Dumb Money Gets Super - Bearish on Silver


By Alex Roslin

Nov 12 2007 4:24PM


Yikes, what carnage Monday has brought to the precious metals. Sharp selloffs like this morning’s are one of the reasons it’s so hard to trade many commodities—the “ulcer factor” is just too high. Here’s a typical scenario: After weeks of happy upside drawing in lots of latecomer small investors to the party, a spot of bad news sparks a vicious run, and the little guy jumps ship, feeling burned. Then, the market recovers and rises again! Doesn’t it feel like the market’s raison d’être half the time is to trick and punish you?

I did away with a lot of these psychological head games I used to play with myself when I developed better risk management strategies, and then I eliminated them almost entirely when I switched to mechanically trading the markets with the Commitments of Traders reports. These are the free government reports issued weekly by the U.S. Commodity Futures Trading Commission, which detail futures and options positions in all the major markets.

The latest COTs report issued last Friday, Nov. 9, shows the small traders in silver futures and options hitting a historically bearish extreme in their net position as a percentage of the total open interest. The “dumb money” little guys have suddenly reduced their net long position to the lowest it’s been since Nov. 2005. Shortly after, silver exploded out of an 18-month trading range, nearly doubling in price over the ensuing half-year. The latest positioning of the wrong-way crowd, whom I trade opposite to in my setup for silver, has given me a renewed bullish signal for silver. This means I’m staying long iShares Silver (SLV).

Sadly, the COTs numbers show in grim relief what’s going on as the little investors try to outguess the markets—and end up losing their shirts.

In my gold setups, I didn’t get any new or renewed signals from last Friday’s data. This means all my existing signals still hold: bearish for gold itself, the HUI Gold Bugs Index and the USERX Gold Fund; and bullish for XGD Canadian Gold iUnits. (Personal disclosure: I am long XGD.) In fact, the small traders in gold futures and options are so bearish right now that they are a hair away from giving a bullish renewed signal for my XGD setup. (See table below for more specifics.) So this suggests today’s selloff is likely a temporary pause. (I should point out, however, that trading off the COTs involves lots of volatility, especially in riskier markets like commodities. So there’s no way to know for sure what the markets will really do, and my setups could very well be wrong!)

My setups for platinum (bullish), copper (bearish) and the U.S. dollar index (bearish) are also unchanged. In fact, the futures data for the U.S. dollar index seems to indicate the greenback may face continued downward pressure, as the “smart money” commercial traders continue to reduce their net long position as a percentage of the total open interest—their seventh straight such reduction since their position peaked in the Sept. 18 COTs report. Now, the commercials have a decidedly bearish tilt when compared to recent data—although I should note they’re still nowhere near registering a renewed bearish signal in my setup for the U.S. dollar index.

For more details and signals from my setups for equities, energy, the Treasuries, agriculture and currencies, visit my free blog Good luck this week.



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



















Small Traders

US Gold (USERX) 11










Gold Bugs Index (HUI) 12










TSE Gold (XGD.TO) 13









Small Traders











Copper (high grade)









Large Specs

U.S. Dollar Index




Bearish (3-Oct-06)







  1. Visit 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


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 for other disclaimer information.