Hello, Reader.

The gold market’s steep selloff at the end of last week was probably just the proverbial “pause that refreshes.” After briefly touching a new all-time high of $2,483 an ounce on July 17, the gold price quickly tumbled $90 over the following 48 hours.

On a short-term basis, gold had become a little too popular for its own good. Prior to the selloff, professional money managers had accumulated their largest net position in gold in more than four years. The CFTC, a contrary indicator, suggested that gold was ripe for a downward reversal.

For those readers who may be unfamiliar with either the CFTC’s “Managed Money” data series, or with contrary indicators in general, here’s a brief primer…

The CFTC tracks the net holdings of various commodity futures and options by professional money managers. Whenever this particular group of investors is leaning hard to one side of a particular trade, it usually pays to take the other side of it. As a group, these investors are not exactly the “dumb money,” but they are certainly not the “smart money.”

They most closely resemble “flock money” because they tend to act like sheep by flocking toward the identical trade at the identical time, especially at the extremes of a particular market.

When a trade becomes “crowded” on the buy side, for example, there are very few investors left to buy into that trade and push its price higher. That’s when a reversal usually takes place.

That’s why it was noteworthy that this “flock money” had established its largest net-long position in gold futures and options since early 2020.

Coincidentally, on September 30, 2022, money managers had placed their second-largest bearish bet on gold of the last 18 years. Since that date, the gold price has soared more than 50%.

So, what now lies ahead?

Based on the Managed Money data series, the gold market is vulnerable to additional selling and downward pressure. But an entirely different data series tells a more optimistic tale.

The retail investors who buy gold ETFs have barely begun to buy into the rally. As the chart below shows, major peaks and troughs in the gold price tend to coincide closely with peaks and troughs in the volume of gold that gold-dedicated ETFs are holding.

In late 2012, for example, the gold price peaked around $1,800 an ounce, just as ETF gold holdings were peaking. Then in early 2016, the opposite scenario unfolded; the gold price tumbled to nearly $1,000 an ounce, coincident with ETF gold holdings falling to nearly half their 2012 levels.

This pattern repeats itself… until late last year. At the point the gold price started ramping higher, even though ETF gold holdings continued drifting lower.

Chinese buying explains part of this divergence. That country has been buying gold so aggressively during the last several months that the gold price moved to a new record despite little investment demand from retail investors. 

But if that barely perceptible uptick in retail buying on the far-right side of the chart gains traction, the gold price could begin setting a long series of new record highs. As that source of investment demand intensifies, the gold price could easily bust through $3,000 an ounce – and perhaps as high as $5,000.

Bottom line: My best guess is that the gold market faces short-term headwinds and downside pressure, but it will likely regain its footing thanks to resurgent long-term investment demand from both retail investors and Chinese buyers.

Now, let’s look back at what we covered here at Smart Money in the past week…

Smart Money Roundup

The Next Blockbuster Drug’s Key Ingredient Could Be AI

You know the lyric “A spoonful of sugar helps the medicine go down,” from Disney’s 1964 film Mary Poppins. Well, 60 years later, we all might as well be singing “A partnership with OpenAI helps the medicine get made.” Several medical technology and biotech companies have been leveraging tech from OpenAI, the company that famously created ChatGPT, for healthcare purposes. Click here to read more.

The “Flash Trend” That Alerted Me to NVIDIA’s Potential… Before Its Big Run

Ever since Nvidia Corp. (NVDA) broke $1,000, Louis Navellier has been telling investors that it is going to be the first company to achieve a market cap of $5 trillion. He thinks it’s going to so in a series of sharp, fast moves up – in big, fast moves that he “Flash Trends.” Learn how to identify these type of Flash Trends early by reading this Special Guest Issue here.

One of the Best Ways to Invest in AI Is… Don’t

While AI isn’t an investment trend that’s likely to let up anytime soon – and is one I will continue to follow – I do believe that one of the best ways to invest in AI may be to invest in what it isn’t. In other words, invest in the industries or assets that AI could never replace. A select few industries are so “future proof” that they deserve our attention… and a place in our portfolios. Continue reading here.

AI Chip Stocks’ Meltdown Is an Excellent Buying Opportunity

As Luke Lango says… there’s no sugarcoating it. AI chip stocks got obliterated this week. However, he believes that evidence suggests that this is a time to be greedy when others are fearful… Learn more in this Special Guest Issue.

A Look Forward

As I said in a recent Smart Money, I have been and will continue to closely follow the AI megatrend.

Although AI continues to dominate the financial news and stock market, millions of investors are in the dark about a new AI breakthrough. New research shows thousands of stocks could soon be impacted by this new breakthrough.

That’s why I’ll be participating in an urgent AI discussion along with my InvestorPlace colleagues Luke Lango and Louis Navellier this Friday.

There’s a major development unfolding in the world of AI – one that’s about to send shockwaves through the stock market. And we want to make sure you know about it.

So, keep an eye on your inbox for more information from me later throughout this week.

Regards,

Eric Fry