Got Gold Report - Gold, Silver Bears Nervous

HOUSTON (ResourceInvestor.com) -- A short covering surge took gold on a $16 Friday (10/26) hop to the $780s confounding bloodied and increasingly nervous underwater gold bears who were no doubt expecting help in the form of either official intervention in the foreign exchange markets or in the gold market itself, or both. Evidently they got neither, because if there was official intervention or attempted manipulation it just plain wasn't enough to overcome escalating demand for both of the most popular precious metals, gold and silver.

Gold and silver bears usually have help sooner or later when the price of the metals looks like it might run a bit too far too fast. This report chooses to view government intervention as one more source of supply, one more market force, albeit a diminishing one as more and more global investors join the ranks of the unofficial gold ownership alliance. Whether or not one believes in government sponsored manipulation of the gold market, Chris Powell's remarks at the New Orleans Investment Conference on Sunday, October 21, are certainly worth a look. Powell is the Secretary/Treasurer of the Gold Anti-Trust Action Committee Inc. (GATA).

"Gold has been manipulated by central banks because it is a currency that competes with their currencies, a currency whose price helps set the price of government currencies and helps determine interest rates," Powel said after listing compelling supporting evidence.

Powell went on to say why GATA believes that governments and central banks seek to suppress or control the price of the metal.

"More than that, gold is the ticket out of the central bank system, the escape from coercive central bank and government power. As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply."

In a sense central bankers have to view gold as the proverbial canary in the mineshaft. When gold gets too high too fast their currency confidence canary is getting sick and listless and they know they need to pump oxygen in for the current fiat currency system to keep breathing. (So as not to undermine confidence in the world's under-backed paper currencies).

Because of the continued dilution of paper currencies worldwide and growing concern that governments will continue to competitively weaken their own mediums of exchange, over time it takes more and more "oxygen" (more and more intervention) in order to achieve results so they have to now be content with attempting to control the pace of gold revaluation. It's obvious that gold is undervalued as measured in today's paper, the central bankers just don't want the price of gold to move so fast that it gets noticed in the mainstream press. They would much prefer to see the revaluation proceed in an orderly fashion.

We should expect that "official sector action" will continue to show up from time to time in the gold market. We just can't know in advance when. But if current, escalating trends continue along the same path they are on today (increasing global investment/safe haven interest in gold versus decreasing official sector ability to maintain stable gold price escalation) we are nearing the point where the global currency confidence mine managers just won't have enough "oxygen" to keep everyone in the currency mineshaft from noticing that the canary is lying prone, feet upward and not breathing.

In this report, we note that COMEX commercial traders remain net short in near record proportions, but actually reduced their net short positioning as of Tuesday 10/23 when gold was trading near $760. Gold is $25 higher now, and it's looking more and more like November of 2005, isn't it? (Details below in the COT Changes section).

Despite reportedly robust physical metal demand for both gold and silver locally and regionally only modest positive money flow showed up for gold ETFs and liquidity-driven money flow has been flat for the silver ETF all month. Yet silver prices attempted a hint of a secondary breakout toward the end of the week. (Read more in the Gold ETF and Silver ETF sections below).

Mining shares continue to struggle to keep pace with gold relatively speaking which is worrisome very short term, but they haven't shown a telltale big-money exodus spike lower either. So if they are not exactly signaling supreme confidence they also aren't signaling the opposite, at least not yet. All that within the context of new all time lows for the U.S. dollar index diligent readers will find more about below.

Bottom line for this report is that we have to keep short term caution flags flying because of the near all-time record net short position held today by the largest and most influential futures traders on the planet and by the increasing risk of official sector intervention most any time. However, just as we noted in the last report : "... momentum has shifted in favor of the gold and silver bulls short term as breakouts for both the metals and mining shares are trying to confirm and if those betting on the short side don't get a break soon, they'll be adding to the fuel to power both gold and silver much higher in the coming weeks as they are forced to cover those downside bets.

Should the dollar rally strongly (it might) and should gold and silver stage a more meaningful pullback it is this report's intention to continue to add into significant to strong dips, but always with reasonable new-trade trailing stops for protection. As each week passes we get closer to the inevitable groundswell flood of global investor wealth into precious metals as more and more of the world's major players tire of consistently devalued paper currencies, opting instead for the only real money there is. Got gold?"

On to some of the indicators.

COT Changes. In the Tuesday 10/23 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) DECREASED 16,327 contracts or 7% from a record 239,096 TO 222,769 contracts net short Tuesday to Tuesday while gold metal was NEAR FLAT, just $1.28 or 0.2% lower from $760.64 to $759.36 on the cash market.

Still no telltale very large jump higher in LCNS. To the contrary. However, since Tuesday gold popped $26.04 higher for a near high-close last trade Friday 10/26 of $785.40 on the cash market. For the week gold turned in a net $20.07 gain as measured in still weakening U.S. dollars. For comparison, the yellow metal also turned in a weekly up tick of EUR10.38 as measured in euro, but it took a Friday EUR11.45 move up to get there.

Over the past week total COMEX gold open interest added 5,599 to 489,471 total open contracts, which is yet another record total open interest on a COT reporting Tuesday, having added nearly 25,000 contracts the week prior.

One interesting aspect is that as the total number of open contracts increased by over 30,000 contracts over the past two reporting weeks the number of reported net short positions held by traders classed by the CFTC as commercial actually declined by 16,327 or a little more than half. So as Gold was still around $760 the commercials were lightening their short positioning a little.

Long term December 2008 and beyond COMEX forwards added a noteworthy 10,812 contracts to 74,713 lots open, but with the increase in the total open interest, that is still only about 15.26% of open contracts. Nothing exceptional about that and still no telltale large spike higher in long forwards. (Note the change to December for the back month.)

Because of the still extremely high LCNS, this indicator has to stay on the bearish side of the gold market indicator ledger short term. It is interesting to note, however, that at least as of Tuesday's COT cutoff COMEX commercials were not yet willing to pile on the gold short side with gold near $760 (about $25 lower than Friday's close).

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], edged higher by a relatively small 3.08 to 597.53 tonnes, $14.96 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.

Over the past week volume for GLD was not particularly high, but there was consistently more up volume than down.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, once again showed only a maintenance reduction of 0.01 to 97.87 tonnes of gold held over the past week. Barclay's iShares COMEX Gold Trust [AMEX:IAU] gold holdings reported an increase of 0.92 to 52.31 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 3.07 to 728.78 tonnes of the precious metal worth $18.27 billion U.S. dollars as of Friday's figures. With Barclay's IAU added to WGC sponsored ETFs globally, gold holdings now measure 781.09 tonnes. According to the WGC that's more gold than all but 6 countries in the world hold in reserves, just above No. 7 Japan who reported holding 765.2 tonnes but well below No. 6 Switzerland who reported holding 1,242.1 tonnes as of the September figures.

We can still say that positive money flow (more wealth entering the ETFs than leaving) is evident, but the pace has once again slowed. It will be very interesting to see how the metal holdings of gold ETFs fare in the next gold pullback.

Just as last time, we can leave this indicator on the bullish side of the gold market indicator ledger but traders will want to keep an eye on the daily metal holding reports from global gold ETFs for signs, bullish or bearish.

Source for data streetTRACKS Gold Trust

Silver ETF: Metal holdings for Barclay's iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained flat again at 4,462.77 tonnes over the last week and that is with silver posting a weekly gain of $0.72 on the cash market.

As silver dipped a teeny $0.04 from COT reporting Tuesday to Tuesday (from $13.62 to $13.58) the large commercial COMEX silver traders (LCs) actually REDUCED their collective net short exposure by 1,452 to 47,155 contracts of net short exposure. Since then silver powered $0.65 higher for a Friday close of $14.23 and now threatens to break out of a short-term flag consolidation.

Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.

Repeating from the last Got Gold Report : "For now, even though we aren't really seeing much positive money flow into the silver ETF, we aren't seeing the opposite either, and physical demand for the metal remains robust on the street. So let's keep this indicator on the bullish side of the ledger. Veteran short term silver traders will probably keep trailing stops elevated a couple notches given the signs, (a pullback is more likely now) but it is somewhat encouraging that the white metal turned in a superior performance to gold late week.

Both short term and long term traders will probably be looking to add into significant to strong dips, if any, and that alone should contribute to a continued rising floor for silver near term.

We still see no reason for longer term traders to change their positioning or trailing stops, but new additions should only be attempted into or following significant to strong dips and, as always, in measured incremental portions in this report's opinion."

Thru 10/25. Source for data Barclay's iShares Silver Trust.

Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as additional technical and market commentary on the charts themselves.

Gold has gotten pretty far above its 200-day moving average and it is kind of by itself in that respect (as compared to silver for example) but that doesn't mean it can't get even farther from it before the inevitable harsh bull market pullback and buying opportunity arrives.

U.S. Dollar. As the USDX FELL a jaw clenching 68 basis points Tuesday to Tuesday from 78.25 to 77.57 long suffering NYBOT commercials actually REDUCED their net long exposure by a small 286 to 24,199 contracts net long. Then the buck kept on trucking lower. Another 57 ticks worth to a new all time low close Friday 10/26 of 77.00.

Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.

It's pretty difficult to find a dollar bull these days and the ones who do surface in the television media seem to be apologetic, meek and uncertain. And that scares pure contrarians. It's often said on Wall Street when just about everyone is on the same side of the boat the boat is close to rolling over. Right now just about anyone who writes or talks about the dollar says it's going lower, but the reasoning each of the pundits and experts uses to back up those assessments carries with it the fatal flaw that the forex markets are assumed to be rational, fair and open. Are they? Really?

Maybe they are for a while, but when one currency gets so far out of whack with all the other printed promises out there that politicians and bankers who run the show in countries whose industries are getting hurt by "value imbalances" and "speculator-driven forex anomalies"... well, sooner or later those pols and bankers find ways to ease the pressure and in this case that takes the form of either official (announced) or unofficial (covert) intervention by governments and central banks directly (or indirectly) in the forex markets. The most direct form would be buying U.S. dollars in large sums and selling their own forms of fiat currencies to prop up the greenback, restore some confidence and stop the bleeding.

Repeating from the last Got Gold Report : "When (not "if") the greenback catches the inevitable phoenix bid against all the other fiat currency lepers, short term that just might put considerable downside pressure on precious metals. So again, continue to mind those trading stops. Eventually though it will more likely be furious global investment and safe haven demand that powers gold and silver to new all time highs, not fiat currency movement. If this report's contention is proven true, the metals will eventually be revalued toward or well above the upper range of its historic real purchasing power in every one of the world's fiat paper currencies before this Great Gold Bull expires."

When intervention shows (and it likely will if the buck doesn't find support convincingly on its own really soon) the greenback should pop higher. But we have to question whether or not a reversal, an increasing dollar index, will translate into meaningful sustained pressure on both gold and silver given all the other bullish fundamentals in play. Short term, sure it might, but longer term it seems like more and more of the world's wealth may be growing tired of losing purchasing power and of long term currency uncertainty. A smaller percentage to be sure, but some will migrate to gold and silver purely because of the fear of a coming crises of confidence in all fiat currencies and what better salesman for that idea than the world's former reserve currency cutting new lows against most all the others.

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 9-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves.

The last Gold Indexes section from mentioned: "It should be very worrisome for gold bears to look at those charts. When the seven-week moving average acts as support it's generally bullish and when a breakout fails to fail early and instead confirms it's also a headache maker for bears."

Well, the HUI is not far from where it was then, now in the 420 region, after a quick dip into the 380s. While the HUI is more or less sideways since the last GGR gold itself has added about $30.00, with about $16.00 of that coming on Friday 10/26. In other words the HUI is once again refusing to answer the latest up moves for gold. Be sure to check the 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.

Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this week's commentary on the graphs themselves.

It's just one indicator, but the HUI:Gold Ratio is this week's most bearish signal.

Cash Gold-HUI. This week the cash gold minus HUI indicator deteriorated considerably. By itself it is flashing a warning, a chilling 28.4 points higher (weaker) than the 336.41 registered in the last Got Gold Report two weeks ago. All this means is that as gold moved higher the spread between the cash price of gold and the HUI index widened at a fast clip over the past two weeks and that suggests increasing skepticism on the part of mining share investors of the sustainability of the gold rally.

Source for data cash market for gold, Stockcharts.com for HUI.

Short-Term Outlook: (Caution flags remain flying for both short term trading bulls and bears. Trailing stops elevated a couple notches to a "near resistance" strategy. Significant to strong dips, if any, can be bought.)

This week's synopsis is in the introduction of the report.

Repeating from the last Got Gold Report : "The odds probably favor a gold pullback very short term, (as they usually do during major breakouts), so it's time to haul out the caution flags for both short term trading bulls and bears. Short term traders might consider ratcheting up their trailing stop strategy to at least a "" level (if not even tighter) in order to protect significant gains. However it is not out of bounds to stress that just because the more important indicators are pointing to a pullback, that doesn't guarantee that there will be one. The indicators almost always do that at major breakouts for the simple fact that the metal is near or at what has stood as resistance until it does break out....

The point is that both sides of the gold market battlefield can and should expect heightened volatility near term. Both short term trading bulls and bears should exercise caution and meticulously manage their respective trailing stop strategies accordingly.

If the expected harsh pullback materializes for gold, silver and selected mining shares, it is this report's contention that significant to strong dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection."

Until next time, scheduled for two weeks hence, as always MIND YOUR STOPS. Some of the individual technical charts in this report may be updated next Sunday afternoon, especially if there are interesting market developments.

Long-Term Outlook: (Continued cautiously bullish, trailing stops normal.)

This report remains long term cautiously bullish, but new positions should only be added into weakness. 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.

About the Author
Gene Arensberg

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web. Gene's more in-depth market reports, insights and trading ideas are available at www.GotGoldReport.com.

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