Contrary to popular opinion, emotions and sentiment do not move stocks or commodities prices. The only thing that moves prices is buying/selling pressure resulting from capital flowing in and out of the particular security. In other words, that which controls the most capital in a security controls the price of the security. Therefore, rather than simply just following fundamentals and technical signs, I have discovered that learning what the big money players are doing can be a major key for successful trading. 

#-ad_banner-#Now, I am not talking about inside information or anything illegal. In fact, the big players in the stock and commodity markets are required to reveal their holdings to the public. This information can be a powerful tool in determining whether to buy or sell a particular security. When it comes to stocks, all big money players (meaning any hedge fund or money management firms that have over $100 million) need to report their holdings quarterly to the SEC on Form 13-F. By studying these filings, traders can determine what is being accumulated or sold over time by those who really move the markets. 

And those who follow their moves could possibly score big gains.

When it comes to commodities, the Commodity Futures Trading Commission publishes a weekly report known as Commitment of Traders, or COT report for short. A new report is issued every Friday at 3:30 p.m. EST, and it shows the positions of traders on previous Tuesday. Traders are divided by size, therefore it’s easy to determine where the big money is going. 

Just this week I noticed a fascinating inverse correlation between the COT reports, large money manager positions and the price of gold. To put it simply, the big money is accumulating gold while the price is dropping.  

Long positions increased 1.3% to 99,684 contracts in gold. Net long positions on gold increased for the third week as of June 18, representing the largest increase since February. In addition, gold holdings jumped to a six-week high as of June 12. 

Out of the 224 hedge funds and large money managers I track, 153 initiated or added to their positions in the SPDR Gold Shares (NYSE: GLD) ETF. With the large players accumulating the precious metal, why has it sold off sharply in the last few days? 

Truth is, I don’t know for certain. It could be a sovereign fund taking profits or a lull in demand from India. However, the pullback is most likely a reaction to the Federal Reserve ramping up Operation Twist. Therefore, the pullback will likely be short-term. 

With the majority of the large players holding long positions, I view this pullback as the perfect time to buy the GLD ETF. 

GLD allows stock investors to participate in gold’s price movements. Launched in 2004, it is tied to a “gold trust” that houses gold with a value of over $16 billion. This huge quantity of physical gold is stored in London at the vaults of HSBC bank in the form of 400oz London Gold Delivery Bars. 

Each share of GLD represents 1/10 of an ounce of Bullion. This makes it easy to calculate the value of each share if you know the price of gold. For example, if gold is trading at $1,500 per ounce, each share of GLD will trade at $150. 

Risks to Consider: It’s important to remember that gold is a commodity like any other. It is extremely sensitive to central bank policy and worldwide economic conditions. Even though it appears that the big money players are accumulating gold right now, making this pull back a great buying opportunity, things can change quickly in the gold market. Nations and sovereign funds can rapidly turn the tables on even the largest gold hedge funds. Therefore, it’s critical to have stops and position size for risk when trading gold in any form.

Action to Take –> GLD looks like a solid buy here. I think this pullback will be short lived because of the reasons I mentioned earlier, and traders who get in now stand to make a tidy profit. 

Even though GLD is below its 50 and 200-day simple moving average, solid resistance exists at $148. My plan would be to begin to accumulate shares now in the $152 range and average in to $148, should GLD continue to fall. $147 would be my stop level. With the heavy big-money accumulation, I expect GLD to be trading at or above $162 by the end of 2012.