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How to Trade Gold into the End of the Year

By Jeff Clark
Tuesday, December 11, 2012

Last Tuesday, Wall Street's biggest and most influential investment banking firm shocked the financial community.  
Goldman Sachs told its clients to sell gold. The firm lowered its 12-month price target for the metal from $1,940 to $1,800 per ounce.
The news sent gold bugs scurrying for cover as gold sold off more than $20 on the day.
Folks who don't like gold – or who are looking for signs that gold's 12-year bull market is ending – can say, "See... even Goldman says it's over." 
Cynics can argue that the only reason Goldman says "sell" is because it wants to buy the metal for itself at a lower price.
In my view, this news is a gift...  
Anyone looking for a chance to buy gold at a cheaper price has to look at Goldman Sachs' announcement as an early Christmas present. The "smart money" certainly is... 
We last looked at the action of the gold commercial traders – the "smart money" – back in October. Then, gold was trading for $1,785 per ounce. And the commercial traders were net short more than 300,000 gold futures contracts.  
That's a BIG short position. And it's typical of what we've seen in the past from the smart money near short-term highs in the gold market.
But last week, the "smart money" was buying. Commercial traders took advantage of the Goldman Sachs-inspired selloff and reduced their net short position to 215,000 contracts.  
That's still a relatively large short position. But the number only reflects the data available as of last Tuesday's close. Odds are good the traders reduced their net short position even further toward the end of last week. We'll know more when the next Commitment of Traders Report comes out this Friday.
Here's the important thing...
As Goldman Sachs told its clients to sell... the "smart money" used that weakness to buy.  
We can't yet rule out a little more downside action in gold. After all, short-term bottoms in the gold market usually happen when the commercial traders' net short positions drop below 150,000 contracts.  
But the smart money's willingness to buy last week is a good sign the bottom is close.
Three months ago, I wrote that $1,675 looked like a good place to buy gold. If we get a move near that level this week, consider it a gift.
Be willing to buy.
Best regards and good trading,
Jeff Clark

Further Reading:

"As both an investor and as a short-term trader, I know that any time gold and gold stocks suffer a temporary sell-off, it's time to get on the right side of the world's biggest financial trend," Editor in Chief Brian Hunt writes. "It's time to buy." Get the full story here.
Gold is cheap today. And if it hits a bottom, it will be an incredible buying opportunity. But there's another metal that offers an even steeper discount... It's cheaper relative to gold now than it has been in the last 20 years... Learn more here.

In The Daily Crux
Market Notes
Natural gas prices break out to a six-week low.
Booze is still a great business... Fomento Econ and Diageo surge to new all-time highs.
Homebuilding/construction plays XHB and ITB top a short list of funds up 50%-plus over the past 12 months.
Luxury jeweler Tiffany sinks to a four-month low.
Market Watch
Symbol Price
S&P 500 1359.88 +0.5% +9.9%
Oil (USO) 31.93 +1.4% -18.8%
Gold (GLD) 165.88 -0.1% -3.3%
Silver (SLV) 31.21 -1.0% -4.9%
U.S. Dollar 81.18 0.0% +4.0%
Euro 1.27 -0.6% -5.6%
Volatility (^VIX) 16.41 -8.8% -51.0%
Gold Stocks (^HUI) 440.85 +0.9% -24.7%
10-Year Yield 1.57 -1.3% -22.3%

World ETFs
Symbol Price
Singapore (EWS) 12.76 +0.1% +14.5%
Taiwan (EWT) 12.69 +0.1% +5.2%
USA (SPY) 136.37 +0.5% +12.3%
S. Korea (EWY) 56.65 -0.2% +7.0%
India (IFN) 21.53 -1.1% -3.7%
S. Africa (EZA) 64.65 +1.9% +7.5%
China (FXI) 35.77 +0.2% +1.5%
Canada (EWC) 27.10 +0.6% +1.6%
Israel (ISL) 12.45 -1.0% -4.8%
Japan (EWJ) 9.06 +1.8% +1.6%
Lat.America (ILF) 40.87 +0.3% -5.1%
Russia (TRF) 13.68 +1.1% -12.6%

Sector ETFs
Symbol Price
Construction (PKB) 15.81 +1.9% +36.3%
Media (PBS) 15.66 +0.8% +22.7%
Health Care (IYH) 81.37 +0.8% +21.3%
Financials (IYF) 57.01 +0.8% +21.6%
Consumer Svcs (IYC) 83.17 +0.6% +20.2%
Water (PHO) 19.09 +1.0% +13.4%
Real Estate (IYR) 61.89 +1.1% +16.3%
Biotech (PBE) 22.19 +1.7% +16.4%
Insurance (PIC) 16.65 +0.1% +13.0%
Retail (PMR) 24.59 +1.2% +16.0%
Telecom (IYZ) 22.91 +0.1% +13.3%
Defense (PPA) 19.53 +0.6% +10.2%
Industrials (IYJ) 68.59 +0.4% +11.0%
Big Tech (QQQQ) 62.30 +0.4% +10.1%
Software (PSJ) 25.98 +1.1% +4.2%
Transportation (IYT) 86.80 -0.5% +0.8%
Utilities (XLU) 34.36 +0.9% +2.5%
Basic Mat (IYM) 63.96 +0.4% -1.6%
Semis (PSI) 13.12 +0.6% -9.3%
Nanotech (PXN) 5.44 +0.2% -14.0%
Alt. Energy (PBW) 3.53 -0.3% -34.6%

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