ATLANTA (ResourceInvestor.com) -- Both gold and silver turned in modest pullbacks in the two weeks since the last Got Gold Report, (as expected) but neither served up much table fare for ravenous bargain hunters looking for entries on the cheap. Instead gold merely proved up support in the $720s and silver’s pullback was measured in a few tens of cents to the $13.10s on the cash market.
Gold ended up this trading week with the highest weekly close of the Great Gold Bull ($749.75 on the cash market) as investors large and small continued to put wealth to work in the precious metals sector. For evidence note continued positive money flow into the largest gold exchange traded fund (details below), a modestly outperforming HUI index and reportedly robust physical gold metal demand regionally.
On the other hand the largest of the largest gold futures traders at the COMEX added enough to their collective net short positions to report an all time record bet against higher gold prices short term.
Yes, the COMEX commercial traders are record net short gold during a breakout for the metal. Should we be surprised? No, of course not, but what is surprising so far at least is that they have so far been unable to wangle a more meaningful sell down, and at least as of this past COT reporting Tuesday (10/9) they had not yet loaded up the truck with a big spike higher of new net short positions. (Details below in the COT Changes section.)
Late week long smoldering silver even caught a little flame after failing to answer gold’s relentless march higher for weeks, but for whatever reason COMEX commercial traders seemed less willing to take on much higher overall short positions on the white metal. While the “LCs” were record net short gold they were still no where near a record net short position on silver. (See the Silver ETF section below for details.)
Meanwhile, the U.S. dollar, a FED noose around its neck, staged a minor bounce off its potential technical trap door to currency Hades, but so far has yet to gain any upside traction. NYBOT commercial traders continue to hold massive net long positions on the greenback. They are either right (this time) or they are gluttons for punishment, but one wonders how much more downside the dollar can have at this point since we are talking about one under-backed printed piece of paper versus a basket of similar shinplasters. The euro and the pound seem to be the least sick members of the fiat currency leper colony these days, but is the dollar all that much sicker? Really? The U.S. Big Markets (this report’s nickname for the DOW and the NASDAQ) have consistently failed to corroborate the now almost universal belief in the financial media that the U.S. is headed for the “R” word. If anything the Big Markets are still signaling just the opposite in its relentless wall-of-worry climbing ascent. That’s not good for dollar bears is it?
Bottom line for this report is that we have to keep short term caution flags flying solely because of the all-time record net short position held today by the largest and most influential futures traders on the planet. However, 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?
With that let’s take a detailed look at some of the indicators.
COT Changes. In the Tuesday 10/9 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) increased 14,990 contracts or 7% from 212,031 to a new record 227,021 contracts net short Tuesday to Tuesday while gold metal turned in a net advance of $6.19 or 0.8% from $731.98 to $738.17 on the cash market.
COMEX commercial traders have never been so strongly net short gold, but they didn’t exactly back up the truck with an overly large one-week spike higher in new net short positions.
Since Tuesday gold tacked on another $11.58 for a Friday close of $749.75 on the cash market, which is $6.75 higher than the Friday before the last Got Gold Report two weeks ago.
Over the past week total COMEX gold open interest increased 19,071 to 458,936 total open contracts. Another record total open interest on a COT reporting Tuesday.
Long term October 2008 and beyond COMEX forwards added 6,463 contracts to 66,902 lots open, about 14.6% of open contracts which is still somewhat below average. So far we have not seen a telltale large spike higher in long forwards in other words.
As measured on COT report cutoff Tuesdays, in the seven reporting weeks since August 21, when gold was trading in the $650s and the COMEX commercials reported a collective net short position of 91,994 contracts, gold metal has advanced $80.39 or 12.2%. Over the same period the LCs have been willing to add a staggering 135,027 contracts to their net short positioning, an increase of 147%.
So as gold was still trading in the high $730s the LCs were betting in all-time record proportions that gold was about to pull back. Indeed there were at least two attempts at pullbacks over the past two weeks down into the $720s, but neither down impulse managed to gain any traction.
Repeating from the last Got Gold Report two weeks ago: “… the last time they (the LCs) set a record net short position, in October of 2005 with gold then trading in the $470s (not a misprint), there was a teensy pullback shortly after that down to the $450s (first week of November 2005) and the COMEX commercials managed to get the heck out of about 60,000 of those net short contracts just before gold took out the psychological $500 barrier on its 5-month, 59% romp higher to $730 in May of 2006. … So the last time the COMEX commercials were this confident of lower gold prices, they were very short term right, but they were long term very, very wrong.”
Is history trying to repeat? Were the meager dips down into the $720s all the pullback we are going to get to work with, or is there another, stronger dip yet to come? No one can say in advance, of course, but we can note one important difference between the two events so far. In the October/November 2005 LC record-net-short-small-pull-back event the LCs dumped a big portion (about 60,000 contracts worth) of their then collective net short positioning during the pullback. As of Tuesday, 10/9, the LCs not only have not dumped any of their net short positioning, they’re still adding to it. That suggests that at least they think a more intense pullback is coming.
Does that mean that we will see a much harsher pullback for sure? No, virtually anything is possible short term. The LCs could be dead wrong too, gold could even go parabolic from here, but it certainly does mean that the LCs need a pullback and will be gunning for one on any opportunity. Friday’s near high close of just under the $750 level also means that the largest of the largest gold futures trader’s net positions are currently underwater in a big way. And make no mistake about it, their net short position really is big, the biggest ever. How big?
Well, as of Tuesday 10/9 COMEX commercials had a net short interest in 100-ounce gold futures contracts covering an amazing 22,702,100 ounces of gold metal. That’s right, they were net short (betting against) over 706 tonnes, worth notionally about $16.7 billion U.S. dollars, almost as much as is held today in all global gold ETFs. As of Friday, virtually all of those net short positions were upside down so, to put it in street language, there are about 16.7 billion reasons why we might suspect that the LCs will be gunning for a more meaningful gold sell-down.
The trouble is for those bullion banks and very large commercial interests betting on the gold downside, further advances in gold can be explosive when they are breaking out to new highs, literally above all short positions and when momentum-chasing funds and so-called “hot-money” is flowing in. Interesting to contemplate, isn’t it?
Nevertheless, because of the now all-time record high LCNS, this indicator has to stay on the bearish side of the gold market indicator ledger short term. This indicator by itself suggests that the odds of a more meaningful gold pullback have increased over the past two reporting weeks.
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], popped higher by a sizable 15.37 to 593.22 tonnes, $14.3 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 noteworthy, but there was consistently more up volume than down.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, showed only a maintenance reduction of 0.01 to 97.89 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings reported an increase of a relatively large 1.38 to 51.39 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 15.36 to 724.37 tonnes of the precious metal worth $17.5 billion U.S. dollars as of Friday’s figures. With Barclay’s IAU added to WGC sponsored ETFs globally, gold holdings now measure 775.76 tonnes. According to the WGC that’s more gold than all but 6 countries in the world hold in reserves, moving just above No. 7 Japan who reported holding 765.2 tonnes as of the September figures.
Positive money flow (more wealth entering the ETFs than leaving) continued to be clearly evident over the past two weeks and suggests that as gold attempted twice to sell down (into the $720s each time) determined dip buying ensued.
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 at 4,462.77 tonnes over the last week. Despite the apparent pause in positive money flow silver posted a net weekly gain of $0.39 as of Friday 10/12 on the cash market.
Interestingly, as silver added $0.18 from COT reporting Tuesday to Tuesday (from $13.34 to $13.52) the large commercial COMEX silver traders (LCs) were only willing to take on an additional 2,149 to 46,998 contracts of net short exposure. Since then silver has added another $0.28 for a Friday last trade of $13.80 and ended up outperforming gold late week.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
What can we say except that as gold is currently breaking out to new 27-year highs silver is not yet doing so. At the same time that COMEX commercial traders are record net short gold, meaning they are betting strongly that gold is about to pull back, the commercials apparently are not as confident in lower silver prices. At least not yet. How do we know? Because with silver Tuesday in the $13.50s the commercial’s net short positioning was still over 40% below their highest 2007 net short position in February when silver was then trading a dollar higher in the $14.50s.
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 10/11. 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.
U.S. Dollar. As the USDX edged 18 basis points higher Tuesday to Tuesday from 78.28 to 78.46 NYBOT commercials let go of just 474 lots of their net long exposure, but remain 26,186 lots net long.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Repeating from the last GGR: “The currency markets have evidently convinced themselves that the U.S. economy is headed for the economic recession trash heap. One problem with that is that the Big Markets are not signaling that at all, not yet. In fact they continue to signal the opposite.
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.”
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.
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.
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 additional commentary on the graphs themselves.
During gold’s not-much-of-a-pullback to the $720s the miners held their collective ground and even outperformed the metal a little. That’s also annoying to gold bears who would prefer to see mining shares telegraphing future weakness, something they are not doing as of Friday 10/12.
Cash Gold-HUI. This week the cash gold minus HUI indicator improved a little, it is 12.42 points lower (better) than last week’s 348.83, but it remains high at 336.41 still suggesting skepticism on the part of mining share investors (as opposed to euphoria if it were down around, say 250 or so).
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.)
On the bullish side of the gold market indicator ledger, after slowing the prior week positive money flow once again showed strongly into gold ETFs over the past week. Technically gold has broken out of a long period consolidation, which is strongly bullish, and the two attempted pullbacks thus far both checked up in the $720s and that tends to confirm the breakout. The U.S. dollar continued its weak performance against other paper currencies (why is a good question now) and has so far failed to catch any upside momentum. Further dollar weakness, if any, would be supportive to firmer gold prices. And mining shares not only held their collective ground into the minor gold pullbacks, but instead they actually showed a little outperformance.
On the less bullish side, although improving and moving in the right direction, the cash gold minus HUI indicator remains very high. The most bearish of the indicators is that when gold was in the high $730s Tuesday 10/9 COMEX commercials are now more net short than ever before, but as of Tuesday they hadn’t seen fit to pile on a huge one-week number of new net short positions as they have in the past just before a gold plunge.
Given the now record net short position held by COMEX commercial traders we have to keep the short term caution flags flying, but that’s into a now convincing gold breakout, so the caution applies to both short term trading gold bulls and bears.
Repeating from the last Got Gold Report two weeks ago: “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 “near resistance” 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.
