HOUSTON (ResourceInvestor.com) -- As gold tested the low $640s, buying demand once again surfaced in amounts sufficient to thwart any real selling momentum from taking hold. Meanwhile, the indicators this report follows closely continued to improve in the two weeks since the last full Got Gold Report.
Despite statements by the Swiss that they intend to sell off 250 tonnes of their gold reserves over the next two years (apparently so they can trade real money for more paper promises), gold seemed to find staunch technical support just above its popular 200-day moving average in the $640s.
In the COT Changes section just below readers will note just how staunch that support seemed to gold traders classed as commercial on the COMEX division of NYMEX. It must have seemed staunch indeed because those veteran gold market combatants once again dumped a pile of their net short positions over the last week. A big pile of them.
In the U.S. dollar section below those on the long side of gold will find comfort in the hot pace of exit out of net long U.S. dollar index positions by New York Board of Trade (NYBOT) commercial traders on really not that big a move up for the greenback.
Overall the indicators followed closely by this report continued to improve over the past two weeks allowing a return to a cautiously bullish stance for short term traders of gold and silver. This report continues its cautiously bullish posture for long term players. Got gold?
Let’s take a detailed look at some of those indicators.
COT Changes. The Tuesday 6/12 commitments of traders report (COT) shows that the COMEX large commercials (LCs) collective combined net short positions (LCNS) plunged a whopping 38,391 contracts or 28% from 136,396 to 98,005 contracts net short Tuesday to Tuesday while gold metal corrected $22.26 or 3.3% from $669.86 to $647.60.
The last time the LCNS was under 100,000 contracts was in January with gold metal in the $620s. To say that another way, as of Tuesday the commercials were about the same level of net short as they were with gold in the $620s but gold was about $20 the ounce higher with that COT report.
Since the Tuesday COT reporting cutoff gold added $7.53 for a last trade of $655.13 Friday 6/15 on the cash market, good enough to score a net gain for the calendar week of $6.18.
Total COMEX gold open interest leaped 27,104 lots this COT week to 412,150 open contracts after the big drop the week before of over 40,000 contracts. Long-term June 2008 and beyond COMEX forwards ended the current week at 83,590 lots or about 20.2% of open contracts. (It’s not unusual for a jump up in long forwards by mid June, but the bump from 13.7% to over 20% in two weeks is quite a bit more than average. Something to keep a watch on.)
The heavy pace of LCNS reduction keeps this indicator on the bullish side of the gold market indicator ledger short 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], rose 3.08 to 472.99 tonnes ($9.9 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. GLD gold holdings dropped a net 7.86 tonnes the prior week. Volume for GLD has been mostly below its 60-day average for the period.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, were flat, showing only a maintenance reduction of 0.01 to 90.80 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] remained steady at 45.91 tonnes of gold held for its investors over the past week.
We can note minor positive money flow (more wealth entering than leaving) into gold ETFs over the past week so this indicator can stay on the bullish side of the gold market indicator ledger for now, but again, short term traders will want to keep close tabs on this one going forward.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 4,284.66 tonnes over the last week (now 137,754,970.1 ounces) worth $1.8 billion as of Friday’s figures. The silver ETF added 60.13 tonnes to its holdings the week prior.
Silver on the cash market traded mostly sideways for the week eking out a net $0.16 gain with Friday’s last trade of $13.23.
Please see the 1-year silver graph for additional technical and market commentary.
Recent silver physical market weakness (based on lower premiums for most physical silver products on electronic bourses) may have started to firm late week and especially on Friday 6/15, but the clock ran out on the week before that firming could translate into either gains on the cash market or into positive money flow into the silver ETF. We’ll have to see if what was an apparent influx of positive physical silver metal demand continues into next week, but for silver bears the end of the week had to be a teensy bit worrisome.
Source for data Barclay’s iShares Silver Trust.
Gold Charts. The daily chart for gold shows the metal doggedly holding onto territory above its popular 200-day moving average following repeated probes into the $640s.
Please also see the 2-year weekly version for context as well as additional technical and market commentary.
The Gold Charts section of the last full Got Gold Report two weeks ago included, “At least as of this writing gold metal is attempting to signal that even during May, a period some feel is the among the weakest of the annual cycle, there was enough demand on dips to prevent selling momentum from getting any real traction.”
Sure enough, the sellers just couldn’t keep it down (so far) much less get any downside momentum going. For supporting evidence we can look at how the COMEX commercials were bailing out of their collective net short positions with gold in the $640s (see COT Changes above) meaning they were not very confident of lower gold prices. We can also look at the improvement in the Cash Gold Minus HUI indicator (see below) which is moving in the “right” direction if one is on the long side.
It’s summertime, when markets usually trade thinner and volatility can be spastic, but in general the signals this report follows closely pretty much all seem to have been improving as gold forayed into the $640s. Not so much improvement to mortgage the house and leverage it all into GLD, but improvement nonetheless.
Gold failed to resume its march up in the previous uptrend channel but it has also failed to challenge its 200-day moving average, an area that has proved to be profitable buying territory throughout the 6-year bull market so far.
U.S. Dollar. The U.S. dollar index climbed 98 basis points from 81.95 to 82.93 Tuesday to Tuesday (the COT reporting cutoff day). Meanwhile the NYBOT commercials shed a big 5,860 contracts off their collective positions on the net long side. As of Tuesday 6/12 they reported being net long by 9,853 contracts meaning they are considerably less confident of U.S. dollar strength than six weeks ago (May 1) when they held a colossal 23,380 contracts net long with the USD at 81.63.
Oh they’re still on the net long side to be sure, but consider that they opted out of 58% of those net long positions as the USD rose what amounts to a move up of just 130 ticks as measured on COT cutoff day reporting. At this pace the NYBOT commercials would go net neutral somewhere in the 83s and would probably be net short before the 84 region. In other words they apparently do not see much more upside potential for the U.S. version of fiat paper currency, (versus a basket of other paper promises) at least as of Tuesday 6/12.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical commentary.
The commercials remain net long USD, but the rapid (and consistent) pace of exit from those net long positions is enough to move this indicator from the bearish side of the gold indicator ledger to neutral 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.
Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves.
The HUI once again bounced neatly off an implied support trend line marked by the January-March-May lows which confirms a continuation of the slightly rising consolidation channel in play since December.
Repeating from the last GGR: “Long period consolidations such as the one in place today tend to stay in place until a substantial change in liquidity into or out of the sector occurs. If significantly more wealth flows into mining shares resistance will inevitably give way, sometimes explosively, just as it did with the 2-year consolidation breakout in December 2005. On the other hand, if a more meaningful liquidity exodus occurs (much more wealth fleeing the sector) then support will fall and a longer period and deeper correction percentage wise would become likely.
As long as support continues to form at higher levels there is no supporting evidence of such a liquidity exodus and, speaking simply, the shorter the distance to resistance the easier it is for that resistance to ultimately be defeated. Until resistance gives way, however, mining share bears will continue to sell it and short term traders will continue to tighten stops near there. That is until enough new wealth pours into the sector to overcome that natural trading wall.
It is this report’s contention that we are likely to see exactly that kind of new wealth inflow into mining shares (and gold and silver) in the months ahead.”
Since the HUI once again tested and bounced off the slightly uptrending consolidation support line, reclaiming its 200-dma in the process, this indicator remains bullish on the gold market indicator ledger short term.
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.
Yes, that is a signature of some improvement (best seen in the 1-year version). Not enough improvement to get overly excited about, but certainly measurable. Now let’s see if that turns into a mining share outperformance trend or just ends up being a summertime anomaly. It won’t take long to know. We should have an idea by the next scheduled full Got Gold Report in two weeks.
Cash Gold-HUI. The cash gold minus HUI indicator closed the week improved again at 318.86. Still fairly high, but 9.28 points lower (better) than the 328.14 reading in the last full GGR two weeks ago. The spread continues to move in the “right” direction from a long mining shares point of view, but it has a long way to go before it signals robust confidence by the market. Today it is just signaling improving confidence from pretty weak levels of the past few months.
What does that mean? Well, among other things it could mean that even though the hottest of hot money is off chasing performance and momentum in the Big Markets (this report’s nickname for the DOW and the NASDAQ) or in foreign equity markets enough buying pressure exists to maintain a slightly rising floor in the PM sector until the momentum chasing guys and gals return. We’ll see.
What should be worrisome for gold and mining share bears is that even though the spread actually got deep into warning territory (Feb-May) it failed to translate into the kind of big sell-down we witnessed the last visit there a year ago. At least it hasn’t yet.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Cautiously bullish. Trailing stops normal.)
As expected the indicators have continued to improve over the past two weeks. On the bullish side of the gold market indicator ledger we can once again note a significant (and accelerated) reduction in COMEX commercial net short positions as gold tested the $640s, minor positive money flow for gold ETFs, continued failure of gold metal to break (or even challenge its 200-dma), failure of silver to break (and still holding its 200-dma), some modest outperformance of mining shares relative to gold, another neat bounce of the HUI off the lower consolidation trend line, a late week firming of silver premiums on electronic bourses and some more improvement to the cash gold minus HUI indicator.
Particularly interesting is the 28% 1-week reduction in COMEX commercial net short positions along with an INCREASE in the total COMEX open interest of over 27,000 contracts in the same week.
On the less bullish side the NYBOT commercials remain long the greenback, although they have hugely reduced their net long position on not that big a move up for the buck.
On balance the indicators continued their improvement (as expected) since the last full report so this report returns to a cautiously bullish stance for short term traders. In this report’s opinion short term traders on the long side can confidently add on significant dips for gold, silver and selected mining shares provided traders are disciplined in the use and management of appropriate new-trade trailing stops for protection.
The usual summertime caveats apply, however. Typically summertime trading can be thin and overly volatile especially during the heavier vacation months of July and August. Opportunistic players learn to take advantage of unusual volatility during the summer period. That’s if they are at their computer terminals or watching their PDAs instead of fishing, golfing or something more enjoyable.
Until next time, as always, MIND YOUR STOPS.
Long-Term Outlook: (Continued cautiously bullish, trailing stops normal.)
This report remains long term cautiously bullish. 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.
