ATLANTA (ResourceInvestor.com) -- The dollar bounced, global gold short sellers pounced (just in time for options contract expiry), the Big Markets took another 500-plus point bull-market gut check, and the greenback avoided a technical confidence puncture over the past week on stepped up volatility for virtually all equity and commodity markets. A top-blowing global flight to cash loped off recent gains in many markets and even gold and silver were not spared.
The moves in gold and the dollar were largely anticipated by the largest of the largest traders in futures for those respective markets. In just one week commercial traders on the COMEX piled on nearly 50,000 contracts of net short exposure, virtually knee-capping the yellow metal just before gold's $21 flop. Their counterparts on the NYBOT had positioned long the U.S. dollar index in record proportions immediately prior to the dollar's expected Phoenix maneuver. The details are chronicled in the COT Changes and U.S. Dollar sections below.
The moves were about as expected as major market moves can be. Indeed the last Got Gold Report filed led off with: "Is it possible that the largest dollar index futures traders are positioned the way they are (extremely net long) because they are confident that governments will intervene in the forex markets to prevent a possible global dollar confidence puncture? (It's a rhetorical question.)"
Well, no surprise that we saw the buck bounce literally standing on the trap door to fiat currency hell and potential financial derivative Armageddon. From their positioning ahead of the dollar bounce and gold's swan dive it's obvious that the Big Boys (rightly) figured that as short term trades go it was pretty close to a sure bet.
Compounding the confusion, another harsh bull market sell-down on the Big Markets added sales pressure to just about all sectors including precious metals and mining leading to the appearance of a near panic get-out for mining shares. The only thing is that the metals really didn't sell off all that much relatively speaking which leads to an impression by this report (and some other gold/silver analysts) that the selloff for mining share indexes just might be a little overdone already. We'll see. Got Gold?
With that, let's take a detailed look at some of the indicators.
COT Changes. This is one of those cases when the COT report just doesn't come out in time to be of benefit for most traders. The 3-day lag between the reporting cutoff on Tuesday and the actual posting of the data late Friday afternoon sometimes renders the report outdated if there are large moves by the metals in between. Had traders been able to see the massive 49,000 contract piling on of commercial net short positions by COT reporting cutoff day Tuesday 7/24 in real time they would have been nervous, but by the time the data were released Friday afternoon gold had already retreated $21 the ounce, mining shares had answered lower and probably the commercial net short position had changed considerably (probably much lower). We won't know for sure though for another week.
In that Tuesday 7/24 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) exploded higher a whopping 49,094 contracts or a huge 44% from 112,508 to 161,602 contracts net short Tuesday to Tuesday while gold metal rose $18.42 or 2.8% from $664.78 to $683.20 on the cash market. (For those keeping score that's about a 15:1 ratio.)
In the two COT reporting periods since the last full Got Gold Report two weeks ago gold metal advanced $19.64 or 3% from $663.56 to $683.20 (as of the Tuesday COT cutoff dates) while the traders classed by the CFTC as commercial on the COMEX were willing to increase their collective net short exposure by 58,417 contracts or a bone chilling 57%. (A white-hot 19:1 ratio! We just didn't know it until after the fact Friday.)
Since the Tuesday 7/24 COT reporting cutoff the U.S. dollar bounced and hot money exited gold in a hurry driving the dollar price of the metal down $21.25 for a last trade of $661.95 Friday 7/27 on the cash market. For the calendar week gold got gored for $21.05 just in time for OTC options expiry.
Total COMEX gold open interest rose 16,008 lots this COT week to 401,603 open contracts following a slight 2,321 contract decline the week prior. Notice please that the 49,094-contract increase in commercial net short positions is equal to three times the total open interest increase for the week. (Meaning that the COMEX commercials were extremely confident in lower gold prices short term. Probably betting on a buck bounce more than anything.)
Long-term August 2008 and beyond COMEX forwards ended the current week 2,807 contracts higher at 58,961 lots open or about 14.7% of open contracts.
Given the unusually large increase to the LCNS in one week we have to knock this indicator back over to the bearish side of the gold market indicator ledger short term, but notice that gold has already retreated $21.25 since.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], declined slightly by 0.62 to 496.53 tonnes ($10.54 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. That follows an increase of 12.31 tonnes the prior week. Over the past week significantly higher volume days for GLD have been on down days, suggesting that more wealth has been flowing out of the gold metal ETF than into it, however as of Friday 7/27 no evidence of significant negative money flow is evident in metal holdings on behalf of GLD.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, rose 1.55 to 94.65 tonnes of gold held over the past week. Barclay's iShares COMEX Gold Trust [AMEX:IAU] added 0.61 to 46.51 tonnes of gold held for its investors.
Over the past week all of the gold ETFs sponsored by the World Gold Council increased their collective gold holdings by a net 1.43 to 617.94 tonnes of the precious metal worth $13.13 billion U.S. dollars as of Friday's figures. Over the past two weeks WGC sponsored gold ETFs added a total of 14.30 tonnes as gold moved up to test the $680s.
Positive money flow (more wealth entering the ETFs than leaving) has been clearly evident over the past two weeks as 14.91 tonnes of new gold was added to all gold ETF holdings for the period.
Since there has not been any significant reduction (yet) from gold ETF metal holdings over the past week this indicator stays on the bullish side of the gold market indicator ledger for now. However, it's still summer, liquidity is light and trading still fairly thin in many markets so short term traders will want to keep in daily touch with this valuable indicator going forward.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay's iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, increased by yet another 30.92 to 4,406.49 tonnes over the last week. That's 141,671,812 ounces worth $1.8 billion as of Friday's figures. The silver ETF added 46.37 tonnes to its holdings the week prior.
Silver took a $0.61 whipping for the calendar week on the cash market. Technically minded traders, especially those of a bearish bent, will say that Friday's (7/27) last trade of $12.7239 represents a bearish technical failure to sustain silver's recent ascent above the popular 50 and 200-day moving averages having been repelled lower from an implied line of resistance formed by the preceding three turning highs. Perhaps, but of more immediate concern to this report was the apparent lagging of silver to the most recent up leg for gold metal and somewhat weaker than normal demand for physical silver metal, over the past week especially.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
Two weeks ago physical demand on electronic bourses for silver metal was absolutely robust if premiums for silver products are any guide (they are). For the past week, however, demand for the white metal has been anything but robust as premiums seemed unusually weak from mid-week up to going into Friday's session, firming some late in the day on apparent early bird bargain hunting.
Interestingly, that physical metal weakness has yet to be reflected in negative money flow from the U.S. silver ETF.
Source for data Barclay's iShares Silver Trust.
Gold Charts. In the two weeks since the last full GGR gold moved up into the high $680s as the U.S. dollar was flirting with a break of its historic support near 80 on the USDX at the beginning of the week. Once it became clear that the buck wasn't going to break down, gold bears took control and the hottest of hot money rushed for the exits just in time for OTC contract expiry. Bearish interests got an unexpected but nonetheless welcome (for them) assist in the form of a global flight to cash and top blowing sell-down (probably temporary) on virtually all equity markets. The 1-Year Daily chart for gold reflects that panicky exodus in a sharp move back down to its popular moving averages (in the $650s) reminiscent of the move in late February-early March (to the $630s).
Please also see the 2-year weekly version for context as well as additional technical and market commentary on the charts themselves.
The obvious trade of the prior week has now occurred, that being a bounce in the U.S. dollar near its historic support. Many pundits and financial commentators attribute much more of the price movement of gold to an inverse reaction to movement in the dollar than is actually the case long term (for more on that catch Adam Hamilton's latest essay at Zeal LLC), but short term reactions by futures and large metals traders can and do mirror dollar movement short term. In other words, while the dollar bear market does not explain all or even most of the gold bull market long term it does affect it short term in fits and starts and many traders react to and anticipate movement in the dollar when deciding how they will trade. That takes us to the next indicator.
U.S. Dollar. As the U.S. dollar index flirted with a break of long term historic support near 80 on the USDX at the beginning of the week traders classed as "commercial" on the New York Board of Trade (NYBOT) were in the process of taking on historic net long positions in USDX futures (quantified below). The obvious conclusion was that they were very strongly convinced that the USDX would bounce at or near that very important technical line in the sand. Some traders expected that if the dollar was actually in danger of a potentially dollar-confidence-destroying breakdown that governments and central banks worldwide would intervene in the forex markets, buy dollars and sell other key fiat currencies which would give the appearance of a dollar market rally.
Well, whether or not there was direct government/CB forex intervention (as opposed to jawboning alone) after trading down to within 2 ticks of the all-important 80 line in the USDX sand Tuesday 7/24 and then closing just 12 basis points above at 80.12, the U.S. dollar index indeed bounced sharply and proceeded to recover another 86 basis points by Friday's 80.98 close. The buckster at least claimed a little breathing room with that move.
As for the COT report, while the USD fell another 42 basis points from 80.54 to 80.12 Tuesday to Tuesday (the COT reporting cutoff day) the NYBOT commercials added yet another 2,829 contracts to their already colossal net long positions to a historic 30,865 DX contracts net long as of Tuesday 7/24. (Were they confident of a dollar bounce or what?)
Since Tuesday, and not a moment too soon for those commercials, the USD index rose sharply and decisively 86 ticks to close Friday 7/27 at 80.98, sparing for the moment (at least) a global technical confidence puncture of the greenback. (As expected.)
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Since the commercials remain hugely net long the DX, this indicator has to reside on the bearish side of the gold indicator ledger.
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.
In the two weeks since the last Got Gold Report as gold metal moved up into the high $680s mining shares answered, rising nearly up to an implied line of slightly rising resistance formed by the previous three turning highs. But then as it became clear that the U.S. dollar was apparently not going down in flames a mini-exodus of capital ensued as hot-money funds and speculators rushed the exits. The happy move for mining share bears was unexpectedly supported by a baby-out-with-bathwater near-panic sell-down and top-blowing flight to cash in the U.S. Big Markets as the DOW plunged a one-week total of 585 points or over 4.2%. All sectors were affected including precious metals mining shares in that example of what may end up being yet another bull market shakeout.
All eyes will likely continue to be focused on the U.S. dollar in the upcoming days and weeks, because it has once again been credited with being the principal reason for gold's latest bump higher. That's an undeserved and inaccurate notion because over time it is rapidly rising worldwide investor demand into an inflexible and only modestly increasing supply of gold metal available for investment that is the prime (but not the only) motivator today.
So again, just as a reminder, the dollar is not the only potential market-moving catalyst in the ballgame. Political and religious tensions are often elevated during the summer months in the Middle East as one example of one that could erupt any time. For another example, nervous investors having just been given quite a scare in the Big Markets just might seek safe haven in something unlikely to be trounced by an irrational investor panic and something that tends to hold its value over time when measured against the world's fiat currencies, such as gold metal.
Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves.
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 U.S. dollar bounce and the top-blowing equity market flight to cash took their toll on mining shares which once again over-sold the $21 move lower for gold metal. It may be a bit early to be calling for it, but since this report is bi-weekly it would not be at all surprising if there was at least a snap back of the ratio northward between now and the next scheduled report as market forces settle out and bargain hunters settle in.
Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and additional commentary on the graphs themselves.
Cash Gold-HUI. Due to the spirited sell-down of mining shares the cash gold minus HUI indicator closed the week at a less than confidence inspiring 323.95 which is 11.18 points higher (weaker) than the 312.77 reading one week ago. Unless this indicator moderates and heads lower fairly soon (as expected by this report) it will be evidence of a more meaningful exodus of capital and loss of confidence in the sector.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Cautiously bullish. Trailing stops normal. Significant to strong dips can be bought. Light liquidity summer trading caveats apply.)
On the bullish side of the gold market indicator ledger, despite a rather steep sell-down for gold we can find no evidence of negative money flow from gold (and silver) ETFs. Indeed so far what we see is the opposite, although action from Thursday and Friday may not yet be reflected in ETF metal holdings. Both gold and silver have traveled into technical areas that saw spirited bargain hunting and dip buying a month ago or so.
On the less bullish side NYBOT commercials were finally rewarded for their historic net long positions in the U.S. dollar index with the buck making a decisive last stand literally at the doorway to currency hell. Just before that move traders classed as commercial on the COMEX backed up the net short truck (to the tune of 49,000 contracts) with gold in the $680s, (but the metal has already given back all of the gains that prompted that net short surge). The fast-moving action resulted in a spike up in the cash gold minus HUI indicator and a less than inspiring performance in the HUI:Gold ratio.
The last Got Gold Report mentioned: "A U.S. dollar rally may indeed ensue near term which might put temporary pressure on gold and silver, but despite what commentators might be saying on a daily basis the greenback is not the only driver of this powerful bull market for precious metals. Consequently there is no immediate change to this report's short term outlook."
Well, the most obvious trade on the planet did indeed occur, the dollar bounced, gold short sellers pounced (just in time for options expiry) and we find the metals once again nearing areas of what proved to be staunch support just a month or so ago.
Consequently, there is no change to this report's cautiously bullish stance for gold, silver and selected mining shares. Significant dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection.
The usual summertime caveats apply, as mentioned in previous reports.
Until next time as always MIND YOUR STOPS.
Long-Term Outlook: (Continued cautiously bullish, trailing stops normal.)
This report remains long term cautiously bullish. Significant to strong dips can be bought provided traders are disciplined in the use and management of appropriate new-trade trailing stops for protection.
Long term gold market drivers have not changed: 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. Got gold?
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 long position in streetTRACKS Gold Shares, iShares Silver Trust and holds various long positions in mining and exploration companies.
