All the glitters may be gold though gold futures (NYM.GC) failed to shimmer on Friday, dropping nearly 2% and closing the week at $930.60 per oz., some $22 below the week's high. The large drop came after a similarly large gain lodged on Tuesday, sending the yellow metal on its way to crossing its 50-day moving average, an accomplishment it fulfilled on Wednesday. Friday's swoon, however, took gold back below its 50-day moving average as hedgers continued to press their bearish bets in the futures. Standing opposite gold producers is the small spec, who continues to be extremely long the currency of kings. Is this latest cross below a signal to the small fry to get out of the way of the big fish?
Q: What happens when the price of gold crosses beneath its 50-day average while small traders are extremely long and hedgers are extremely short?
A: The 11 previous completed instances have brought little luck to the little guy. Instead, Hedgers have claimed victory 100% of the time over the next 43 trading days, capturing an average decline of -3.91%. The average return hits -4.56% the next day while the statistical edge continues to improve, as measure by the Sharpe ratio, until day 47. Best go against gold, and go with the gold producers to garner some coin for one's pocket.
If you would like to see more details of this historical edge, go to www.markethistory.com
Jason Thompson is a Chicago-based speculator focusing on electronically traded derivatives and their underlying instruments.
