HOUSTON (ResourceInvestor.com) -- As expected in the last report, both gold and mining shares took a dive. While gold's downside move thus far has been modest, mining shares took a disproportionate whipping, suggesting the largest players are expecting further weakness for the metal. Momentum has also shifted in favor of the bears, but a few signs suggest bears should not get cocky. Not yet at least.
This Week's Observations: Friday, March 10, 2006
It's no secret that there is a general expectation among gold mining share investors and newsletter writers (good friends included) that the annual Prospectors and Developers Association Conference (PDAC) marks the beginning of the end of the annual "gold season." Statistically coincidental? Probably, but one wonders if that's the case, then why doesn't PDAC move its annual event to JUNE? Would that mean the expected "gold season" would last longer? (A rhetorical question.) Maybe not, but it would sure be warmer north of the U.S. border for the annual gathering.
Since the (February 25th) Gold edged up to test the previous lower high of $569.00 and even managed to best it (on a news-assist) to $571.20 before a lack of physical buying and short-term technical selling tripped sell stops on Monday (3/6). That was a small, and lately rare, technical victory for the bears in the sense that the advance failed to challenge the February peak of $575.30. Given late comments from gold pundits, market watchers and gurus immediately following the sell-down it was clear Tuesday that the general impression among the gold elite is that the bulls had then gone on defense and the bears had the ball.
We should note parenthetically that gold had a mighty nice run up on extraordinary momentum and as noted here previously a pullback was expected on both gold and mining shares. Just as news out of the Middle East forestalled a pullback getting underway the prior week, it was news that the tensions might be relaxing that set the stage for Monday's double digit drop for gold. Political and religious tensions can work both ways, it seems.
Inevitably, following major advances and especially after one good pullback, sell stops for in-the-money long traders bunched up near the highest technical trending lines, so it really didn't take much to send the price into a sell-stop triggering event (SSTE). As always following a SSTE it was the next 48 hours that gave the "short-termers" and herd-running funds all the direction they needed.
Shares in the biggest names in the mining business (with coincidentally the largest herd ownership such as AU, NEM, and ABX among others) all got buzz-sawed in herd-selling. However, the damage to the gold share indexes was not universal as a fairly large number of companies on down the mining company food chain have not met with the determined selling of the bellwethers. There were even a few counter-trending upgrades late week, such as this one for Goldcorp [NYSE:GG; TSX:G] by Research Capital.
By the end of the trading week, while at the lowest gold had just pared 7.1% off it's February peak of $575.30, at its intra-day low the HUI had been sliced a whopping 20.3% off its overheated 349.48 January peak.
Gold mining shares often move ahead of the metal and this week's action suggests that the institutional heavyweights expect lower gold prices. Just as they move ahead on the down side, the mining share indexes often firm up well ahead of a bottom for the metal.
Contrary to a strongly bearish case, however, the strong selloff in mining shares has so far not been supported by general physical selling on the major bourses or by share redemptions or selling of gold by the exchange traded funds. This should be short-term very worrisome for the bears.
Anecdotal evidence from the field suggests that individual small investors have been doing a little more selling than buying of gold bullion coins with some rotation out of gold into silver.
"We're seeing more selling of gold than buying over the last week," says Sonny Toupard, head of Royal Coins & Jewelry, a 33-year rare coin and bullion firm in Houston. "We're also seeing some rotation of investors from gold into silver, probably motivated by the new silver ETF news and the disparity of the gold/silver ratio. I think we are starting to see silver head back toward its historic relationship with gold," he added.
However, as confirmed by other bullion dealers, selling action at the local and regional levels has not been particularly aggressive, at least so far. Generally, aggressive buying or selling by individual investors is a contra-indicator.
Moving on to the weekly rundown, the bears have the ball, but there are signs they need to convert on 4th and "short," so-to-speak.
COT Changes. As of the Tuesday 3/7 cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) decreased their combined net short positions (LCNS) from the prior week by 7,110 contracts to total 149,751 contracts net short while gold metal dropped $9.80 or 1.7% Tuesday to Tuesday ($552.92).
That is a pace of only 726 contracts covered per dollar decline in gold, well below the average pace, suggesting that the LCs expect lower gold prices. However, since the Tuesday cutoff date, gold shed another $10.97 to close Friday at $541.95 and there were notable reductions in the open interest (by Thursday) of the April COMEX contract which were only partially offset by increases to the June contract open interest. If gold holds near its Friday closing price or declines further, it will be interesting to see the rate of change (ROC) of the LCNS in the next COT report.
As of the Tuesday cutoff, total COMEX gold open interest declined by 1,534 lots from 339,859 to 338,325 open contracts after having increased by 6,449 contracts the week before. Since the last report, there have only been insignificant increases in forward month contract open interest. No unusual increases in long-term forwards have surfaced, at least so far.
Gold Charts. The daily chart for spot gold shows that the price has moved below the technically popular 50-day moving average with both momentum indicators heading into bearish territory. Interestingly for the metal and as opposed to mining shares, the thrust down below the 50-day failed to trigger a sell-stop chain reaction. At least as of Friday that suggested support at the lows was equal to or greater than the sell stop pressure which is probably somewhat disconcerting to gold bears.
Please see additional commentary on the weekly chart.
Gold ETF. Since the last report (2/25), physical gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], increased by 7.76 tonnes from 343.17 to 350.93 tonnes of gold bars now held by the trust. This, while gold metal retraced $23.31 from $565.26 to $541.95 over the two week period.
While not large by GLD standards, the increase to the gold holdings while gold pulled back does put a figurative slap in the face of bearish case. Both bulls and bears should stay alert to significant changes in the gold holdings of the ETFs over the near term.
Technically speaking, the graph for GLD gapped below the 50-day moving average and then retested that break lower from below. That's bearish action if not immediately (within a week or so) corrected. Please see the GLD Graph, 6-month, daily.
See streetTRACKS Gold Trust for financial data updated daily.
Euro Gold. Since the last report two weeks ago, Euro gold gave back EUR17.03 closing at EUR452.92 (3/10) on the cash market. Even so, as seen on the dollar, euro and gold performance comparison chart, gold has managed to retain the lion's share of its purchasing power gains against the two largest fiat currencies since October 2005.
U.S. Dollar. As of the Tuesday, 3/7 COT cutoff, and over the two weeks since the last report, the combined net short positions of the large commercial traders on the NYBOT for the dollar index declined by 728 contracts from 14,941 to 14,213 contracts net short, while the index actually gained 15 basis points from 90.59 to 90.74 over the two week period. But, that doesn't mention that LC dollar bears had it going their way for much of the period (explained below). By Friday the index edged up another 9 ticks to close at 90.83.
As of Tuesday the LCs remained very strongly positioned for dollar weakness, but even the Bureau of Labor Statistics (BLS), with its large company bias could not "seasonally adjust" the February non-farm payroll job growth enough to please dollar bears or to hide a currently robust U.S. economy. One wonders if the LCs have found themselves temporarily on the wrong side of the greenback, or if they are once again just a bit early. Please see the US dollar index graph.
Gold Indexes. The fifteen companies in the AMEX Gold Bugs index strongly over-sold gold metal for the past week. At one point the HUI had retraced a whopping 20.3% off its January over-heated peak of 349.48. The fund herd hit the collective red button for a sell-stop triggering dive, as expected. However, perhaps because the index is nearing a likely area for intermediate support to form, or perhaps because bargain hunting and a lack of supportive physical metal selling failed to show, gold mining share bears holding massive bets on the down side will note that the HUI sell-down checked up Friday above an implied support line.
This action suggests that for the very short term, at least, the selloff for gold mining shares has gotten well ahead of the metal. For a closer look here is the 6-month version.
HUI:Gold Ratio: The HUI:Gold Ratio, which measures the relative performance of the HUI index and spot gold, shows mining shares outpacing the modest selloff of gold metal by a wide margin. Please see additional commentary on the graph above and on the one-year version.
Confirming that mining shares were over-sold relative to the metal over the past two weeks, the spot gold/HUI spread indicator (spot gold minus the HUI index) jumped 11.84 points from 238.51 to 249.35 as of Friday's close. The indicator is once again moving into the zone which suggests that either the shares have sold off too much or gold has sold off too little. Even at this level readings above 250 should be un-sustainable for any length of time.
Entries in the Weekly Books
On the bullish side of the gold market trading ledger, there still has been no meaningful increase to the LCNS. There has been no exodus of capital from the gold ETFs and there was a pick up late week in regional physical gold buying. The LCs remain very strongly positioned for a weaker U.S. dollar. Continued political and religious psychosis could ignite safe haven buying at any time, a kind of continuous caveat bears should keep in mind. Mining share volumes showed notable increases overall for the past week. Strong selloff in mining shares not fully reflected in the gold price. For mining shares any further significant rally attempts, if any, could be explosive as enormous short positions probably remain in place. Bullion dealers report a moderate increase in individual gold metal net selling, a slightly bullish contrary indicator. Numerous potential implied support levels directly underneath week's lows on both gold and mining shares. Pundits, market watchers and gold gurus have jumped onto the gold-bearish bandwagon in a big way, a bullish contrary indicator short term.
On the bearish side, we note of the absence of significant bullish dip buying so far, although some positive money flow into physical gold and the gold ETFs is noted. Aggressive insider selling of mining shares January and February and massive February short positions in the miners suggest the industry types required to file insider trading reports and the largest short-selling hedge fund players expected lower prices as of the most recent short position reports. Technically, gold and mining shares confirmed a lower high by moving south of their respective 50-day moving averages. Mining shares strongly outpacing the metal to the downside. Gold and mining shares are moving into a weaker part of the expected annual cycle. Political and religious tensions eased somewhat for the period. Technical momentum for both gold and mining shares has shifted to the defensive side of the playing field. LCs may have found themselves on the wrong side (short) the U.S. dollar index.
Commentary and Outlook: (Caution Flags Remain Flying)
The last said: "Right or wrong, indications are that both gold and mining shares are trying to enter the retrace part of the cycle following the highest and longest duration rush forward so far. In other words, gold has the feel of a market poised to roll over. ... Reduced trading volume for mining shares, aggressive insider selling in January and the first two weeks of February support a further contraction of the mining share indexes and most mining shares."
As expected, both the metal and mining shares did indeed move lower since that report. However, as of Friday there are signs that the selloff on mining shares was too aggressive relative to the metal. It is this report's opinion that this particular pullback for mining shares has already passed the half-way mark in percentage terms. It is time to start wrapping up research in mining companies so as to be prepared for redeployment.
Believe it or not, it is probably not too soon to begin scaling in (in measured bites with appropriate stops) on the very select group of miners (there aren't many of them yet) who have been pummeled beyond reason due to an over-sized percentage of the share float being concentrated in a few very large funds who have been selling.
And, if, repeat IF, we are so lucky as to have a quick follow-through, high-percentage, throw the baby out with the bath water-style capitulation in mining shares in the near term, that will likely be the short-window buying opportunity of the quarter.
The failure of physical gold selling to answer the mining share selloff precludes any outright bearish call by this report. Instead, caution flags remain flying for both bulls and bears. Any new positions, long or short, should only be attempted with the tightest of new-trade trailing stops.
With that said, as always, MIND YOUR STOPS.
Weekly COT comments beginning 2/7/2006: Snapshots of the weekly change in the reported positions of the Large Commercials (LCs) and how they relate to the closing gold price of that weekly period. Remember, the COT data is usually released on Friday after the bell, but it reflects the previous Tuesday's close.
2/7/06 Gold $548.28 (-$21.20 or -3.7%) LCNS 155,438 (-12,844 or -8%) Small LCNS decrease relative to large decrease for gold. Normally suggests that the LCs expect further weakness, however most of drop on COT cutoff day. Wait for confirmation in next COT report. Open interest adds 2,082 to 341,727 contracts. Some increase noted in long term forwards.
2/14/06 Gold $547.92 (-$0.36 or flat) LCNS 149,205 (-5,233 or -3%) Continued decrease to LCNS on flat gold, normally a signal favoring firmer gold. Open interest dips 3,584 to 338,143 contracts.
2/21/06 Gold $553.55 (+$5.63 or +1%) LCNS 149,953 (+748 or + 1%) Insignificant increase to LCNS on $5.63 increase for gold. Just 133 contracts per dollar advance. Total open interest declines 4,733 contracts from 338,243 to 333,410.
2/28/2006 Gold $562.72 (+$9.17 or +1.7%) LCNS 156,861 (+6,908 or +5%) Modest increase in LCNS relative to increase for gold, however this represents the largest LCNS increase for 10 reporting weeks. Caution indicated. Total open interest adds 6,449 to 339,859.
3/7/2006 Gold $552.92 (-$9.80 or -1.7%) LCNS 149,751 (-7,110 or -5%) Moderate decrease for the LCNS relative to the decrease for the metal, well under the average pace, suggesting that the LCs expected lower gold prices as of Tuesday. Normally consistent with continued weakness, however this week's decline completely erased the previous week's LCNS increase and since Tuesday gold has given up another $10.97. Caution strongly indicated for short-term gold bears. Open interest dips slightly by 1,534 lots to 328,325.
Last 4 weeks (3 reporting weeks 2/14-3/7) Gold +15.00 LCNS -546 contracts net short. Almost flat rate of change (ROC) for the 4-week period, which is inconsistent with the ideal bearish COT model. Suggests indecision on the part of the LCs. Either that or a continued lack of opportunity to add to COMEX short positions under favorable conditions.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make
