By John Kosar, CMT
Much of the financial media’s focus during this low-volume, last week of summer has been on what appears to be an impending US military response in Syria, and its potential effect on asset prices. One such projection that we have been hearing a lot of lately is “buy gold before the military strike, then sell it out once the strike begins.” Basically, a buy the rumor, sell the fact strategy which, generally speaking, is how markets react to major events.
However, there is another big component in this equation that is not being discussed: assets flows and investor positioning.
The chart below is taken from our July 23rd report entitled Gold Prices Test Their First Upside Obstacle: Watch The Smart Money. It plots the weekly net position of Commercial Hedgers in the COMEX gold futures contract since 2000 in the upper panel, according to Commitments of Traders data compiled by the Commodity Futures Trading Commission (CFTC), with a corresponding weekly price chart of COMEX gold in the lower panel.
Commercials are always “net short” gold futures. They have the physical asset, and they want to hedge their downside risk to lock in a more steady profit. That is what corporations like -- steady profits, rather than big wins and big losses -- so they pay for this “profit insurance” via establishing a hedge in the futures market.
COMEX Gold & Commercial Hedgers’ Net Position
The red highlights on the chart show that, at net short just 19,041 contracts as of July 9th, these Commercials, a.k.a. the “smart money,” were collectively the least bearish (meaning most bullish) on gold prices that they had been since January 2002. Note that June 2002 became a major bottom in gold prices that preceded the price of the yellow metal more than quadrupling by late 2011.
Since July 9th, COMEX gold has already risen by $184 per troy ounce or +15%. Meanwhile, the Commercial Hedgers are now net short 67,665 contracts according to the most recent data, which indicates that they have been slowly “lifting their hedge” as gold prices have risen, but are still holding an historically bullish position in the futures market.
So, although the buy the rumor, sell the event strategy may indeed work again this time for a short term trade, more intermediate to long term oriented investors may consider keeping tabs on what the smart money is doing in the gold market on an ongoing basis. The next Commitments of Traders data update is scheduled for Friday.
John Kosar, CMT, has 30 years of experience and insight in covering the global financial markets. John spent the first half of his career on the trading floor of the Chicago futures exchanges, where he had the opportunity to learn how the US financial markets work from the inside out. This experience, early in his career, became the foundation for the unique analysis, insight and perspective that defines Asbury Research. John is frequently quoted in the financial press both in the US and abroad, and can be seen regularly on U.S. financial television. Follow him on Twitter at:@asburyresearch.
- Commodity Markets