dumb money dumps gold

Dumb Money Dumps Gold

By Alex Roslin

Nov 19 2007 10:12AM

www.cotstimer.blogspot.com



Are we having fun yet? The precious metals markets went a little nuts last week, didn’t they? Down, up, down. Make up your mind already.

Alas, the latest Commitments of Traders report issued Nov. 16 was its usual stoic self amid the insanity. This is the data issued free each week by the U.S. Commodity Futures Trading Commission. It tells us what the major players are up to in the futures and options markets.

Turns out the “dumb money� small traders in gold derivatives have thrown in the towel. The latest data shows their net long position falling to a bearish extreme as a percentage of the total open interest in gold futures and options.

What does that mean in layperson’s terms? The folks who tend to be positioned the wrong way in the markets believe gold has topped, and they’re selling it. That means my system based on trading opposite to the small traders in gold has just flashed a renewed bullish signal for Canadian Gold iUnits (symbol XGD). (See the table below for more details.) Personal disclosure: I’ve been long XGD since this setup flipped to bullish back in May. I found in my research on the past COTs data that the best way to trade XGD was to fade the gold small traders.

However, not all markets work the same. My research also found it was best to trade on the same side as the “smart money� gold commercial traders—these would be the gold miners—for bullion itself as well as the HUI Gold Bugs Index and USERX U.S. Gold Fund. That’s just the way this fascinating data works.

And these three latter setups flipped to bearish in the Sept. 25 COTs report due to extreme pessimism on the part of the commercial traders. Since September, the commercials have steadily reduced their large net short position to the point where my gold and HUI setups have just gone to neutral (zero) for the first time in nearly two months. Of course, the commercials are still far from actually getting to the point where they’d flip my setups to bullish.

In silver, the “dumb money� small traders have bumped up their net long position a fair amount since the previous COTs report. Now, they’re just slightly negative about silver’s prospects compared to the historic data. My silver signal remains solidly in the bullish column, where it’s been since July. (Disclosure: I’ve been long SLV iShares Silver since that signal started, too.)

The action in copper since September has been quite depressing if you happened to be a bull. Since my copper setup gave three renewed bearish signals starting in the Sept. 25 COTs report, copper is down about 15 percent. Yikes. With the latest COTs report, my copper setup still has a bearish tilt because the “dumb money� large speculators—the big investment firms and hedge funds—are still fairly bullish by historic standards. This, despite the dramatic selloff! It makes you wonder how these folks stay in business. Oh yeah, that’s right. Commissions, management fees, tax loopholes, offshore accounts. Almost forgot.

And what of the beleaguered U.S. buck? Do the COTs give any hope for the poor greenback, so crushed and unloved? No, sorry, they don’t. In fact, the “smart money� commercials in U.S. dollar index futures have again reduced their net long position—their seventh straight such move. My dollar setup, already on a bearish signal since way back in Oct. 2006—when the dollar’s latest downtrend started—now has a decidedly bearish tilt.

For more details and signals from my setups for equities, energy, the Treasuries, currencies and agriculture, visit my free blog COTsTimer.Blogspot.com. Good luck this week.

COTS SIGNALS FOR 16-NOV-07


New signal 1
Rene-wed signal 2
COTs Timer Ratio 3
Existing signal (signal date) 4
COTs system profit 5
Index profit 6
COTs vs. Index profit 7
Larg-est draw-down 8
Traders to watch 9

Gold 10
-
-
0.00
Bearish
(25-Sep-07)
351.6
174.1
202.0
11%
Commercials

Silver
-
-
-0.13
Bullish
(3-Jul-07)
880.3
241.6
364.4
17%
Small Traders

US Gold (USERX) 11
-
-
-0.05
Bearish
(25-Sep-07)
2,693.9
76.0
3545.9
28%
Commercials

Gold Bugs Index (HUI) 12
-
-
0.00
Bearish
(25-Sep-07)
2,238.6
180.3
686.4
40%
Commercials

TSE Gold (XGD.TO) 13
-
BULLISH
-1.09
Bullish
(22-May-07)
681.9
192.3
354.6
19%
Small Traders

Platinum
-
-
-0.04
Bullish
(14-Aug-07)
303.0
266.4
113.8
32%
Commercials

Copper (high grade)
-
-
0.25
Bearish
(10-Apr-07)
899.9
287.2
313.3
25%
Large Specs

U.S. Dollar Index
-
-
-0.60
Bearish (3-Oct-06)
185.8
87.2
213.1
11%
Commercials


NOTES TO TABLES

Visit COTsTimer.Blogspot.com to see how I trade new signals.


A “renewed� signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. The results in this table are based on acting only on new signals.


The COTs Timer Ratio is my reading of the bullishness or bearishness of traders from the latest COTs report. A reading of 1 or more means a buy signal for the commercial traders or a sell for the large specs and small traders. A reading of -1 or less means a sell for the commercials or a buy for the large specs and small traders. The ratio is based on the traders’ net percentage-of-open-interest position compared to the position’s moving average divided by the number of standard deviations I use for this setup.


In parentheses are the dates of the COTs report that gave this signal.


Past return using the signals of my COTs Timer system, starting from a baseline 100. This is the theoretical return from buying the security on a buy signal and shorting it on a sell signal.


Past return from buying and holding the underlying cash market, starting from a baseline of 100.


Ratio of the COTs Timer return versus the underlying market’s return.


Largest past drawdown the setup experienced during a trading signal between the entry price and the lowest price. This was not necessarily the loss at the end of the trade. I use this figure to calculate my maximum portfolio allocation for the setup based on my 2-percent risk threshold of total assets for any one trade.


The group of traders that had the best historic return in this market. My signals are given when this group reaches specific extreme levels of bullishness or bearishness. Unless otherwise noted, my system trades in the same direction as the commercials and fades the large speculators and small traders.


The gold setup trades on the same side as the commercial traders when their net percentage-of-open-interest position is two or more standard deviations from its 18-week moving average (using the combined futures-and-options data). The same setup parameters are used for the HUI Gold Bugs Index.


Signals for the U.S. Global Investors Funds U.S. Gold Fund (symbol USERX) are based on the gold COTs data.


Signals for the HUI Gold Bugs Index are based on the gold COTs data. See note 10 for more details on this setup.


Signals for the S&P/TSE Canadian Gold iUnits ETF (symbol XGD.TO) are based on the gold COTs data.
Alex Roslin