HOUSTON (ResourceInvestor.com) -- The big news in this week's offering of the Got Gold Report is the staggeringly high number of large commercial trader's (LCs) collective net short positions (LCNS) that evaporated over the past two commitments of traders reports (COT) issued by the Commodities Futures Trading Commission (CFTC). As gold thrice tested key technical support near U.S. $607 last week, the COMEX LCs were in the process of dumping over one-quarter of their collective reported net short positions. That was as reported on Tuesday 1/9 well in advance of the Friday upward surge for the metal. Now the LCs are net short at a level consistent with the last (October) turning low for gold. Read more about that in the COT Changes section below.
What may not be readily apparent to casual and non-technically minded observers is the potential for failed bearish technical signatures on short-term daily charts for silver, gold and mining shares, something suggested to look for in . It would not take all that much follow through to the upside over the near term for the attempted reversal now underway to become very convincing. For gold short sellers that sold into what appeared to them as a clear technical break last week it already is convincing. Got gold?
With that, let's take a look at the improving slate of indicators going into the long weekend in the U.S.
COT Changes. The Tuesday 1/9 commitments of traders report (COT) shows that the large commercials (LCs) collective combined net short positions (LCNS) plunged by a staggering 30,773 contracts or 27% from 112,447 to 81,674 contracts net short (Wednesday 1/3 to Tuesday 1/9) while gold metal dipped $14.33 or 2.3% to $613.26 for the period. The last trade on the cash market Friday printed $626.65, a bump up of $13.39 after the COT cutoff. Gold posted a net gain of $21.17 for the calendar week with $14.78 of that coming in Friday's gush higher.
Total COMEX gold open interest fell 6,003 lots to 347,491 open contracts. Long-term December '07 and beyond COMEX forwards ended the week 2,852 contracts higher at 76,501 or a fairly high 22% of open contracts.
Bulletin! The big story this week is the very big reduction in large commercial net short positions. As of Tuesday the data show the large commercials reducing their collective net short exposure by the largest amount percentage wise (-27%) since August 30, 2005 (-28% Hurricane Katrina). This, following gold's test of implied support, trading as low as $604.07 on the cash market intra-day the day before the COT cutoff.
To put this unusually large change of position in context, as gold metal fell from the Wednesday 1/3 close of $627.59 to as low as $604.07 Monday 1/8 (-$23.52 or -3.7%), then edged back up for a Tuesday COT cutoff close of $613.26, the large commercial COMEX traders covered or offset a whopping 30,773 COMEX contracts of their net short position. So as gold dipped a net $14.33 Tuesday to Tuesday the LCs reduced their net short positions for paper contracts covering about 96 tonnes of the metal.
Humorously speaking, conspiracy mavens will no doubt be asking what the LCs knew and when did they know it! Whatever,... what readers ought to focus on instead is the history of gold metal following similar large plunges in LCNS in the recent past.
Tuesday's LCNS plunged to the lowest mark since October 24, 2006 (80,509) when gold was trading in the $580s and staging for its run back on up to the $650s. The next previous plunge in LCNS over 20% occurred on August 30, 2005 on the heels of Hurricane Katrina when the LCNS dropped over 54,000 contracts (-28%). Gold was trading then in the $430s at the beginning of the last major up leg of the Great Gold Bull. Gold peaked eight months later near $730.
Since very large drops in the LCNS usually precede significant advances in the gold price this indicator jumps back onto the bullish side of the gold market indicator ledger.
Gold versus the large commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
Gold ETFs. This week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], fell 4.48 to 448.76 tonnes of gold bars held by a custodian in London for the trust. The reduction was reported Friday, probably reflecting action on Wednesday 1/10 when gold in London was fixed at $608.40, the lowest closing price of the week there. Interestingly, volume for GLD was not particularly heavy all week.
The U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, saw a reduction of 3.8 to 86.49 tonnes of gold held, while Barclay's iShares COMEX Gold Trust [AMEX:IAU] remained steady at 44.45 tonnes of gold metal held for its investors.
We can observe that during the depth of the gold weakness this week there was some negative liquidity (more wealth leaving than entering), however the amount of liquidity-induced reductions of gold metal do not seem large given the action in gold. Having said that, traders will want to continue watching metal holdings in the ETFs closely. Given the smallish reductions in metal holdings let's move this indicator to neutral on the gold market indicator ledger. If further reductions surface that would be a bearish sign. If metal holdings remain steady or new additions surface instead, it would move back to bullish in the next report two weeks from now.
Intuitively, given the Friday surge in the gold price, it would not be at all surprising to see metal being added to the gold ETFs in reports early next week.
Source for data streetTRACKS Gold Trust
Silver ETF: This week metal holdings for Barclay's iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 3,797.46 tonnes (122,091,233.4 ounces) worth $1.52 billion as of Friday's figures.
Please see the short term graph for silver metal and the 1-year silver graph for additional commentary.
Last week's noted a short duration bearish head and shoulders breakdown pattern developing and then said: "From the wild, wild world of technical "Chartdom," and from the something-to-watch-for department, about the only thing more reliable than the bearish signal given by a head and shoulders breakdown for technical folks is if that signal fails! (Not a joke.) In other words, a failed head and shoulders breakdown is bullish!"
Well, what do you know? As of Friday silver was attempting to turn the bearish head and shoulders pattern, ... uh, on its head! Let's see if some follow through to the upside develops in the coming week to confirm the theory. One of the reasons a failed head and shoulders breakdown is bullish is simply because technically minded traders sell (sell short) the formation all the way back up to where the implied break is, expecting prices to fall back considerably lower. Once the trading moves back above the break that new layer of now offside short positions becomes rally fuel for a time as those positions get covered (and some traders flip to long in the process).
Silver ETF Will Support Silver Price
Last week's report also mentioned: "With continued off-take of actual physical metal by the silver ETF and really not that much more silver likely to be produced this year than last, intuitively that should be fairly supportive of silver prices for quite some time to come, again in this report's opinion."
The metal put away by SLV in December was substantial as reported . A very considerable amount of new wealth flowed into silver via the ETF and that positive liquidity continued right up until this past week. This week we can note that even during the depth of the sell-down for silver there was no liquidity-induced reduction of metal holdings by the silver ETF. In that respect at least, silver turned in a stronger performance than gold for the week suggesting that investors are still keen to build new positions in the less than nine month old silver trading vehicle.
SLV only invests in actual silver metal and does not use futures, options or any other kind of paper silver. Each time liquidity demands cause an increase in the number of shares for SLV a corresponding amount of the relatively finite supply of available silver metal is tucked away and taken off the market. Roughly 10 ounces for each share. So far a little over a billion and a half dollars worth of silver resides in the vaults of the trust's custodian and that socked away about 122 million ounces.
Imagine, if you will, what will happen to silver prices if the current pace, or even half the current pace of wealth inflow into SLV continues. From its April 28 2006 inception through the first week of January 2007, the off-take of actual silver metal from the market by SLV amounted to about 3,797 metric tonnes of heavy, average 1,000-ounce silver bars. That is about 122,091 of those bars in 8.2 months or roughly 14,889 good delivery silver bars per month. Put another way that is about 500 of those shiny 1,000-ounce hunks of silver for each day including weekends and holidays.
Remember when some alarmists were suggesting that there wasn't enough silver available for the silver ETF? A few even went so far as to claim that there was not even enough available silver to fill out the first registration of shares by SLV and predicted a runaway market higher. As mentioned here in this report back then those predictions were foolish. Obviously there was and is plenty of available silver for now (repeat for now) and for the demand that has flowed into SLV so far.
So far though we are only talking about a measly $1.5 billion worth with silver at $12.70. In eight months. If that figure were to double or more over the next year or so then we could very well start to see a crimp in available metal stocks unless of course the price of the metal receives a stronger demand-driven upward adjustment.
Gold ETFs sponsored by the World Gold Council have garnered about $11 billion in two and a half years or so. While $11 billion for gold and $1.5 billion for silver may sound like large figures today, they really aren't. That is now, when gold and silver are still relatively unpopular but beginning to gain in popularity again. As investors world wide continue to see their various fiat paper currencies further debased, precious metals which cannot be debased will certainly become more popular. Because of that alone it is this report's contention that both gold and silver will very likely see wealth inflows of at least several orders of magnitude to what they have seen already and not really all that far in the future.
The thing is, as opposed to gold, where a very high percentage of the metal ever mined is still available and sitting above ground in some form or other, there really is a much smaller percentage of all mined silver that has not been irreversibly consumed and is still available for investment. And, while the actual amount that is available is higher than the alarmists thought, it very probably is no where near enough to satisfy the coming surge of demand for it as prices escalate and finally grab the attention of mainstream investors.
When that day arrives, the day when silver becomes popular again, it might help to remember that there are now more hedge funds in existence than listed stocks in the U.S., many of them controlling funds in excess of the total amount so far invested in SLV and each looking for a place to make some hot money. Got silver?
SLV metal holdings graph as of Friday, 1/5:
Source for data Barclay's iShares Silver Trust
Gold Charts. The daily chart shows gold metal attempting a bounce in the vicinity of the 38.2% Fibonacci retrace level and near an area of fairly critical technical support. Please also see the 2-year weekly version for context as well as additional commentary. The 2-year graph contains this report's read of the Fibonacci basis.
said: "Contrary to some charting specialists, this report holds the $607 region as critical support. Support that would have to be defeated convincingly in order to cascade through another series of sell stops, again in this report's opinion. Bears must defend the area between $615 (the implied break) and $621 (the 200-dma) at all costs or risk what this report calls a trap door reversal. (Another name for a failed bearish signal, which is of course bullish! In "Chartdom.")
Well, how about that! During the week attempts to crash through that important support level met with determined buying pressure as evidenced on the daily chart. By Friday apparently hot-money gold bears decided they had given it their best shot and opted to get out before the long U.S. weekend. Just as with silver short term daily charts now show the potential for a failed head and shoulders breakdown which technically minded traders consider a strongly bullish sign. In this particular case the now bullish signal is well supported by the exodus of net short positions by the LCs.
Take a good look at the daily chart. That is not a timid reversal signature. To the contrary, the Friday surge regained chart real estate above the 200-dma which gives the move convincing early credibility. It would not take much in the follow-through department to convince even die hard bears the bearish gig is up for now, but follow through is necessary next week to keep the bears on their back paws.
This indicator jumps back onto the bullish side of the gold market indicator ledger.
U.S. Dollar. As the U.S. dollar index leaped up 81 basis points from 83.94 to 84.75 Wednesday 1/3 to Tuesday 1/9 the LCs reduced their substantial net long positions by 7,161 contracts to 4,837 NYBOT contracts net long. From Tuesday to Friday the index gained another 28 ticks to close Friday at 85.03, having tested as high as 85.40.
Last week's report included: "If the LCs were reducing their net long interest AHEAD of the bump up for the index, just what did they do during it? We will have to wait for the next COT report to find out, but if this report were giving odds it would be for a substantial reduction in the net long interest by then."
Bingo. A substantial reduction in net long positions did indeed occur. Evidently the LCs lost confidence in a higher dollar to the tune of about 88 contracts per basis point advance for the week, which is a fairly hot pace of reduction. No way to know for sure until the next COT report, but it would not be at all surprising if we find that the LCs have gone flat or even net short the greenback as of this coming Tuesday's COT cutoff. That is if the buck trades near this 85 level then.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional commentary. With the sharp reduction in LC net long positions, this indicator can move from bearish to neutral. Since it will be two weeks until the next Got Gold Report traders can see how the commercials have positioned in the buck here next Friday afternoon.
Gold Indexes. All over the globe technically minded portfolio and fund managers, long and short-term traders and investors large and small track their favorite indexes and make trading decisions based on them. The AMEX Gold Bugs index, [AMEX:^HUI] which follows a basket of fifteen of the most popular mining companies that generally do not use hedging and therefore should have more leverage to the gold market, is one of the most popular of those indexes and is the index that this report tends to focus on.
Please see the 6-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary. Last week's report noted that mining shares were not answering the gold sell down in proportion and the lack of downward follow through following what appeared to be an attempt then to breach key support in the 312-315 region. On a weekly closing basis the attempted breach failed and mining shares tentatively answered gold's Friday surge higher.
Should the HUI reclaim the area above its 200-dma it will return to bullish on the gold market indicator ledger. For now it has to remain neutral, but the signature is much improved from last week.
HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performance of mining shares versus gold. When the ratio is rising mining shares are putting in a stronger performance relative to the metal and vice versa.
The one-year daily HUI/Gold ratio chart has mining shares answering the Friday move higher for gold, but that follows what had been some further weakening of mining share confidence earlier in the week as gold tested its key support.
In the 2-year weekly HUI/Gold version the weakening confidence shows as the first trading bar below what had been a steady but choppy trend of mining share outperformance.
For now and probably very short term this indicator has to stay on the bearish side of the gold market ledger, but this report suspects that the potential for this week's trading bar to become an "island low" on the ratio is pretty good. Again traders will want to closely watch the relationship of the HUI index to gold over the very near term now that gold has signaled a potential reversal to the upside. For both gold and for the miners next week it will be all about sustaining and following through.
Cash Gold-HUI. The cash gold minus HUI indicator snapped a large 15.17 points higher (weaker) from 291.36 last week to 306.53 using cash market closing prices. Regular readers will note that is nearing the level that indicates a significant loss of confidence by mining share investors in this report's opinion. However, most of the move higher for gold occurred on Friday and it may take a little while for mining shares to react since that move was in opposition to the prevailing momentum. This report strongly suspects a plunge in the spread over the next few trading days. If so, fine from a long point of view, if not, pay attention.
Source for data Thompson Financial via Stockcharts.com
Short-Term Outlook: (Continued cautiously bullish; add into significant dips; add more aggressively into strong dips. Trailing stops normal for gold and mining shares.)
An attempted support breach for gold and mining shares failed to follow through resulting in a dramatic Friday short covering surge higher for gold and silver, and a modest answer higher for mining shares. Short term technical indicators are showing failed bearish signals which are short term bullish. Longer term the technical signatures remain bullish for the Great Gold Bull and the potential for a rare and extraordinarily bullish Fibonacci stair step consolidation remains intact for both gold and silver.
On the bullish side of the gold market indicator ledger the large commercial traders on the COMEX strongly reduced their collective net short positions and at a very high ratio compared to the percentage dip for gold metal. Metal holdings for the silver ETF remained steady despite a spirited sell-down. The current LC net short position for gold is about where it was at the last turning low in October (in the $580s). Short term charts for gold, silver and mining shares all bounced near important support. NYBOT dollar index commercials deserted greenback long positions in a big way as the buck tested the 85 region. Mining shares answered the Friday move higher, but we have to note that it was only tentatively so far. Moderately strong physical demand surfaced for the metals near important support, especially for silver in this report's opinion, but tailed off somewhat late Friday after both metals had advanced strongly.
On the bearish side of the ledger, premiums for both gold and silver physical products seemed curiously pale considering the strong upward surge of gold and silver late on Friday. (Perhaps a delayed firming reaction shows on Tuesday?) Modest negative liquidity for gold ETFs did surface from action associated with its test of key support, but this report believes that unless additional negative liquidity surfaces the amount is not significant.
Although not mentioned in every report, continued global political and religious tensions remain a potential short term explosive catalyst which could erupt most any time. Something bears should keep firmly in mind. In addition, continued forex conversion out of U.S. dollars and into other vehicles including gold and silver probably will continue to add support to and contribute to a rising floor under both of the most popular precious metals.
Considering all of the indicators this report follows closely given the gold and silver metals and miner's bounces near important implied support this report plans to remain cautiously bullish for gold and mining shares with normal trailing stops. Provided resource investors are disciplined in the use of reasonable new-trade trailing stops for protection, significant dips, such as the one likely just completed, can be bought in scale-in measured increments and stronger dips bought more aggressively. The basic idea being that the current/recent pullback is/was in the context of a longer term up leg of the Great Gold Bull.
The next Got Gold Report is scheduled for the weekend of January 27-28 two weeks from now. Until next time as always MIND YOUR STOPS.
Long-Term Outlook: No change. A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies, probably continued de-hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing. In real terms gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world's fiat paper promises. ... The Great Gold Bull has a long way to go. It just won't go straight up.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a net long position in streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies.
