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Gold, Silver Shine: Is "Smart Money" Turning Bullish Again?


October 3, 2011

More turmoil in Europe over the ongoing debt crisis led investors Monday back into gold and silver ETFs. But will two-days of positive gains be enough to convince traders that a bottom is near after September’s nasty sell-off?

The SPDR Gold Trust (GLD) closed up today by 1.8% and the iShares Silver Trust (SLV) finished ahead by 2%. Miners followed stocks down: the Market Vectors Gold Miners ETF (GDX) slid 1.3% and the Global X Silver Miners ETF(SIL) fell 2%.

Meanwhile, holdings in gold ETFs rose 0.2% on Friday, the first improvement in a week, Bloomberg data showed.

“We expect physical demand to be quite decent in the coming days,” Edel Tully, an analyst at UBS, wrote in a report. “After the recent washout, gold positioning is far from extended, and this is quite a bullish signal for price strength ahead.”

Barclays, which is taking a more neutral short-term view of precious metals, agreed that demand should continue to be “healthy” ahead of this week’s national holiday in China. Such growth in consumption “remains key to cushioning the downside in forthcoming sessions,” the analysts wrote in a note to clients.

Gold for December delivery rose 2.2% to settle at $1,657.70 an ounce on the Comex. December silver, the most active contract, increased 2.4% to finish at $30.80 an ounce.

Today, CME Group (CME) said it was increasing to $500 million the amount of physical gold its U.S. clearing members can post as collateral for margin requirements. The requirement had been $200 million.

Several analysts today also came out with reviews of the latest Commitment of Traders report from the government. The statistics show different types of activities in various futures markets. As noted earlier, such institutional-sized investors continued to sell gold and silver in the latest week.

But in a breakdown of those numbers today, independent analyst Jordan Roy-Byrne pointed out that such buying sentiment seems to be waning. Those “commercial” traders, often referred to as the “smart money,” have reduced their short positions nearly in half over the past few months, he says.

Roy-Byrne wrote:

“The commercials (the smart money, the end users and producers) are positioned more bullish than any other time in the past two years. This is another way of saying the speculative long position is at a two year low. Meanwhile, open interest is 28% off its high and close to a two year low.”

In silver futures, such commercial traders are net short just 24,000 contracts — the lowest level since December 2008, he added. Another bullish sign for silver traders: open interest is 35% off its high and at its lowest point since mid-2009.

One rival for safe-haven shopping among precious metals, however, is the U.S. dollar. And that kept building steam today. In after-hours, the PowerShares U.S. Dollar Index (UUP) was most recently up 1%.