Gold tasted $1,300 late last week, a level not reached since Election Day. The taste was fleeting, at least during Friday’s Comex session where spot metal settled down 80 cents at a shade under $1,286.

A reversal day just before the weekend sent a frisson through the market technician community. There’s been no end of punditry and prediction about gold’s price trajectory over the past four months as bullion’s vacillated in a $100 range. The question facing chart watchers during such consolidation phases is this: Who ultimately wins when gold finally breaks out? Bulls or bears?

Given the way things shaped up last week, perhaps the better question to ask is this: Who’s taking the smart money position? Speculators or hedgers?

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Futures markets are venues where risk can be transferred from commercial users or producers of a commodity to speculators. Take the case of a gold producer. A producer owns the physical commodity in one form or another and looks ultimately to its sale to generate revenue. At times the market price of gold provides an adequate profit margin; at others it doesn’t. In anticipation of future production, producers can use the futures market to lock in a sale price. Selling futures short while holding a long position in physical gold insulates the producer from most of the downside price risk during the production cycle but eliminates the opportunity for a windfall profit if prices rise. That’s what’s transferred to the speculator – the chance to make a leveraged profit by correctly forecasting the future price of gold.

Federal regulators keep track of the positions held by hedgers and speculators, releasing this data weekly in the form of a Commitments of Traders report. When you look at these reports, you’ll typically see the net position held by gold producers and users is short while that of money managers (speculators) is long.What tends to vary from week to week is the size of these net positions.  

Commercial net short positions and money managers’ net long positions tend to peak near cyclical price tops. In other words, producers tend to hedge effectively by selling futures when prices are most vulnerable. Speculators, though, tend to lose near market tops. It’s for this reason that hedge trades are often referred to as “smart money.”

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This past week, the short ratio on the commercial side rose to 85.4 percent, meaning the vast majority of positions held by gold producers and users were “negative delta” or short. That’s, in fact, the highest (most negative) ratio in over a decade.

The “smart money” is tilting to the short side. We’ll find out just how smart these commercials are in the weeks to come.