Smart Money is Leaving Gold Just as the ‘Herd’ is Jumping in

From June 2 to July 10 gold prices surged 8.7%. Commercial traders were the first to get in on this rally and the first to get out. While commercials pulled out, the ‘herd’ (or dumb money) piled in. Could this be a significant gold high?

The greater fool theory may just be playing out in the gold market.

Commercial traders (often considered the ‘smart money’) have been pulling money out of gold while investors and speculators (often considered the ‘dumb money) are piling into gold and gold ETFs.

The most popular gold ETFs are the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

The chart below plots the SPDR Gold Shares against the futures positions of commercial traders (Commitment of Traders report).

Commercials’ exposure to gold futures just dropped to the lower level since October 2012. This marked the onset of a nasty decline that accelerated in March 2013, the only other time commercials really scaled down their exposure (red lines).

Partially based on investor sentiment, the June 13 Profit Radar Report recommended to short gold (unfortunately, our sell stop was not quite triggered).

Various media outlets linked this week’s gold (and GLD, IAU) selloff with Yellen’s comments about inflation.

Those comments may have contributed to gold’s $50 drop, but it can’t be the only reason. If it were, it would imply that commercial gold traders (which started selling gold weeks ago) could actually read Yellen’s mind.

Is there another reason why gold prices sold off? Yes there is.

In fact, based on a combination of factors, the June 1 Profit Radar Report projected a gold rally to around 1,350 followed by a steep reversal.

The actual price projections, the reasons for the projection, and what’s next is discussed here:

Gold Chart at the Cusp of Breaking Down

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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