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Gold End Run?

By Alex Roslin       Oct 9 2007 11:24AM www.cotstimer.blogspot.com

Is this fall’s wild gold bull run over? My trading setups based on the Commitments of Traders reports give an interesting picture.

Readers may recall that several of my gold-related setups flipped to bearish as of the Sept. 25 COTs report. This was because the “smart money” commercial traders had put on a massive net short futures and options position, according to data from the Commodity Futures Trading Commission.

That net short position caused my setups to flip to bearish for gold, the HUI Gold Bugs Index and USERX U.S. Gold Fund.

However, my trading setup for the XGD Canadian Gold iUnits ETF, trading in Toronto, remained in bullish mode. The reason: this setup is based on fading the gold small traders, who I consider the “dumb money” and are usually wrong at key market turns.

The gold small traders had not yet hit any kind of extremes in their bullish positioning, so I remained bullish for XGD and am still long this ETF.

Same for silver. The silver small traders still had a fairly bearish tilt, too, so I remained bullish and haven’t sold my SLV position.

After I wrote a report on that COTs data Monday, precious metals did indeed sell off sharply starting Tuesday, though they ended the week recovering some of their losses. Some readers wrote to me thanking me for the timely call. I appreciate your kind words, but the fact is the timeliness of the call was likely due at least in part to coincidence.

Trading off the COTs reports is a long-term game of maximizing probabilities. Most of the profits don’t come from such spectacular timely-to-the-day calls, but rather long-term discipline. Above all, money is made by catching the major moves in a market and controlling risk. It’s impossible to get in right at the bottom and get out right at the top each and every time, so we shouldn’t be frustrated when that doesn’t happen. Also, it’s impossible for every trade to make money, so traders and investors have to decide on appropriate position sizes that reflect the risk in each trade.

The latest COTs report for last Friday, Oct. 5, didn’t give me any new signals for the setups in the table below. I got a renewed bearish signal for copper, as large speculators have flipped to net long and mounted a highly bullish position.

So I remain bearish for gold, HUI, USERX, copper and the U.S. dollar index; and bullish XGD and silver.

So back to the question I posed at the start: Is the gold bull over? The COTs data is telling me it’s too early to tell. Two of my precious metals setups remain bullish. For all I know, the three COTs bearish signals from the Sept. 25 report just represent a short breather, and they could flip back to bullish next week.

Visit my free blog COTsTimer.Blogspot.com to see my signals in other commodities, equities, Treasuries and currencies. Good luck in your trading and investing.

COTS SIGNALS FOR 5-OCT-07

	New signal 1	Rene-wed signal 2	COTs Timer Ratio 3	Existing signal (signal date) 4	COTs system profit 5	Index profit 6	COTs vs. Index profit 7	Larg-est draw-down 8	Traders to watch 9
Gold 10	-	-	-0.89	Bearish (25-Sep-07)	351.6	174.1	202.0	11%	Commercials
Silver	-	-	-0.36	Bullish (3-Jul-07)	880.3	241.6	364.4	17%	Small Traders
US Gold (USERX) 11	-	-	-0.92	Bearish (25-Sep-07)	2,693.9	76.0	3545.9	28%	Commercials
Gold Bugs Index (HUI) 12	-	-	-0.89	Bearish (25-Sep-07)	2,238.6	180.3	686.4	40%	Commercials
TSE Gold (XGD.TO) 13	-	-	-0.06	Bullish (22-May-07)	681.9	192.3	354.6	19%	Small Traders
Copper (high grade)	-	BEARISH	1.28	Bearish (10-Apr-07)	899.9	287.2	313.3	25%	Large Specs
U.S. Dollar Index	-	-	0.41	Bearish (3-Oct-06)	185.8	87.2	213.1	11%	Commercials

NOTES TO TABLES

1. Visit COTsTimer.Blogspot.com to see how I trade new signals.
2. A “renewed” signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. The results in this table are based on acting only on new signals.
3. The COTs Timer Ratio is my reading of the bullishness or bearishness of traders from the latest COTs report. A reading of 1 or more means a buy signal for the commercial traders or a sell for the large specs and small traders. A reading of -1 or less means a sell for the commercials or a buy for the large specs and small traders. The ratio is based on the traders’ net percentage-of-open-interest position compared to the position’s moving average divided by the number of standard deviations I use for this setup.
4. In parentheses are the dates of the COTs report that gave this signal.
5. Past return using the signals of my COTs Timer system, starting from a baseline 100. This is the theoretical return from buying the security on a buy signal and shorting it on a sell signal.
6. Past return from buying and holding the underlying cash market, starting from a baseline of 100.
7. Ratio of the COTs Timer return versus the underlying market’s return.
8. Largest past drawdown the setup experienced during a trading signal between the entry price and the lowest price. This was not necessarily the loss at the end of the trade. I use this figure to calculate my maximum portfolio allocation for the setup based on my 2-percent risk threshold of total assets for any one trade.
9. The group of traders that had the best historic return in this market. My signals are given when this group reaches specific extreme levels of bullishness or bearishness. Unless otherwise noted, my system trades in the same direction as the commercials and fades the large speculators and small traders.
10. The gold setup trades on the same side as the commercial traders when their net percentage-of-open-interest position is two or more standard deviations from its 18-week moving average (using the combined futures-and-options data). The same setup parameters are used for the HUI Gold Bugs Index.
11. Signals for the U.S. Global Investors Funds U.S. Gold Fund (symbol USERX) are based on the gold COTs data.
12. Signals for the HUI Gold Bugs Index are based on the gold COTs data. See note 10 for more details on this setup.
13. Signals for the S&P/TSE Canadian Gold iUnits ETF (symbol XGD.TO) are based on the gold COTs data.

Alex Roslin