Gold News

Trading Gold with the COT

Spotting the tops and calling the lows with gold futures sentiment...
I SAW a correction in precious metals coming as early as August, writes Bob Moriarty of 321gold for Streetwise's Gold Report.
I wrote a piece early in the month I called Money Always Moves from Weak Hands into Strong Hands. I was both right and wrong. Yes, we were going to have a correction in gold and silver but I missed the top by three weeks. If I had known about a site I just discovered, I could have nailed the top in gold nearly to the day as I did with silver in 2011.
People tend to get confused with tops and bottoms in markets. Gold hit its lowest price in twenty years in August of 1999. But silver didn't hit its lowest price until late November of 2001. Silver was cheaper in nominal terms in 1993 but in inflation adjusted terms, the low for silver was late 2001. I called that too.
So which was the bottom? Was it gold in August of 1999 or silver in November of 2001? But wait, the HUI and XAU bottomed on the same day in late September of 2000. The low in metals and resource shares took over two years to complete. So is the bottom in the metals a date and time or is it a process?
Actually it's both. If you can find accurate enough data on sentiment you can forget technical analysis and fundamentals that do a poor job of calling tops and bottoms. Since gold and silver are different and the shares in gold and silver are entirely another breed, you need to understand that tops and bottoms are both a process but individual components are something that can be timed, often nearly to the day with an precise measure of sentiment.
I made my first investment in gold in 1969. I was a pilot stationed in Vietnam. I looked around me at all the money the government was spending fighting what seemed to be a pretty stupid war and realized that someone had to pay for all that and it wasn't the US taxpayers.
Johnson had put in a 10% income tax surcharge but it was a drop in the bucket compared to the cost. As an O-1 Birddog pilot, I tallied up how much I could expend in one three-hour flight just to see if I could do it. I managed to drop over $1 million (and remember, this is 1969, gold was $35 an ounce) in a single mission.
There were not a lot of gold bugs around in the late 1960s but I figured if the Dollar was going to go down, gold might go up. I started buying small amounts of gold as a hedge against inflation. I ended up selling all that gold a week too early in January of 1980.
We didn't have the internet then or even personal computers. The best source of financial information was the daily paper or the Wall Street Journal for those who could afford it. I wasn't a serious investor; I was just flying blind using Kentucky Windage.
When I left Vietnam I started college and ended up at Southern Methodist University. One of the required courses was based around a semester of reading and discussing Extraordinary Popular Delusions, the classic book about human psychology written over 175 years ago. It's a long plodding book difficult to read but eventually the reader figures out that all the author was doing was pointing out how stupid the behavior of people is. Humans fall for everything.
Once you learn that very vital piece of data, investing becomes easy. Making profitable investments has little to do with squiggles on charts or market fundamentals and everything to do with the stupidity of the mob of investors. If you can measure with precise accuracy what the mob is doing, all you have to do is to do the opposite. It's so simple that most ordinary investors never get it. They fall for the honey-baked words of every scam artist and con man peddling a popular theory no matter how daft. Those con men soon learn that if you feed people's fantasies, the punters would hurl money at them. That hasn't changed in 175 years at all.
A year ago almost exactly I said this in a piece on the positioning data collected by the CFTC for gold futures contracts:
"The Commitments of Traders numbers are more favorable for gold than they have been for 14 years, going all the way back to 2001. Silver is not quite as positive but still positive. We are perfectly positioned for a bull phase even if you believe gold and silver are in some kind of permanent bear market."
That was on the 23rd of December 2015 and gold had hit its lowest price in a half-decade one week before. By measuring the sentiment reflected in the COT number on gold, I could accurately predict a trading low in gold. You can do exactly the same thing if you understand both the importance of sentiment and what the COTs are saying.
I'm always looking for the perfect measure of sentiment in any market I trade. Gold is one of those financial instruments that the Fake Stream Media loves to bash. It often takes them years to figure out it has gone down but at bottoms they show an incredible ability to trash the wisdom of something that is about to explode. They all write using their rear view mirror and never look forward.
If you look around today you can find pieces on both Barron's and the Financial Times bad mouthing gold. Those are important signals of an impending turn. And while there is a world of bad information on the Internet well worth ignoring, there are a few sites that do understand financial markets and the data they provide. I found a wonderful article just a couple of days ago based around sentiment.
If you want to measure turns almost to the day, you need to find a source of very finely turned sentiment. When I saw this article, I knew I had found something both valuable and accurate. I did some research into the source of data for the piece and found an entirely new website to me that has a subscription to the precise sentiment in 40 different commodities that comes out every day an hour after the close of the stock market. It's called and run by Jake Bernstein with forty years' experience.
I called him and told him I wanted to do a piece about his service and needed access to his data so I could see for myself just how finely tuned it is. He sent me a password and a file showing historical data going back years.
I looked at the numbers for gold and they showed a Daily Sentiment reading of 4 on Dec. 15, 2016. I pulled up a chart of gold and sure enough, it showed a low of $1124 and change on Dec. 15, 2016. The lowest reading for DSI matched up perfectly with the low for gold.
I was already predisposed to be looking for a low in gold; after all, a 29-year low for DSI in the 21-day moving average for gold is a giant signal. So I believe Jake's service called it literally to the day. For verification of my theory, I looked at the DSI for the Dollar Index. After all, gold has traded for months as the inverse of the Dollar Index. My opinion is that way too many people are on one side of the boat on the Dollar Index and we should be looking for a top with a major high in the DSI.
The DSI for the Dollar Index peaked at a reading of 96 on Dec. 15, 2016, the same day as gold hit a reading of 4 proving one is the opposite of the other. The price of the Dollar index topped some few trading days later on the 21st of December at about 103.4. While the DSI for the Dollar Index didn't exactly mark the top in the Dollar, it was pretty close.
There are two issues readers need to be aware of with this or any other sentiment service. You can't know until afterwards if you have hit an extreme of emotion either high or low. For example, the DSI on the Dollar Index marked a reading of 92 on Nov. 24 when gold hit a reading of 5 on the same day. But that was neither the top for the Dollar nor the bottom for gold.
So when you use the data you probably should be looking for other sentiment measures to confirm the DSI. Is 5 the low for gold or could it go to 3 or even 2 or 1? That's why knowing a 29-year measure of a 21-day moving average does nail the bottom in gold. It's hard to get more negative than in 29 years of measuring even if it is possible.
The other issue with the DSI service is price. It is valuable but it's not cheap. A six-month subscription to the DSI for forty different commodities will set you back $1295. If you are a serious investor in the metals or the Dollar Index or even the stock market, you should try it. If you think investing in gold means having a couple of American Eagles in a safe deposit box, the service would probably not provide good value for you.
For those who would like to read an excellent discussion from a serious trade on the role of sentiment in investing go here.
Jake Bernstein offers a number of various options on his site. Other than the DSI, I simply cannot comment. I don't ever trade futures and I can't say if what he sells has value or not. I will say the Daily Sentiment Index is as close to the Holy Grail of investing as you will find. If you will take the time to at least understand contrarian investing you can either make a lot of money or save a lot of money by subscribing to his DSI service.
I wrote a book about the basics of investing last March I called Nobody Knows Anything. In it I discussed Extraordinary Popular Delusions at length and gave readers a short course on contrarian investing. At $14.99 it's the cheapest good financial advice you will ever get. If you haven't read it, you should.
I have no financial connection to Jake Bernstein or his company in any way. I simply don't have a dog in the fight but I really like the DSI a lot.

A former pilot in the US Marines – and the first pilot to fly between the pillars of the Eiffel Tower – Bob Moriarty launched 321gold 10 years ago as a space to present and discuss his views on the natural resources sector. Later adding 321energy to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy, Bob and his wife Barbara continue to feature articles, editorial opinion, pricing and new updates on both sectors today.

See full archive of Bob Moriarty articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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