HOUSTON (ResourceInvestor.com) -- Why didn’t gold sell off? Among other things, big honking write downs by the financial sector giants, a pipeline attack in Yemen, civil unrest and martial law in nuclear armed Pakistan, heavy weather in the North Sea and record high oil prices nearing $100, a mining strike in Peru, sub-prime woes expanding into prime time loans, major U.S. housing sector anxiety, lots of talk about slowing U.S. growth or even recession heaped on almost certainly higher inflation talk, a very sick and dangerously low greenback prompting increased fiat currency confidence erosion, significant and sustained short covering in both gold and silver ... and the kicker this week: A high Chinese official commenting that China will be diversifying into other-than-U.S. dollars accelerating the already underway mass exodus of enormous global wealth out of the buck and mostly into the other global fiat paper promises. (One wonders how long the Chinese official has left in his job after talking down what amounts to a $1.3 trillion U.S. dollar trade book.)
The combined effect of what is shaping up to be a bullish perfect storm had the yellow metal within inches of its all time nominal high of $850 in 1980 this past week, twice testing $845 before modest Friday (11/9) profit taking set in paring off just the tip top of the action for a weekly last trade of $831.90 on the cash market.
After coming so close to the all time high, then easing off just a little, it is remarkable that we have not seen more of a pullback for gold. “At this point, gold is doing well by doing nothing,” said Brien Lundin in emailed comments to clients Friday 11/9. Lundin is the editor of Gold Newsletter, based in Jefferson Louisiana.
“All in all, considering the upside resistance at around $845, the degree of profit-taking that is in progress, and the need for liquidity that many equity traders must now be facing, it’s quite remarkable and impressive that gold is holding so steady,” he added. Indeed it is. And so far it doesn’t seem like the biggest short-side players are ready to jump in front of the Gold Express.
So what are the indicators saying now? Well, as gold tested the $820s the COMEX commercial traders did add enough to their collective net short positions to once again show an all-time record short position of 240,000 contracts, but they really didn’t pile on the short side. Not yet anyway. There are interesting parallels in today’s COT action to the last major run up for gold in 2005-2006. Diligent GGR readers will want to catch all the details in the COT Changes section below.
Despite near record prices for gold and recent increases in the price of silver, and sort of in the face of what had been extreme demand for physical metal on the street locally and regionally over the past month, only very modest positive money flow showed up for gold and silver ETFs over the past week. (Read more in the Gold ETF and Silver ETF sections below).
Thanks in part to incredibly bad timed comments out of China that seemed to be kicking the dollar dog while it’s down the U.S. dollar index cut new all-time lows again this past week and mining shares continue to struggle to keep pace with gold relatively speaking. (But they haven’t yet actually sold down ahead of the metal.) Attentive readers will find more about all that below.
Bottom line for this report is that we have to keep short term caution flags flying because of the all-time record net short position held today by the COMEX commercial traders and the still expected risk of official sector intervention in the foreign exchange markets. However, the lack of a big spike up in commercial short positions as of last Tuesday combined with no meaningful sell downs in mining shares leaves those on the short side vulnerable, underwater and very nervous going forward.
Gold, and especially silver will more likely than not see much higher prices as measured in all the world’s fiat currencies going forward, but somewhere along the way we should also see the usual, and now overdue, harsh bull market pullbacks offering superior entry opportunity for long term investors. Got gold? (Please see additional comments about silver in the Silver ETF section below).
Scheduling note: Due to an aggressive travel schedule the next Got Gold Report is scheduled for the weekend of December 1-2, three weeks from now.
Tomorrow is Veteran’s Day in the U.S. Special thanks to all vets who read the Got Gold Report.
On to some of the indicators.
COT Changes. In the Tuesday 11/6 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) edged higher by a teeny 4,876 contracts or 2% from 235,133 to a new record 240,009 contracts net short Tuesday to Tuesday while gold metal screamed higher $43.30 or 5.5% from $781.70 to $825.00 on the cash market.
So while the COMEX commercials were once again net short in all time record proportions, as of Tuesday, with gold in the $820s, they really hadn’t piled in on the short side in a telltale one-week cluster bomb yet. Still, the commercials are net short in a huge way already, to the tune of 746 tonnes of gold, so it’s possible, maybe even likely we could see a harsh pullback without the glaring big one-week jump higher in LCNS ahead of time.
Since Tuesday gold twice tested the $845 level before meager late week profit taking pared just the top off for a last trade Friday 11/9 of $831.90 on the cash market. Gold turned in a net $25.10 gain for the calendar week.
Over the past week total COMEX gold open interest ballooned 40,693 to 556,856 total open contracts, having added nearly 27,000 contracts the week prior. That’s the largest ever total open interest for the COMEX 100-ounce gold contract on a COT reporting Tuesday. (Open contracts on either side, long or short, of a staggering 55,685,000 ounces of gold worth notionally about $46.3 billion, with 24,000,900 ounces or $19.9 billion worth represented by the COMEX commercial net short position.)
Long term December 2008 and beyond COMEX forwards added a small 4,330 contracts to 84,227 lots open, but with the large increase in the total open interest long forwards constitute just 15.1% of open contracts. That’s below average and still no ultra-bearish big spike up in long term forwards.
Because of the record high LCNS, this indicator has to stay on the bearish side of the gold market indicator ledger short term. However, as of Tuesday COMEX commercial traders were still reluctant to add meaningfully to their already large and increasingly off side collective net short positions with gold then up sharply in the $820s.
So, on the one hand the LCNS (the collective commercial net short position) is at an all time high which indicates the commercials think gold is near a pullback, but on the other hand, at least as of Tuesday 11/6, they had not yet grown overly cocky about it by piling on in even bigger numbers.
The situation is very similar to what occurred during the October 2005 – May 2006 run up for gold when the metal marched up 59% from the middle $400s to $730. In the October 11, 2005 COT report the LCNS reached a then record 212,714 contracts net short. That was with gold then trading at $475.95. By late November the LCNS had been bled down to the 180,000 contract range as gold was then taking out the psychological $500 barrier. As gold moved to new highs the commercial short positions FELL and as dips for gold occurred from increasingly higher highs the LCNS stayed well below the October high water mark. When gold finally peaked in May of 2006 at $730 the LCNS was around 170,000 contracts, about 40,000 contracts below the previous record.
With the existing commercial net short position so bloody high already, and with all but the very latest of those positions off side and bleeding, further advances for gold could be very dramatic, but the most powerful and influential gold futures traders on the planet need a pullback bad and they’ll be gunning for one at every opportunity. They will also likely be keen to decrease their short exposure on any coming dip and that paradoxically helps to support the notion of a rising floor for gold metal near term.
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 small 1.97 to 599.5 tonnes, $16.02 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, showed a maintenance reduction of 0.01 to 97.86 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings reported an increase of 1.83 to 54.14 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 2.57 to 731.35 tonnes of the precious metal worth $19.56 billion weakening U.S. dollars as of Friday’s figures.
Even with gold testing the $840s we still see a small amount of liquidity-induced positive money flow (more wealth entering gold ETFs than leaving them) so we can leave this indicator on the bullish side of the gold market indicator ledger. Short-term traders will want to continue keeping 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, finally registered an increase this week, up 46.31 to 4,522.71 tonnes. That occurred while silver scored a weekly gain of $0.87 on the cash market. Over the past two weeks SLV reported adding a relatively modest increase (for SLV) of 59.94 tonnes of average 1,000-ounce silver bars to its holdings after holding near flat for most of October.
As silver soared a whopping $1.45 from COT reporting Tuesday to Tuesday (from $14.15 to $15.60) retreating large commercial COMEX silver traders (LCs) added just 3,778 contracts (not many relatively speaking) to 54,966 contracts of net short exposure. Since then silver probed as high as $16.21 in a short-covering spike, then consolidated in a volatile range between $14.87 and $15.81.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
Is silver expensive here? Well, in a word, no. It may be due for a short term pullback technically, but with gold knocking on the door of its all time nominal highs silver has a mountain to climb value wise to achieve the same goal. In fact silver could triple from right here and still be under its all time 1980 nominal peak of $50. And in 1980 dollars were “worth” a lot more than now.
Adjusted for inflation silver’s 1980 $50 peak would equate to about $125 in today’s weakened U.S. currency, so silver would have to increase eight-fold just to match its peak purchasing power back then. Is that hyperbole? Well, perhaps a little, but even if silver’s 1980 mania-driven spike was a once-in-a-lifetime financial fluke, it traded for weeks over $35 back then, or the equivalent of $87.00 today. Silver could increase 400% and still not have the same purchasing power it garnered for weeks in 1980 in other words.
Those who have yet to begin building a long term position in physical silver or the silver ETF ought to consider doing so opportunistically, during the next fade, pullback or correction in this report’s opinion. Sooner or later, in this secular silver bull market, the second most popular precious metal will approach or eclipse its historic peak purchasing power barring unforeseen catastrophic geopolitical or natural calamity.
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.
With gold now 21% above its 200-day moving average the distance between the actual trading and the most popular moving average is large enough to make veteran traders on the long side nervous. But isn’t that always the way it is during major breakouts?
U.S. Dollar. As the USDX FELL yet another 69 basis points Tuesday to Tuesday from 76.73 to 76.04 gutted and skinned NYBOT commercials actually REDUCED their net long exposure again by 2,198 to 19,916 contracts net long. Of course then greenback dove another 65 ticks to a new all time low close Friday 11/9 of 75.39.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Suffice it to say that official intervention in the forex markets, (or at least jawboning about it), which was expected by this report and by other analysts is still missing in action. When it arrives (if it arrives?) we should see quite a short covering spike higher on the USDX from the unwinding of truly massive global speculative short positions, but until it does the buck just seems to get sicker and sicker and the collective pressure on greenback has become self sustaining to a degree near term. That ought to limit the potential upside to coming dollar rallies, for a while anyway.
Having said that, it is essential that short term traders maintain the tightest of tight stops on anything that relies on a still weaker U.S. dollar. Foreign exchange intervention or the threat of it remains a very strong possibility.
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 this week’s 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.
Cash Gold-HUI. This week the cash gold minus HUI indicator skies to a stratospheric 389.98, with klaxons blaring and warning lights flashing. Taken in context with a general sell-down late week for the lower tier miners and explorers on Canadian and U.S. exchanges, this has to be this week’s most bearish indicator. What it is saying is that gold is moving up faster than the inflows of liquidity into the entire mining sector, so instead of a corresponding robust inflow of new capital into mining we are seeing skepticism and profit taking instead. Otherwise this indicator would be falling, not rising.
Gold is near an all time nominal high, the highest it’s been in 28 years. Why is gold running off without the miners? And why aren’t the mining stocks in the lower ranks showing more spunk? When that occurs isn’t that usually indicative of a maturing move short term?
Yes, it usually is, so short term traders ought to be tightening stops accordingly, and perhaps taking partial profits. However, just about anything goes during major breakouts. Gold could move quite a bit higher before the inevitable bull market pullback occurs. It could also consolidate at a much higher technical plane than the last consolidation allowing the mining sector to play catch up in a hurry once the market has adjusted to the new price reality.
Short term this indicator is a big warning sign, but the most interesting aspect of it will come once gold does pull back or begins a consolidation. When that occurs we ought to see the spread collapse if the current bull surge is alive and well. If not, then we’ll be (mostly) out and looking for better opportunity in the next bull run.
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. Strong dips, if any, can be bought.)
This week’s summary is in the introduction of the report.
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 a harsh pullback materializes for gold, silver and selected mining shares, it is this report’s contention that 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 three weeks from now, as always MIND YOUR STOPS. Some of the individual technical charts in this report may be updated on Sunday afternoons, 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. 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 iShares Silver Trust and holds various long positions in mining and exploration companies.
