Caution: Gold Could Be in For a Short-Term Decline

When it comes to trading gold, it pays to watch what the commercial traders are doing.

Commercial traders are the so-called “smart money.” They’re merchants, miners, explorers, or bankers in the gold business. They use futures contracts to hedge their exposure to gold and protect themselves from adverse downside moves.

And right now, they’re piling on the protection…

[ad#Google Adsense 336×280-IA]As of last Tuesday, commercial traders were net short over 300,000 gold futures contracts.

That’s an extreme position for this group.

The commercial traders are almost always net short gold futures contracts.

After all, they’re hedging long exposure.

But the total net short position usually ranges between 150,000 and 250,000 contracts.

It has only been above 300,000 two other times in the past two years. Each time preceded a sharp move lower in the price of gold.

Take a look at this chart of gold…

The red circles on the chart indicate the times when commercial traders were net short more than 300,000 futures contracts. The gold price fell 10% in four weeks in early 2011… And it dropped 12% in four weeks last September.

So you can see why I’m a little nervous about trading gold right here.

Gold is in a long-term bull market. But bull markets are often interrupted by short-term declines. We may be on the verge of that right now – especially if gold behaves as it did when commercial traders were this short before.

(You can find out what the commercial traders are doing in gold by reading the Commitment of Traders Report every Friday off gold-trading websites like www.321gold.com.)

Remember, though… short-term declines during bull markets can make for great buying opportunities. A few weeks ago, I showed you some likely downside targets for gold.

Keep an eye on those targets, and be ready to buy as those levels approach – especially if we also see the “smart money” unwinding their short positions. A drop back toward 150,000 net short gold futures contracts would be a good sign.

Best regards and good trading,

Jeff Clark

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Source: The Growth Stock Wire