Is Gold Going to $5,000? Maybe So - But Not For Long

Gold has had a wild run in the past few weeks, as the U.S. dollar index collapses to all-time lows. But is gold topping? Or is it going to going to fly to $3,000—or even $5,000, as one reader informed me today? That's the question of the minds of many analysts and traders. I think there are good reasons for caution—sorry, gold bugs!—but I'm still long iShares Silver Trust (SLV) and gold stocks (Canadian Gold iUnits, symbol XGD, traded in Toronto). At least for now.

Both trades are based on fading the small traders in gold and silver, as reported in the free Commitments of Traders data issued weekly by the Commodity Futures Trading Commission. I've developed a system to trade opposite to the "dumb money" small traders when they hit specific extremes of bullishness and bearishness in their net futures and options positions. Last May, the gold small traders hit a bearish extreme that gave me a buy signal for XGD. And in July, the silver small traders followed suit with a similarly bearish position—giving me a buy for SLV.

Where do these guys stand today? They're still quite gloomy on both gold and silver. So I'm still long. Meanwhile, my trading setup for the U.S. dollar index has been bearish since last October 2006—so that should also support higher precious metals prices.

However, dark clouds for the precious metals are forming elsewhere in the COTs universe. Commercial traders in gold futures and options built massive net short position in late September that gave me a sell signal for gold itself, as well as the HUI Gold Bugs Index. My historic testing found that the best way to trade gold and HUI was by going long when the commercial traders were two standard deviations or more above their 18-week moving average and going short when the commercials were two standard deviations or more below. These setups are now short.

Don't hate me, gold bugs! The good times can't last forever.