Investigating Alleged Smart Money Positions in Gold


What if anything does does the futures position of commercial hedgers say about the price of gold?

Tom McClellan says "Gold COT Data Call for More of a Drop"

McClellan claims "The commercial traders are generally speaking the smart-money, and when they get to a big skewed position it usually pays to bet with them, at least in the long run."

He also notes "their current big net short position is a pretty compelling message that gold prices are too high at the moment, and that an appropriate adjustment is coming."

McClellan objected to my use of his chart. But the same data is available in many places.

So rather than rebut McClellan's statements with his chart I replaced his chart with one from [Barchart](*0/technical-chart?sym=GCG20&data=MN&density=X&pricesOn=1&indicators=COTLC(13369344,26112,153%29;COTDLC(13369344,26112,153,16750848%29&studyheight=100&height=375&width=1060)).

The "long run" shows gold blasted higher with smart money shorts most of the way.

Moreover, gold collapsed from roughly $1600 to roughly $1100 with relatively low "smart money" short positions.

Understanding Miners

The miners sell their output via futures. There is nothing particularly smart about this alleged smart money. Miners mine gold and sell it. It's what they do.

Understanding Commercial Traders

McClellan fails to point out that commercial traders also include the broker dealers like JPMorgan. Those commercial traders take the other side of bets put on by hedge funds and small traders.

Although they have been proven to be manipulators, it's important to note that gold rose from $250 to over $1900 with the allegedly smart commercials short the entire way.

The broker dealers hedgers must take the other side of trades. In the futures world, for every long there is a short. Much of the short position is involuntary and hedged.

Thus, there is nothing particularly smart about the hedgers either.

Moreover, it's important to note that the hedgers like JPM are not even net short. Rather, they will be long gold in some other way to balance they books. In general, they do not care which way gold moves but if and when they do is when the manipulation is likely to happen.

Direction and Movement

Note how gold got hammered for years without the alleged smart money being hugely short.

On the other hand, commercials being net long is rare (note the small blue box). And I did write about that at the time.

It's not so much that the smart money is particularly brilliant (again the hedgers simply take the other side of the bet and somehow hedge it).

Rather those were signals of extreme indifference by the hedge funds to own gold. Sentiment wise, it can mark great buying opportunities.

But gold was already up huge off the October 2008 low of roughly $600.

Where to From Here?

There may be a pullback or not. I don't know nor does anyone else.

Ideally, we would see long liquidation, typically misrepresented as "commercials covering their shorts", accompanied by a small price movement.

Regardless, tops are made when speculators are net long. We do not know when that will be, nor will we know the price except in hindsight.

Bottom buy points are easier to spot, but I highly doubt we will see commercials net long any time soon. Thus, spotting the next time to add may not be easy.

Gold Fundamentals

I believe the fundamentals of gold are in excellent shape as I noted in How Does Gold React to Interest Rate Policy?

So, be my guest if you want to time gold finely to alleged "smart money" positions.

Regardless, it is irksome to see reports that misrepresent what the "smart money" really is all about.


McClellan objected to my use of his chart. I believe it was fair use. But I found another chart, it was easy enough and many sites have COT data, and I also reduced my quotes of his two a couple sentences.

Mike "Mish" Shedlock

Comments (16)
No. 1-8

I completely agree with you.

Open interest spiked and remained high as the price started rising in the summer. Presumably traders running long bullion and short futures are happy to roll futures over to the next contract. I wonder if open interest would drop significantly if there were serious selling at some point.


Excellent comments. I have made the same points for years, but got tired of making it since no one pays any attention. In any case, saying "bet with the commercials" is essentially saying "bet against the speculators, which is only logical. If the large specs already have a large long position, who is going to be the buyer that pushes gold higher?

The commercial net positions are a mirror of the large trader net positions. Most of the time commercial net positions mirror the funds trading patterns but there are some important exceptions to this rule. The commercial trading pattern is to average up when the market is trending up. When the market is trending down the strategy applied by the commercials is averaging down. This strategy helps to ensure hedge protection as the market moves further against their position. They buy on weakness and sell on strength. Maximum exposure typically occurs at market turns. In very rare circumstances commercials will run out of buying/selling capacity no matter how far the prices move against them. They possess the deep pockets to stay in the trade longer than anybody else. Rare does not mean never, sometimes the commercials need to cover their positions and this can lead to significant price moves.


I’m guessing a lot of the long “supposed speculators” are the non physical ETFs investing the proceeds of investments?



"who is going to be the buyer that pushes gold higher?"

It does not take buying to push things higher


What might be interesting to know is what percent of gold miners future production is "hedged" in the futures market.


Smart traders of ramdom series, are never more than figments of the imaginations of not-so-smart starry-eyeds.


I think every human on the planet understands gold has value.

From you gang banger with gold teeth to your gold wedding rings. You won’t find one place on the planet it doesn’t. People understand value.

If gold spiked to 10k people would understand something wasn’t right. Some level must be maintained for confidence in fiat. The last thing CBs want is to answer questions.

The last time gold spiked the CBs freaked out. Why should they? Gold is a tiny market that has no real impact on our monetary system. It’s the value factor. People think paper money has value but they know gold has value.

That is the rub. It does have impact inside people’s brains. People start asking questions at some point. When they do it can happen very quickly.

Mish you won’t find a chart that correlates gold. The main reason is because the trend doesn’t exist yet. It will, but as I always say timing is the hard part.

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