Why This Precious Metal is Set to Rally

The smart money is turning bullish on gold.

Of course, gold hasn’t done much of anything over the past five months. It has been stuck in a trading range between $1,920 and $2,050 an ounce. It closed Friday at $1,940.

As a result of this lethargic action, traders have moved on to other assets.

Small investors have almost no interest in owning the metal. And large investors have their smallest exposure to gold futures contracts since the shiny, yellow metal bottomed in March near $1,825 an ounce.

There is, however, one group of gold investors that is buying gold – the commercial traders.

 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, 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 March when gold was trading near $1,800 per ounce, and the commercial traders’ net-short position fell to 115,000 contracts. That was the lowest net-short position since the previous November – which also preceded a big rally in the metal.

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. And they got that move as gold blasted above $2,000 an ounce in April.

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, however, the COT report showed the “smart money” short interest had fallen to just 80,000 contracts. That’s the smallest net-short position since last November – just before gold rallied $300 in three months.

Historically, when the commercial traders’ net-short position gets this low, the price of gold tends to rally.

Traders should view the lethargic action in the price of gold over the last five months as an opportunity to buy.

That’s what the smart money is doing. And based on their history, there’s a good chance gold will be much higher in the months to come.

Best regards and good trading,

Jeff Clark

Have you been buying gold this year?

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