Gold is screaming higher.

Last Friday, the precious metal closed at $1,367 per ounce. That’s its highest price in two years. And it’s 30% above gold’s bottom of $1,050 per ounce last December.

[ad#Google Adsense 336×280-IA]Regular Growth Stock Wire readers might remember that I noted the “smart money” had become bullish on gold by the end of 2015.

At the time, the commercial traders’ net short interest in gold futures had fallen to less than 6,000 contracts. That was the lowest level in more than 15 years… and a good sign that the price of gold was headed higher…

You see, commercial traders are the “smart money” for gold. They’re merchants, miners, explorers, or bankers in the gold sector.

They use futures contracts to hedge their exposure to the precious metal and protect themselves from adverse downside moves.

Each week, the Commitment of Traders (COT) report shows the positions (long or short) of the largest commercial gold traders.

The short position in gold is almost always a positive number – meaning that commercial traders are usually short the metal. That makes sense since most commercial short positions are hedges against future declines in price.

For example, if a major gold producer wants to lock in a guaranteed price on its gold production, it will short gold in the futures market – thereby hedging its bet.

When gold is trading at a relatively low level and commercial traders expect it to be higher in the near future, the COT short interest often drops to less than 50,000 contracts.

On the other hand, when gold is trading at a high level and commercial traders expect the price to decrease, the COT short interest often rises to more than 150,000 contracts.

Last Friday’s COT report showed that commercial gold traders were short 316,000 contracts. That’s the highest short interest I’ve seen in the past 20 years of following this report. And based on history, it’s a short-term bearish development.

Of course, in April, I pointed out that the commercial traders’ short interest on gold had reached 195,000 contracts. That’s a relatively high level, and I suggested it was a caution sign for gold.

Since then, gold has rallied about $100 per ounce. That has some folks questioning if the smart money has turned stupid.

Probably not.

The commercial traders’ position is not an “absolute” timing indicator that marks the definitive highs and lows in the price of gold.

It’s a “ballpark” indicator. It tells us when the price of gold is approaching a turning point – when it’s in the ballpark of hitting an intermediate-term high or low.

For example, last November, the commercial traders’ net short interest dropped to 24,000 contracts. That’s a historically low position that suggested we were in the ballpark of a low in the price of gold.

If you bought gold last November at around $1,100 an ounce, you’re sitting pretty right now. An ounce of gold costs about $1,330 today. So buying gold when the commercial traders’ position suggests we’re in the ballpark of a low turned out to be a good idea.

Selling gold when we’re in the ballpark of a high is probably a good idea as well.

I am bullish on gold in the long term. I am absolutely confident the price of gold will be higher by this time next year. I am concerned, though, about the next few months.

The smart money has never had this large of a short position in gold futures contracts. That may not mark an absolute high in the price of gold. But it suggests we’re in the ballpark.

Best regards and good trading,

Jeff Clark

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Source: Growth Stock Wire