HOUSTON (ResourceInvestor.com) -- An interesting divergence is setting up in the primary indicators followed closely by this report. On the one hand the large commercial COMEX traders are taking on short positions at an exaggerated pace like they think that the dollar price of gold is about to plunge. On the other investors in gold and silver ETFs are buying more of the metal trading vehicles than selling. A lot more.
Some observers might think that this is shaping up as a kind of showdown between metals market forces and it is happening while both gold and silver are challenging near technical resistance. That certainly makes it more interesting and potentially much more volatile. This coming week we should get an indication of whether the old guard market forces (represented by the COMEX large commercials) or the new market forces gun slinger (represented by a broad base of global investors/traders in gold and silver ETFs) has the better aim.
The next full Got Gold Report (GGR) is scheduled for next weekend, February 10-11. However given the interesting conflict between indicators now underway during this off week, here are a couple indicator updates and links to the technical charts used by this report for our regular readers.
Large Commercials Continue to Add Net Short Positions
Last week’s GGR noted a very large 29% spike up in the COMEX large commercial trader’s (LCs) collective net short positions (LCNS) as gold metal approached implied resistance in the $650s. Over the past week the LCs kept at it even though as of the Tuesday 1/30 CFTC commitments of traders report (COT) gold had actually declined $1.52 the ounce from the previous Tuesday COT cutoff. Indeed, as gold dipped a little Tuesday to Tuesday the LCs were willing to boost their net short position by 17,034 COMEX contracts or 14% more to total 135,611 contracts net short. We have to go all the way back to the August 8, 2006 COT report to find a larger net short position for the large commercial COMEX traders (141,925). That was with gold then around $643.
Meanwhile the total open interest on the COMEX declined 13,079 lots to 348,035 contracts, each representing a paper promise for the future delivery of 100 ounces of gold in New York.
A significant increase in the LCNS on flat to lower gold is usually a signal that the largest paper gold traders on Earth expect lower prices for the metal short term. To give readers a sense of how convinced the LCs are that gold is nearing at least a short-term pinnacle consider that less than one month ago on January 9 the LCNS stood at 81,674 contracts net short. In the three weekly reporting periods since, the LCs were willing to increase their collective net short position by 53,937 lots to 135,611 or a whopping 66% as gold rose $33.14 from $613.26 to $646.40. The lion’s share of the increase came with gold above $630 by the way.
So as gold rose just $33 the large commercials very aggressively took the short side of the market, increasing their short exposure with additional contracts representing 167.76 tonnes of gold with a notional value of $3.5 billion at $650 gold.
Does that mean that the LCs are trying to bust the gold market? Probably not. What it very likely does mean is that the LCs strongly believe something less bullish is about to surface for the gold market in the near term. It does not mean they will be right, but it is a reflection of how they were positioning as of the COT cutoff date. One excellent example of when the LCs got it very wrong is in last week’s report under the sub-header “Mind Your Stops.”
Interestingly, following the Tuesday COT cutoff gold took a shot at an upside breakaway testing as high as $661.40 Thursday (closing Thursday at $657.89) before a Friday news-assisted U.S. non-farm payroll report-inspired $10 hammering brought it back to a weekly close of $647.63 on the cash market. We will have to wait for the next COT report to know for sure how the LCs positioned during that Maalox moment for gold bears, but if the LCs were adding to the LCNS on flat gold last week what were they doing as gold looked to be attempting a breakout? (Please see the Gold, 6-Month Daily chart link below showing the attempted breakaway.)
In any event the LCs positioning this week keeps this indicator even more strongly in the bearish camp.
LCNS vs. Gold as of the Tuesday COT Cutoff:
Source for data CFTC for COT, cash market for gold.
Positive Liquidity Returns to Gold, Silver ETFs
Positive liquidity (more wealth entering than leaving) returned to gold and silver exchange traded funds over the past week and it did so in an impressive way.
Gold ETFs: In direct conflict with the LCs positioning on the COMEX (positioning for lower gold) liquidity induced metal additions to gold ETFs showed up in this week’s reporting.
Gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], increased a rather large 8.33 to 458.63 tonnes of gold bars held by a custodian in London for the trust. GLD reported a reduction of 1.54 tonnes the week prior.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased 0.61 to 87.09 tonnes of gold held, while Barclay’s iShares COMEX Gold Trust [AMEX:IAU] remained steady at 43.67 tonnes of gold metal held for its investors.
So while we have the large commercials on the COMEX willing to fade speculative longs aggressively other investors have been doing more buying than selling of gold ETFs (and physical gold too over the past week if firmer premiums at regional electronic bourses are any guide).
Source for data streetTRACKS Gold Trust.
Silver ETF: During the week metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, jumped by a substantial 108.45 tonnes from 3,611.51 to 3,719.96 tonnes (119,599,586 ounces) worth $1.63 billion as of Friday’s figures. This, as silver metal edged a net $0.06 higher with a last trade Friday of $13.41 on the cash market having surged as high as $13.78 the day before the Friday sell down.
Very similar to GLD, SLV is classed by the Securities and Exchange Commission as a continuous offering exchange traded fund. Its structure is designed to track closely with the price of silver. Each share of SLV approximates roughly 10 ounces of silver metal less the trust’s accumulated expenses which are capped at 0.50% per year. The amount of metal holdings and the number of shares fluctuate according to the price of, and demand for the shares relative to the price of silver. The trading vehicle only invests in silver metal and does not use futures, options, derivatives or any other kind of paper silver.
Also similar to GLD, positive liquidity in the silver ETF is as simple as it sounds. When the amount of metal held by the trust is increasing it means that there has been more wealth flowing into the trust than can be satisfied by the number of shares then issued and trading (the then available liquidity in the market). If the number of shares were to stay the same under those increased demand conditions the price of each share would escalate faster than the metal. To prevent that authorized market participants cause the trust to issue new shares in minimum “baskets” in return for delivery to the trust’s custodian of a commensurate amount of silver metal in average 1,000-ounce “good-delivery” bars. (According to the SLV website the current basket amount is about $498,000 worth of silver.) Negative liquidity is just the opposite.
Each metric tonne contains about 32,150.75 ounces or roughly 32.15 good-delivery bars. SLV’s 3,719.96 tonnes represents about 119,600 of the heavy pure (minimum .999 fine) silver blocks held in the trust’s custodian’s ultra-secure London facilities.
One interesting note is that for the month of January SLV showed a net negative liquidity amounting to -125.52 tonnes and that followed a robust positive liquidity December where SLV added a huge 355.3 tonnes of the metal. One obvious reason for the January negative liquidity is early-year profit taking which is probably winding down.
So as of this past week apparently positive liquidity (more wealth entering than leaving) has markedly returned to SLV and that also indirectly argues with the positioning by the large commercial gold traders on the COMEX mentioned above.
Source for data Barclay’s iShares Silver Trust.
Concluding Remarks
Briefly in other GGR indicator developments, as shown in the charts below, mining shares continue to under-perform the metals, likely partly due to recent weakness in copper. The NYBOT commercial traders in the U.S. dollar index increased their collective net short positions from 523 to 4,292 contracts net short indicating they thought that the buck had more of a chance for a down move than up as of the Tuesday cutoff with USD closing at 85 even.
With gold and silver still challenging near technical resistance this seems a good time to repeat one section of last week’s report which read: “Gold and silver sometimes have a mind of their own and proceed to make fools of arrogant souls who get cocky and think that their batch of indicators is foolproof. One example: Just ask the large commercial COMEX traders who held a collective gold net short position of over 190,000 contracts in early December 2005 with gold metal trading at $515. One could hazard a guess that their indicators at the time told them that the rally was plumb done. It wasn’t.
It pays to remember that the metal had only just touched $500 for the first time in this bull market a week before in November ‘05. It also pays to remember that while the COMEX LCs were then pretty confidently net short to the tune of 590 tonnes of gold on paper the metal itself would rendezvous with the $730 mark less than five months later. Obviously their indicators were wrong back then.
That’s why when short term indicators are arguing with the rally, such as right now, rather than just selling outright seasoned traders use and constantly manage trailing stops and let their stops do their trading for them. That way if it turns out that the short term indicators are giving false signals they can confidently stay in the game and have a better chance of participating in surprises (to them) to the upside.”
The return of significant positive liquidity in both the gold and silver ETFs should at least give the short happy large commercial traders on the COMEX pause (no, it doesn’t say “paws”) if not an outright case of the willies. We will see if changes to the indicators this week end up affecting the conclusion of the next full GGR in about a week. Until then as always MIND YOUR STOPS.
Most of the graphs used by this report are updated each week during the weekend even on most off weeks when there is not a full Got Gold Report. Below are links to the most often used technical charts, most with new commentary:
Short-term Silver
1-Year Silver
Gold, 6-Month Daily
Gold, 2-Year Weekly
Gold, Advances-Corrections 2002 to Date
U.S. Dollar, 1-Year Daily
U.S. Dollar, 2-Year Weekly
HUI 6-Month Daily
HUI 3-Year Weekly
HUI:Gold Ratio 1-Year Daily
HUI:Gold Ratio 2-Year Weekly
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 net long position in streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies.
