Gold rallied to its highest point ever two weeks ago.

The price of the shiny yellow metal topped $2,050 per ounce. And, in doing so, prompted cheers of “it’s a new bull market for gold” from long-suffering gold bugs (like me) who’ve waited for this day for a very long time.

But while gold was rallying – and the public was finally turning bullish on the metal – the smart money was turning cautious…

Commercial traders are the “smart money” for gold.

They’re the merchants, miners, explorers, and bankers in the gold sector. They use futures contracts to hedge their exposure to the precious metal and protect themselves against adverse downside moves.

For example, if a major gold producer wants to lock in a guaranteed price on its gold production, then it’ll short gold in the futures market – thereby hedging its bet.

Each week, the CFTC Commitment of Traders (COT) report shows the positions (long and short) of the largest commercial gold traders.

The short position in gold is almost always a positive number – meaning that commercial traders are usually short gold futures contracts. That makes sense, since most commercial short positions are hedges against a future decline in price.

When gold is at a relatively low level and commercial traders expect it to be higher in the near future, the COT short interest often drops to less than 200,000 contracts.

That’s what happened in late January, when gold dipped below $1,800 per ounce, and the commercial traders’ net short position fell to 165,000 contracts. That was the lowest net-short position in over a year.

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The smart money wasn’t too concerned about a further decline in the price of gold. They weren’t looking to hedge their bets. They wanted to profit on an upside move.

When gold is trading at a relatively high level and commercial traders expect the price to decrease, the COT net short interest often rises to more than 300,000 contracts.

Last Friday’s COT report showed that commercial traders were net short 352,000 contracts. That’s the largest net-short position of the past year.

The last time the smart money was this cautious was last June. Back then, gold was trading for $1,900 per ounce. It dropped $150 over the next four weeks.

Historically, when the commercial traders’ net-short position gets this high, the price of gold tends to suffer in the short term.

That doesn’t mean investors should sell all their gold, or that traders should build up short positions. The long-term outlook for gold remains bullish.

But, folks should be careful chasing the price of gold higher in the current environment.

We’ll likely have a chance to buy it a bit cheaper several weeks from now.

Best regards and good trading,


Jeff Clark

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