Brad's Desktop

Real-time Monetary Inflation (last 12 months): -1.8%

Reactions to yesterday's missive ("Shootout At The 24K Corral") proved one thing: Not everybody is off on their summer holidays or, if they are, they're staying wired. (No, not wired. That's so last generation, but I'm not sure that the phrase "they're staying wirelessed" is proper.)

The article created some stir on the discussion boards as well as some blowback. Among the comments that came over the transom yesterday was this:

"Just learned of the [Money Manager Strength] Index. What do I have to do to understand it, construct it, or follow it?"

It's not complicated, really. The index merely represents the percentage of money managers' total contract positions held long. But first things first. Who are these money managers, anyway?

Among those running money in the futures markets are CFTC-registered commodity trading advisors (CTAs) and commodity pool operators (CPOs) who are the loose equivalents of registered investment advisers (RIAs) and mutual or exchange-traded fund operators on the securities side. Hedge funds—unregistered entities —are also included in the category.

Historically, money managers' net position, as a percentage of total COMEX gold open interest, is roughly equal to that of commercial entities that produce, process and market gold. Commercials use the futures markets to lay off the risks associated with their cash market activities, while money managers use futures to produce—hopefully—speculative gain for their investors.

While money managers' and commercials' net positions are about equal in size, they point in opposite directions. Commercial entities are historically net short; money managers are net long.

The depth of these net positions fluctuates over time. In the past four years, for example, the strength of money managers' net long position has wavered from 58.1 percent of total contracts held to 99.6 percent—always long, but to varying degree.

Lately, money managers' net long position has been hovering near the saturation point (100 percent), but last week, so much managed money fled the market that the percentage of total gold contracts held long dropped below 89 percent. Still a big slant to the long side, but now much closer to the four-year average of 87.9 percent.

Money Manager Strength Index Vs. Net Long COMEX Gold Position



And there you have it. The strength index is just a better indicator of potentially overbought conditions in the gold market than the absolute size of the net long position in contracts.

This week's action in price—and in the strength of money managers' long exposure—is bound to be instructive.