Keeping an eye on the gold COT report

Sep 122009
 

The Commitment of  Traders (COT) report is released every Friday for data reported as of the previous Tuesday. It gives market participants a lot of information about those who trade futures contracts. The report makes public the long and short positions for commercial traders, large traders , and small traders.

I look at the COT report every Friday. I’m most interested in the net long or short positions of commercial traders. They’re the big boys. They’re the ones who can move markets and they’re the ones with the best information. Let’s call them the smart money.

If you subtract the number of short positions from the number of long positions you will get a positive or negative number. If there are more longs than shorts the number will be positive. If there are more shorts than longs the number will be negative. If the number is positive the smart money is net long. If the number is negative the smart money is net short.

It has been my experience from years of studying the COT reports that when the smart money has the most extreme net long or the least net short position in a market that they have had in a while (I use the last 18 months) it is a bullish sign. It means that commercial traders think the price is relatively low and they don’t see a need to sell futures. Or, depending on the market, they may see an opportunity to buy futures. So they have reduced their short positions or increased their long positions in the futures market.

Conversely, when the smart money has the most extreme net short position (or least net long) they have had in the last 18 months it could be a bearish sign. Commercial traders see the price as high and are increasing short positions. In other words, they are hedging by locking  in higher prices.

The reason I’m bringing all this up right now is the COT report for gold this week is a real eye-opener.  Here is the part that got my attention…

cot gold 9-8-09

As of Tuesday, September 8 (released on Friday, September 11) commercial traders of gold futures are long 84,842 contracts. They are short 355,639 contracts. Therefore, they are net short 270,797 contracts. It’s an increase of 54,089 shorts from the previous week.

270,797 net shorts is a huge number. In fact, according to my brief review of the historical data, it’s the largest commercial net short position in the history of the gold futures contract. It’s sending us a signal that the smart money thinks gold is getting pricey. Therefore, they want to lock in higher prices by greatly increasing their selling of gold futures contracts. It could be an important bearish signal.

However, it has been my experience — especially with gold and silver — that when commercial traders have an extreme bullish position (more longs in relation to shorts) it is a much more reliable signal than when commercials have an extreme bearish position (more shorts in relation to longs).  I have seen commercial traders have big net short positions in precious metals and the price just keeps going up for a long time. It happened in 2006. It also happened in 2007.

So it’s just a cautionary sign. The prudent thing to do is if you own gold, gold ETF’s, or gold mining stocks, stick with your original plan. There is no question that the primary trend is telling us that gold is in a bull market. But if you don’t already own gold, right now may not be the best time to rush in and buy.

$1,000 gold: Is the third time a charm?

Sep 082009
 

Gold is trading over $1,000 an ounce in early morning trading. It’s the third time since March of 2008 that it has reached that  level. The first two times $1,000 proved to be a tough ceiling to break through and gold sold off significantly.

This time? Like everybody else, I haven’t the slightest idea.  But I think a breakout has a good chance of it sticking this time, even if it has a modest pullback first. If so, $1,000 could become the new floor rather than the ceiling.

Update: Bespoke makes a couple of good points. If gold manages to hang on to today’s gains it will be an all-time closing high. Also, this move above $1,000 is getting a lot less attention than the two previous attempts, which makes this quote appropriate..

They say a watched pot never boils, but once you take your eye off of it…

Indeed.

Glittering gold

Sep 052009
 

Chart

Gold was the star performer this week and attracted the usual attention that anything receives when it makes a big move. And as I noted in a previous post, the action began on Wednesday. There was another advance on Thursday. There was a minor attempt at a pullback on Friday, but by the end of the day the metal was back close to its highs for the week.

So what now?

Gold made its all-time high in March of 2008. It then got caught up in the wholesale liquidation of assets that affected most markets for the remaining of last year. It made a rally attempt at the high in February of this year that failed. That failure is understandable since it was a “v-shaped” rally off the low made in the latter part of 2008. V-shaped rallies often fail.

Now it appears to be heading for another test of the all-time high. But I think this one holds much more promise than the February rally. It’s not v-shaped. Gold has been moving sideways all summer. So it has formed a nice base. The breakout this week came out of that base. It’s been my experience that breakouts out of a sideways pattern have much more potential for a sustained move than what we saw in February.  It also moved up on good volume even though it was a slow week before a major holiday.

All that is good for gold. However, we won’t know if this rally is for real until it gets back to the March ’08 high (just over 100 for the gold ETF, GLD). If it clears the high on good volume and stays above it there is nothing to keep it from moving much higher. But that’s still a big “IF.”

I think there are two reasonable strategies for those who own gold (I’m talking about the liquid forms of owning gold, like GLD, not the physical metal with high transaction costs). One is to just enjoy the ride as long as it lasts, with your previously planned exit strategy in place. The other would be to take a little off the table on this rally — holding on to the rest of the position — and wait and see if gold does make new all-time highs.

If you don’t own gold, but you would like to, you may very well get another chance to buy it. Healthy, long-lasting breakouts will usually give you another chance to buy on a pullback closer to the breakout area.

But you shouldn’t even be making these decisions after the fact. You should already have a plan before you enter into a position. You should already have a system, an exit strategy, a positions sizing strategy — all the things we will be talking about at Grail Investing.

I’m merely walking you through the thought process of one experienced investor.

What do you believe?

Sep 042009
 

ChartDid you know you can’t trade the markets? It’s impossible.

That’s not an original thought, by the way.  In fact, I’ve never had an original thought in my life. Everything I know I’ve learned from someone else. I learned that you can’t trade the markets from Dr. Van Tharp, the author of several books on investing and trading.

And in every one of his books that I’ve read he makes the point that you can’t trade the markets, you can only trade your beliefs about the market. At first that idea didn’t mean much to me. And then it finally hit me that the fact that it’s impossible to trade anything other than your beliefs about the market is a profound idea. One that can lead to consistent profits.

For example, do you believe you need to be right when you make a trade or investment in order to make money? If so, why do you believe that? Would you rather be right or make money? If you would rather make money, you need to get rid of you belief that you need to be right.

Does it bother you to take a loss? Why? Do you know of any significantly profitable method of investing or trading that doesn’t involve losses? Let me answer that for you — you don’t. That being the case, why do losses bother you?

Winners in this business get to a point where losses don’t affect them at all. They know if they trade long enough at some point they’re going to take 10 or 20 losses in a row, but — as long as they have a methodology that gives them an edge and as long as they size positions properly — they’ll still be profitable.

So examine your beliefs. They may be holding you back.

10,000 hours to greatness

Sep 032009
 

I’ll begin touching on what it takes to be a successful investor. Very lightly at first, but gradually getting much more in depth.

Success in this business begins with a commitment. In Malcolm Gladwell’s book, Outliers, the second chapter is about  what he calls the 10,000-hour rule. His conclusion is it takes 10,000 hours of practice to become really great at most things worth pursuing.

From This Is Your Brain On Music, by Daniel J. Levitin…

“The emerging picture…is that ten thousand hours of practice is required to achieve the level of mastery associated with being a world-class expert—in anything. In study after study, of composers, basketball players, fiction writers, ice skaters, concert pianists, chess players, master criminals, and what have you, this number comes up again and again.”

The BEATLES Portrait by DamyanGladwell cites several examples of the 10,000-hour rule. One is the Beatles. Before they were rich and famous the Beatles performed live about about 1,200 times. Sometimes they performed eight hours a day, seven days a week. They started out about as good as you and me and evolved into something extraordinary. I think it’s safe they put in their 10,000 hours.

Many say that Hall-of-Famer Ted Williams is the best hitter that ever played the game of baseball. He used to bristle when someone would call him a “natural.” His retort was he only became a natural after swinging a bat 200 times a day, every day,  for years.

I know I have over 10,000 hours invested in the markets when you consider everything  I’ve done over the years related to trading and investing. The good news is I’m slow. I think it can be done in a much shorter period of time. But the specific number of hours is not the point. The point is, just like becoming a master at anything, you have to put in the work. You must be committed.

I’ll write a lot more about commitment in the future because it’s been my observation that most people who fail in this business never gave themselves a chance to succeed. They were never really committed in the first place.

There is a tendency to think you can read a financial book or two. Maybe subscribe to a few blogs. Make a few paper trades. And, presto, you’re good to go. Unfortunately, it doesn’t work that way. You have to commit your time and go through all the steps — steps that most people never even think about.

However, you very well may find it’s a labor of love. You would be hard pressed to find an endeavor that offers as much intellectual and emotional satisfaction as the “money business.” It’s fascinating and a lot of fun. If it gets in your blood, it won’t seem like work.

So you might as well get started. An hour today and you only have 9,999 hours to go :-)

Money on the sidelines… yawn

Sep 032009
 

Have you ever heard those who are trying to make a bullish argument say “there’s a lot of money on the sidelines?”

Well, how about this…

“There’s a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched (sic).” Economists point out that banks and insurance companies “never before had so much money lying idle.”
-August 28:, 1930

Let’s chalk it up to there’s nothing new under the sun.

HT: The Big Picture

Smells like gold spirit

Sep 022009
 

A rather spirited performance by gold today, huh?

Chart

Big move.  Big volume. Breaking out of a long sideways pattern. Entering a period of seasonal strength. What’s there not to like? As the old Wall Street adage goes, there’s always a bull market somewhere.

Where does it go from here? Ah, that would be predicting. I don’t do that. I can’t predict a future that doesn’t exist.

You go with what’s moving. You set your stops. You size your position properly. And you let it go as far as it wants to go. We shall see.

Lo!

Sep 012009
 

I happen to have the History Channel on while I’m writing this and I learned something new. The first ever message sent on the Internet was…

“Lo!”

You know, as in “lo and behold.” So since this site is a  new venture I thought “Lo” might be an appropriate subject title for the first post.

If you haven’t had a chance to do so yet go over to the home page and sign up for the free Grail Newsletter. It will give you a good idea of what we believe in as far as the financial world is concerned.

I’ll be back later.  Until then… Lo!

© 2011 Grail Investing Suffusion theme by Sayontan Sinha