HOUSTON (ResourceInvestor.com) -- After marking a second, lower high in the $820s, a move higher that was not supported by most of the indicators this report follows closely, gold moved sharply lower into the lower $780s on the cash market, threatening to break key upper technical support levels. A break of upper support could turn a high level consolidation into a bona fide correction. Falling oil prices and a firmer U.S. dollar will get most of the blame, but more likely than not this down move for gold was just plain overdue.
Speculators who rule the roost at extremes are by nature short term traders and this current up leg for gold has become quite long in the tooth. As measured by this report, at 56 weeks in duration as of November 9, the current/recent up leg for gold has become the longest period of uninterrupted advance without at least a 10% correction since the Great Gold Bull began in 2001-2002. (Gold still hasn’t corrected more than 10% so it might actually be longer now. We’ll see.) For speculators 56 weeks is an eternity, so we can’t blame them for thinking there is no way that the up move can continue much longer, even if they end up being collectively wrong.
Mining Shares Signaled Weakness
One barometer that has been consistently negative over the past six weeks is persistent weakness in the junior mining sector. Even as gold and silver cut new bull to date highs and sentiment became modestly frothy, shares of lower echelon miners and explorers languished. That’s bearish and suggests large scale profit taking and a relative dearth of new wealth inflows into the sector.
Financiers and high risk money brokers, who are paid bonuses on their performance and need to raise funds for the next big play have been cashing in chips on their previous darlings. Tax loss selling, which actually has two peaks in late October and in early December has also taken its toll on the low-totem-pole issues. The good news? There are only 19 trading days left in 2007, so the vast majority of that downward pressure has already been expended.
As gold was air kissing its all time nominal high near $850 the action in mining shares suggested that new blood, new wealth in sufficient amounts to support higher prices was conspicuous in its absence. For evidence consider the Cash Gold Minus HUI indicator near the end of this report.
A Rising Tide
As gold and silver move higher in price the amount of wealth it takes to support those higher prices increases logarithmically, so, further advances are dependent on increasing global wealth inflows into the metals. As long term gold and silver investors we have to ask ourselves if we believe that more wealth will be entering the gold and silver markets than leaving going forward. Yes, it’s that simple. Over time will more money be chasing metal than increases in the amount of metal available?
It is this report’s view that given the current global state of affairs and the cast of characters which have been allowed to run the show, and with obviously strengthening trends now firmly in place, the long term answer has to be yes, wealth will flow into the metals faster than the industry can increase the available supply. From time to time much faster depending on global events and various crises.
Along the way there will be ebbs and flows in the sea of total global wealth seeking safe harbor in tangible hard assets, but the overall tide is most definitely rising. It’s up to us to take advantage of those ebbs in the flow of global liquidity to improve our own positioning ahead of the next flood of new wealth into real money.
Argument in the Indicators
If mining shares have been signaling lower gold prices, that argues with the signals being sent by some of the other indicators this report follows closely such as the positive money flow into the largest gold ETF over the past week (see the Gold ETF section below).
Perhaps more importantly, although the largest of the largest gold futures traders on the planet remain very strongly net short gold futures, they sure seem to be in a hurry to reduce that collective net short positioning lately. Traders classed by the CFTC as commercial have significantly reduced their net short positioning over the past three reporting weeks even with gold above $800 (see the details in the COT Changes section below).
Bottom line for this report is that we have to keep short term caution flags flying given the still large, but shrinking COMEX commercial net short positions and the lackluster performance of mining shares to the metals. However, it is this report’s contention that it is not too soon to begin bargain hunting opportunistically, especially in the already beaten up ultra-high-risk miners and explorers well down the mining share food chain and strong to very strong dips for the metals themselves should be bought in measured, incremental bites, ahead of the next tsunami of new wealth into precious metals.
On to some of the indicators.
COT Changes. In the Tuesday 11/27 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) DECLINED 4,301 contracts or 2% from 209,625 to 205,324 contracts net short Tuesday to Tuesday as gold metal turned in a net GAIN of $8.38 or 1% from $803.70 to $812.08 on the cash market.
Since Tuesday gold sold down another $30.38 to $781.70 on the cash market, down $42.06 for the very volatile calendar week.
Over the past week total COMEX gold open interest inched higher 8,352 to 520,782 total open contracts, but that follows the big 40,116 contract reduction the week prior.
Long term December 2008 and beyond COMEX forwards added 3,136 contracts to 91,193 lots open, about 17.5% of open contracts. That is a little above average, but not enough to raise eyebrows and still no ultra-bearish big spike up in long term forwards.
What is sticking out of the COT data like neon billboard? Well, if gold is about to plunge even lower then why, when gold turned in a net $8 advance on COT reporting Tuesdays, did the largest of the largest gold futures traders (and hedgers) elect to reduce their collective net short positioning? That’s right, as gold advanced the COMEX commercial traders were getting out of net short positions this week.
Indeed, they have been reducing those net short positions for several weeks. Since the combined collective COMEX commercial net short position (LCNS) peaked at a record 240,009 contracts on Tuesday, November 11, with gold then at $825, the commercials have quietly pared down their net short exposure by 34,685 lots or 14.4% while gold itself dipped $12.92 or 1.6% (as measured on COT reporting Tuesdays).
If the commercials thought that gold had much more downside, shouldn’t they be increasing their net short positioning or at least standing pat as gold moves lower? Instead, over the past three COT reporting weeks those grizzled veteran futures traders got the heck out of net short positioning equal to a little over 107 tonnes of gold metal. Now that gold is $30 lower than Tuesday’s COT report (actually reported Friday 11/30), we can bet that the LCNS is even lower, maybe much lower, but we’ll have to wait for the next COT report to know for sure.
Although the action by the LCs suggests urgency in net short position reduction, (see the chart below) the LCNS remains at a very high level, so we’ll keep this indicator on the bearish side of the gold market indicator ledger short term. However, when COMEX commercial traders are reducing net short positions into gold strength that would not normally be regarded as particularly short term bearish. Let’s see if that continues given recent dollar strength.
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], first shot 20.59 tonnes higher Monday and Tuesday (to a new record 609.33 tonnes) then fell by 7.68 to 601.65 tonnes. As of Friday’s figures that’s equal to $15.1 billion U.S. dollars worth of gold bars held by a custodian in London for the trust. For the week GLD shows a net increase in metal holdings of 12.91 tonnes.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, remained steady at 96.92 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings also stayed pat at 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 13.41 to 733.60 tonnes of the precious metal worth $18.5 billion.
Gold ETFs increase the number of trading shares in minimum “baskets” and increase the amount of gold held by a corresponding amount when buying pressure for the shares increases faster than the share market price and vice versa. By increasing or decreasing the number of shares in the float the authorized market participants (AMPs) keep the shares trading very closely with the price of the metal. When the amount of gold held is increasing that indicates positive money flow, or more wealth entering gold ETFs than leaving and vice versa.
As gold put in its lower high near $826 liquidity-induced positive money flow was clearly evident, but apparently it abruptly shut off as gold reversed back to the downside mid week. The net positive money flow registered for the week puts this indicator on the bullish side of the gold market indicator ledger for now despite the 7-tonne reduction Friday. This report believes the most bullish signal this indicator can show occurs when metal holdings increase following significant gold weakness. Watch for it, remembering there is a one to three trading day delay (depending on the day of the week and holidays) from the time that additional liquidity is requested by the AMPs to the time the increase in metal holdings is actually received and booked by the custodian for the trust.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained remarkably steady at 4,522.71 tonnes. Silver showed a weekly decline of $0.79 on the cash market.
As silver fell $0.26 from COT reporting Tuesday to Tuesday (from $14.72 to $14.46) the large commercial COMEX silver traders (LCs) only reduced their collective net short positioning by 1,185 contracts (almost nothing) to 51,700 contracts of net short exposure. Since then silver took a $0.47 dive to $13.99 rewarding the LCs short side tenacity once again.
Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and market commentary on the graphs themselves.
Repeating from the last Got Gold Report three weeks ago: “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 this report’s technical and market commentary on the charts themselves.
U.S. Dollar. As the USDX FELL another 9 basis points Tuesday to Tuesday from 75.21 to 75.12 brutalized NYBOT commercials actually REDUCED their net long exposure again by 2,489 to 12,866 contracts net long. Then, finally, the greenback caught a bid, powering higher a whopping 103 basis points for a Friday 11/30 last trade of 76.15.
Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.
Gold Indexes. 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 gold 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 report’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 report’s commentary on the graphs themselves.
Cash Gold-HUI (G-H). What a ride this week as the cash gold minus HUI indicator continued with klaxons blaring and warning lights flashing. On Monday, November 26, with gold marking a lower high in the $820s the G-H skied to an ear-popping all time high of 408.40! That’s screaming a warning and indicates that mining shares are refusing to track with gold higher. Since then, as gold reversed course back down into the $780s the G-H has improved mightily, but still remains uncomfortably high at Friday’s 375.49.
Look for this indicator to improve (decline) further as gold nears or marks new support. That will mean mining shares are outperforming the metals. If that fails to show, then gold will probably establish a lower base before the next major up leg of the Great Gold Bull. That’s on the theory that the largest and best informed institutional traders will be pouring in new wealth into the sector ahead of the next bull market romp higher for gold.
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.)
For the battle-hardened, strong-stomached, high-risk-loving veterans who know what they’re doing and understand that it’s extremely difficult to peg the exact bottom on any highly liquidity dependent, thinly traded junior miner or explorer, it’s not too soon to go bargain hunting opportunistically on the already beaten up and tax loss pummeled future mining industry consolidation fodder. But think cheap when adding and be prepared to be surprised at how cheap they can go during the next two weeks of peak tax loss selling pressure.
Repeating from the previous 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 two weeks from now, 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. 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 various long positions in mining and exploration companies.
