, and other institutions that have large exposure to the price of gold. They use the futures market to hedge that exposure. So, the “smart money” is almost always net-short gold futures contracts.

Being net-short simply means that you have more short positions than long positions. In this case, being net-short gold futures contracts allows commercial traders to hedge against a decline in the price of gold.

The important thing to know is that when the price of gold is high and the smart money is concerned about a potential decline, the net-short interest can rise above 300,000 contracts. That’s often a pretty good warning sign that the price of gold is nearing a peak. For example, last August when gold was trading above $1350 per ounce, the commercial trader net-short position was 340,000 contracts. Gold fell over $200 per ounce over the next four months.

When the price of gold is low and the smart money is more optimistic about the potential for higher prices, the net-short interest declines to less than 150,000 contracts (sometimes a lot less). Last December, for example, when gold was bottoming near the $1125 area, the commercial trader net-short position was just 111,000 contracts. Two months later, gold had rallied back up to about $1255.

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It’s not a perfect indicator. The commercial trader net-short position doesn’t always mark the exact bottom or top in the gold market. But, it gets pretty close. And, at the very least, it’s a good indicator to use for deciding when to add or reduce exposure to the mining sector.

Right now, with the smart money net-short position at only 75,000 contracts, it looks like a good time to add some gold exposure.

But, it’s an even better time to buy silver.

You see, the commercial trader net-short position on silver is just 23,000 contracts. That’s one of the smallest net-short positions the smart money has ever had on silver. It’s even less than when silver bottomed below $14 an ounce back in December, 2015.

And… it gets even better…

At the same times the smart money is bullish on silver, the dumb money is giving up.

Back in April, just as silver was peaking above $18.50 per ounce, small speculators had amassed a huge long position in silver futures contracts of more than 100,000 contracts.

Small speculators are the average Joes and Janes who try to trade the futures markets. They’re individual investors and traders. And, whenever they’re all lined up on one side of a trade, they’re almost always wrong.

The price of silver peaked in early-April and then dropped about 20% over the next three months.

Today, the “dumb money” is net-long fewer than 10,000 silver futures contracts. That’s the smallest exposure since December, 2015 – right at the bottom of the silver market.

So… just to recap… the smart money is even more bullish on silver than it was back at the bottom of the market in December, 2015. And, the dumb money is even more bearish.

It’s a similar story for gold.

Best regards and good trading,

Jeff Clark

P.S. I’m always happy to get reader feedback. Drop me a message by going right here.

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