HOUSTON (ResourceInvestor.com) -- Positive money flow into gold ETFs continued at a brisk pace over the past two weeks as gold consolidated its move into the $660s then sucker punched short sellers with a fun-to-watch Wednesday $19 romp higher following a Tuesday $12 head fake lower this past week on the cash market.
Gold has now bested all but the highest of technical turning highs in this Great Gold Bull set last May in the $730 region and with the current bullish momentum it would not be surprising to see a retest of the May 2006 highs. Continued global tensions (Iran), aggressive fund buying, unusually strong physical metal demand, €500 gold holding in Europe, higher oil and other commodities prices and renewed inflation worries were all cited as bullish signs underpinning the current march forward for the two most popular precious metals in news reports this past week. In addition, with most gold and silver short positions underwater, advances also gain from short seller pain.
Win With Trailing Stops
Rallies don’t last forever though. This particular surge higher will come to an end at some point. The key questions for short term traders are where and when? Since no human knows the answer to either of those questions in advance, how can we traders get “our share” of these fantastic opportunities?
Long term readers will already know that one good way is by developing and constantly managing sound trailing stop strategies for most trading positions. Trailing stops are a subject for a separate series of reports and beyond the scope of the limited space here, but the basic idea is to shadow a move (in this case a rally) with a sell stop order (or several orders at various prices) always in place. After a new trade becomes a trending move the primary goal is keeping that stop close enough to the action to prevent losing most of the hard won profits but not so close as to get taken out by ordinary volatility. Once the prices roll over and head south the stop gets hit, the position is sold (pay day) and the trader can then calmly look for another opportunity.
Depending on the action seasoned traders vary the closeness of their stops according to the caution level they assign to the current slate of indicators, technical events and metals moving news. Over time successful traders learn to set stops intuitively based on experience rather than relying on a set formula or a single percentage.
Done well and managed carefully trailing stops can allow a trader to stay comfortably in the trade even when the move goes well beyond expected upper resistance. While using trailing stops pretty much guarantees that you won’t get the last dollar of a move it can, and often does, result in being able to participate in much more of a move than if the individual had just picked an arbitrary measured move target. Look for more on this subject in future reports.
On another note, since this report turned cautiously bullish on September 17 with cash market gold at $570, the global standard of wealth for over four millennia has advanced a net $113.03 or 19.8% as of Friday’s close.
From the Mailbag
A new reader writes: “I have been following your report for a month now. Why do you use the term ‘large commercials?’ The CFTC does not make any distinction as to size when it refers to commercial traders.”
This report uses the term “large commercials” to describe the commercial net short position on the COMEX because invariably something over half the total gold short position each week is concentrated in eight or fewer traders classed as commercials by the CFTC. In other words as of today the short world on the COMEX is dominated by a relative few large players. How few and how large?
Well, as an example in the February 13, 2007 COT report issued by the CFTC all 46 reporting traders classed as commercials held a collective short position on gold of 288,984 contracts. They aren’t, but if the short positions were evenly distributed 46 ways that would amount to about 6,282 contracts per trader. Just for a basis to understand the next comment 6,282 COMEX contracts represents paper promises to deliver about 628,226 ounces (19.54 tonnes) of gold metal which was about $421 million worth at $670 gold.
The CFTC also reports the percentage of those positions held by the largest four and eight individual traders and for February 13 the largest eight traders were responsible for 51.3% of the total short position on the COMEX for gold. That means that 8 firms were responsible for 148,248.8 contracts of the total short interest representing 14,824,879.2 ounces on paper (461.1 tonnes) worth $9.9 billion at $670 gold. They aren’t, but if those short positions were evenly divided eight ways it would amount to 18,531 contracts for each of the eight largest traders covering gold worth about $1.2 billion in notional value each.
Now technically the CFTC doesn’t say that the eight largest traders short are all commercial traders. But we don’t have to look all that far for supporting evidence that they are. Just 7.4% of the total short position was reported by 50 non-commercial traders and a dinky 3.9% of the total short interest was from players with positions too small to be classed as commercial or non-commercial.
So, a relative few commercial traders on the COMEX dominate the short side for now, each with large positions in nominal terms. Hence this report’s term for them, “large commercials” or “LCs” for, …uh, short. Large commercial interests they are.
A brief description of how a trader becomes classed as either commercial or non-commercial is available on the CFTC Web site. It is not quite as simple as this, but generally if reporting traders report on their CFTC Form 40 that they use futures or options for hedging in a particular commodity under the commission’s rules all their positions in that commodity are reported as commercial whether or not their particular positions are actually hedges.
What this report tracks religiously in the “COT Changes” section are changes to the positioning of these very large COMEX commercial interests. The theory being that usable signals are sent out when there is extraordinarily large movement in their positioning. For example, a bearish signal is sounded when there is a very large spike up in the commercial net short position on flat or lower gold. The idea is that for whatever reason these large commercial interests were willing to take on short positions at an exaggerated pace and therefore are expecting lower gold prices near term.
The thought behind focusing on the LCs is that they should be well informed to be taking such large positions. That doesn’t necessarily mean the signal is right of course, there have been times when it has been dead wrong. Just another confirmation of the notion that traders ought to follow a basket of indicators when trading.
With that, let’s take a detailed look at some of the indicators this report follows closely.
COT Changes. The Tuesday 2/20 commitments of traders report (COT) shows that the COMEX large commercials (LCs) collective combined net short positions (LCNS) increased by a modest 2,686 contracts or 2% from 165,464 to 168,150 contracts net short Tuesday to Tuesday having surged 18,800 contracts the week prior. This week’s COT reflects positioning at the close of what turned out to be the low close of the week with gold metal on the cash market pegged at $658.87. So while gold metal actually fell $5.78 or 0.9% the LCNS increased a little.
Since Tuesday gold took off higher, adding a net $24.16 for a last cash market trade of $683.03 Friday 2/23. The move higher erased Tuesday’s $12.63 downer and was good enough for a net gain of $13.94 for the calendar week.
Total COMEX gold open interest increased 12,946 lots to 396,115 open contracts after adding a big 22,233 lots the week prior. Long-term December ‘07 and beyond COMEX forwards ended the current week just 1,091 contracts higher at 91,831 or a slightly less but still high 23.1% of open contracts.
It might not be a fair comparison using Tuesday’s closing data (at the low close of the week), but in the six reporting periods since the January 9, 2007 COT report with gold at $613.26 the LCs have been willing to increase their net short exposure by 86,476 lots. That is a little more than double (106% higher) the 81,674 contract net short position held by the COMEX commercials when gold was trading at $613.26. (Most of the increase occurred above $630.) So as gold added a net $45.61 or 7.4% (as of Tuesday) the largest traders on the COMEX were willing to increase their collective net short exposure by taking the short side of paper contracts covering about 269 tonnes of gold with a notional value worth $5.9 billion as of Friday’s close.
For clarity, that was just the increase in the LCNS since January 9. The total commercial net short position covers COMEX contracts for about 523 tonnes of the yellow metal worth notionally about $11.5 billion. As of Tuesday COMEX commercials held net short positions of about the same amount of gold as is held in all the gold ETFs sponsored by the World Gold Council in other words. One wonders where the price of gold would be today without the counterbalance of global gold ETF investor demand.
One aspect not to be overlooked is that with gold in the $680s nearly all of the gold short positions on the COMEX (and for that matter on other bourses large and small) are off side, so upward thrusts of the metal relative to paper currencies tend to trip short trailing stops and has the potential to snowball into short covering routs.
Even though they reflect surging speculative demand, (the other side of the commercial short positions) given the large increases to the LCNS over the past six reporting weeks and the hot rate of change which showed in the prior several reports, this indicator has to remain on the bearish side of the gold market indicator ledger.
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], jumped 11.71 to 487.47 tonnes of gold bars held by a custodian in London for the trust. That is after adding 14.18 tonnes the prior week.
For the month of February GLD alone has seen liquidity-induced gold metal additions of a whopping 37.17 tonnes or 8.2% reflecting strongly positive money flow (more wealth entering GLD than leaving). That is the fastest monthly pace of gold metal additions since November 2006 when GLD added a net 52.96 tonnes.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, were trimmed by a maintenance .01 tonnes to 87.07 tonnes of gold held, while Barclay’s iShares COMEX Gold Trust [AMEX:IAU] added 0.62 tonnes to hold 44.28 tonnes of gold metal held for its investors.
This indicator remains on the bullish side of the gold market indicator ledger.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, added a relatively modest 30.98 tonnes from 3,888.9 to 3,919.88 tonnes (126,026,951.1ounces) worth $1.8 billion as of Thursday’s figures. Silver metal on the cash market turned in a net $0.61 gain for the week with the last trade Friday of a bear slaying $14.577.
Over the past two weeks silver has recorded a net gain of $0.71 seemingly answering the 277.39 tonne off take of silver metal by SLV the two weeks prior as reported in the February 9 Got Gold Report. Since then the pace of liquidity-induced metal additions has slowed, but remains on the positive side.
This indicator remains on the bullish side of the indicator ledger.
Please see the short term graph for silver metal and the 1-year silver graph for additional technical commentary.
SLV metal holdings graph as of Thursday, 2/22:
Source for data Barclay’s iShares Silver Trust
Gold Charts. The last GGR two weeks ago noted that the daily chart showed a rather convincing attempt at an upside breakaway above what had been resistance attempting to form in the $660 region on the cash market all that week (roughly $665 on Stockcharts.com). Since then the metal traded sideways, then saw a one-day $12 sell-down on this past Tuesday (the COT cutoff day), but thanks to some global tensions (Iran), renewed inflation concerns, determined fund buying and strong physical demand, Tuesday’s down action turned into a down side head fake. Wednesday’s net $19 thrust higher was obviously fueled in part by new short interests lured in the previous day as they were forced to change their mind.
Please also see the 2-year weekly version for context as well as additional technical commentary.
The last GGR also mentioned: “With gold having broken though implied resistance short term traders can relax their stops just a smidge to “near resistance” levels to allow for a bit more volatility. A large number of trailing stops will migrate to just under the previous implied resistance (roughly $650 on the cash market) which technical theory holds should now become near support.”
Support actually formed a little above $650 over the two weeks since then, with the intra-day cash market low Tuesday 2/20 coming in at $656.22. That was very near the short-term trending 7-week moving average (7-wma) which is currently crossing $656.76 and now steeply rising. Some traders believe and trade based on the premise that gold tends to respect its 7-wma (on a weekly closing basis) when strongly trending in either direction. While not foolproof, a quick look at the two-year weekly graph above would seem to bear them out. The current thrust upward for gold has respected the 7-wma for six consecutive weeks.
With gold now above its July 2006 highs there is no measurable resistance between here and the $720 - $730 region. There is nothing magic about that area other than that is where gold finally ran out of steam last May after its longest and most significant upward run of the Great Gold Bull so far. Gold has been in a wide consolidation since then.
Resistance and typically sharp reversals can form anywhere between here and there or above there and no one will know where they will form until they do. There is really no sense in trying to guess where resistance will eventually form either. Instead, seasoned traders employ and manage trailing stop strategies which seek to allow them to stay in the trade while protecting hard-won profits from sudden, dramatic reversals.
This indicator remains bullish on the gold market indicator ledger.
U.S. Dollar. As the U.S. dollar index dipped 53 basis points from 84.70 to 84.17 Tuesday to Tuesday the commercials dumped their net short positions entirely and flipped to 4,805 contracts net long. That is a one-week swing of 8,209 NYBOT contracts, suggesting that the commercials believe that there is now less of a chance for dollar weakness short term. From Tuesday to Friday the index edged 13 ticks lower to close Friday at 84.04.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional commentary.
Given the abrupt movement from net short to net long by the commercials this indicator flips back onto the bearish side of the gold indicator ledger short term.
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.
The last GGR two weeks ago said: “Mining shares continue to under-perform precious metals. As both gold and silver have broken through interim resistance the miners have yet to challenge theirs. The lethargic collective action of mining shares to the rallies in gold and silver has to be this report’s most bearish indication.”
The HUI index is finally challenging its long-term resistance nemesis between 350 and 360, but that’s with gold in the $680s and we have to note that the last two visits to the HUI resistance zone came with gold in the $630s and $650s respectively (August and November 2006). In other words the HUI is just now challenging the same resistance it did when gold was $30 to $50 cheaper.
With mining shares collectively at the top of a triangular formation and challenging an area that has proved to be persistent resistance since July 2006, coupled with large enough short positions on some of the gold index components to be interesting, any convincing thrust higher from here could be quite dramatic and fun to observe. This being arguably the fourth attempt by the HUI to break above the 350-360 resistance zone in the seven months since last July, there has been more than ample time for a legion of buy stops to accumulate not far above.
Please see the 6-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves. Lest anyone think that this potential breakout condition is peculiar to the HUI, consider the similar technical formations on the less volatile Philadelphia Gold and Silver Index [XAU] and the more broadly based AMEX Gold Miners Index [GDM].
Until and unless the mining share indexes do indeed convincingly break out above persistent resistance their reluctance to do so raises questions as to why mining shares are not endorsing the rallies of gold and silver so far. Some theories being mentioned by industry observers include large scale distribution by very large holders of mining shares, i.e. selling into the rallies (not really supported by institutional filings with the SEC), the recent strong sell-down of copper (possibly one reason although other industrial metals are cutting new highs now), expansion/dilution of the collective floats of index components through financings (not investigated for this report) and investors chasing performance in overseas equity markets and the U.S. big markets leaving a little less liquidity for mining shares (also possible).
It will be enormously interesting to see the action in the mining share indexes should they successfully break out. Breakouts from long-period consolidations can be explosive. Until they do convincingly break out though mining shares are collectively at or near resistance and this report believes short term traders should continue to employ and manage trailing stops accordingly.
The HUI indicator is technically bullish, but would be more so if the next two indicators would show some improvement.
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.
The one-year daily HUI/Gold ratio chart graphically shows the reluctance of mining shares to endorse the rallies in gold and silver. Please also see the 2-year weekly HUI/Gold version for context and additional commentary.
Where is the enthusiasm? Will mining shares suddenly answer the metals in a big short-covering-buy-stop-triggering way, or are mining shares the proverbial canary in the mine shaft signaling caution to gold and silver traders right now? We shouldn’t have very long a wait for an answer.
Cash Gold-HUI. The cash gold minus HUI indicator turned in a still high 325.74 0.86 points lower from the 326.60 reading two weeks ago using cash market closing prices. Once again, either mining shares need to advance or gold metal needs to pull back or both for this indicator to regain par.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (“Near resistance” trailing stop strategy for short term traders for gold, silver and mining shares. Medium to longer term continued cautiously bullish; Trailing stops normal for gold and mining shares for longer term investors.)
The last GGR concluded: “Considering all of the indicators this report follows closely short term traders on the long side might now relax just one notch from an “at resistance” to a “near resistance” trailing stop strategy to allow for a bit more volatility while protecting significant profits.”
With the strongly positive money flow still evident into gold ETFs and momentum now favoring the bulls there is no change in this report’s stance for short term traders.
As mentioned two weeks ago, medium to longer term this report plans to remain cautiously bullish for gold and mining shares with normal trailing stops. For now longer term investors should only add into strong to very strong dips in this report’s opinion.
The next Got Gold Report is scheduled for the weekend of March 10-11 two weeks from now. Until next time as always MIND YOUR STOPS.
Long-Term Outlook: No change. 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 net long position in streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies.
