Bullion Boom Still Has Legs

By Alex Roslin       Jan 22 2008 2:27PM www.cotstimer.blogspot.com

What strange and twisted times. Will Bernanke save the day with his 0.75-percent Fed Funds rate cut today? Will it be enough to restart the reflation trade and buoy bullion? Or is the precious metals boom now finally busted?

As crazy as the action of the past week has been, the latest Commitments of Traders report issued last Friday remains steadfast in the signals it gives my trading system based on this fascinating government data. In fact, interestingly enough, the data shows very little variation from the previous week.

The latest report from the Commodity Futures Trading Commission shows the “dumb money” small traders in gold futures and options with a net position that is decidedly neutral by historic standards. They’re not excessively bullish, nor are they at a bearish extreme. In fact, it’s been the same way for the past three weeks. As a result, my existing bullish signal for the HUI Gold Bugs Index and iShares Canadian Global Gold Index Fund (XGD) remains good. It’s been on the same bullish signal since the May 8, 2007, COTs report. This setup is based on trading opposite to the small traders when they hit periods of excessive bullishness and bearishness.

What will flip the setup to bearish? We’re looking for it to hit a specific level of excessive bullishness that in the past has reliably suggested the markets will sell off in a big way. That still hasn’t happened. In other words, in historic terms, trader positions at this point suggest the recent selloff was likely a minor fluctuation not worth getting too excited about.

For gold itself, the best setup I found was to trade opposite to the large speculators. Since hitting a peak of bullishness in mid-October, these guys have slowly and steadily reduced their net long position as a percentage of the total open interest. As the table below shows, however, they still have a fairly bullish bias in comparison with recent trader positions. Thus, they’re nowhere near flipping back to a bearish signal.

Note that my gold setup is actually in cash since being stopped out on Dec. 28. On that day, the price of gold rose above the 12-percent stop level that I use for my gold trading setup. This stop level is based on the largest past drawdown the setup has seen historically.

In silver, the “dumb money” large specs have built a net long position that is also quite bullish by historic standards. It flirted with excessive bullishness at the end of December, but the large spec positioning has come down slightly in relative terms and the existing bullish signal thus remains good.

My other existing signals all still hold, too: bearish for gold, the U.S. dollar index, platinum and copper. Personal disclosure: I’m long XGD and iShares Silver Trust (SLV).

See my free blog COTsTimer.Blogspot.com for more details on how all this works and for my latest signals for equities, energy, currencies, Treasuries and agriculture. Good luck this week!

COTS SIGNALS FOR 18-JAN-08

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. My gold setup sells gold short when the large speculator net percentage-of-open-interest position is 1.9 or more standard deviations above its 32-week moving average. It goes long when the net position is -1 or more standard deviations below its 32-week moving average.
    
    
11. Signals for the iShares Canadian S&P/TSX Global Gold Index Fund (XGD trading in Toronto) are based on the gold COTs data.

Alex Roslin

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Disclaimer: This report isn’t meant as financial advice or a recommendation to buy or sell any security. Please do your own homework before trading. My system isn’t for everyone, involves substantial risk and has experienced large drawdowns in some past trades. Past results are no guarantee of future profits. I’m not a certified financial advisor. While I consider my information to be reliable and accurate, I make no guarantees. Please see COTsTimer.Blogspot.com for other disclaimer information.