HOUSTON (ResourceInvestor.com) -- Over the past two weeks the U.S. dollar index fell hard enough and far enough to threaten long-term historic technical support. Legions of U.S. dollar bears are salivating at the prospect of a possible technical meltdown for the buck. They haven’t been this close to that dollar-bearish Holy Grail event since December of 2004. The previous shot at a break of 80 on the index to that occurred in 1995 so it isn’t all that often that the trading approaches such a seminal threshold.
Interestingly, the last 146 basis points or so of this dollar plunge was while the largest of the largest traders of U.S. dollar index futures were already hugely net long the greenback. In other words if their positioning reflects their expectations then they thought that a bounce should have already occurred.
Is it possible that the largest dollar index futures traders are positioned the way they are because they are confident that governments will intervene in the forex markets to prevent a possible global dollar confidence puncture? (It’s a rhetorical question.) For more on this please see the U.S. Dollar section below.
Gold bounced up off its popular 200-day moving average a little over two weeks ago after having briefly tested the high $630s. Since then it has marched on back up to the high $660s, as expected. As noted here, just prior to that move up for the metal mining shares first refused to answer gold weakness and then strongly outperformed the metal in an apparent burst of liquidity inflow to the PM sector. As noted in the Gold Indexes section below mining shares have once again traveled up to an area of persistent resistance and seem to be consolidating there waiting for a sign.
The past two weeks have also seen a resurgence of pretty strong positive money flow into gold and silver exchange traded funds. Readers can catch the numbers in the Gold and Silver ETF sections of the report.
However unlikely an actual technical break of the U.S. dollar index long term support may be, and no matter the size of the huge bets now in place that it bounces here by seasoned, very large, well funded and presumably well informed trading interests, the U.S. dollar is currently perched on a technical trap door. Traders worldwide are on dollar breakdown watch (even if virtually no one really believes it might actually be allowed to crater … this time).
Brief Market Commentary: It’s Not Just Dollar Sickness
As discussed a bit more below, it seems that weakness in the U.S. dollar has gotten most of the credit (blame?) for the current move up for gold and silver, but dollar sickness is just one of many fundamental drivers affecting the global precious metals bull market today.
For example, evidence of global diversification by large holders of dollar denominated forex reserves away from the U.S. dollar and into everything else including gold continues to quietly surface. Although relatively small in numbers Qatar’s quadrupling of its gold reserves between January and April is symbolic of what is almost certainly a developing and soon to be accelerating trend.
Along with global forex diversification is the expected stepped up assault by NGOs and anti-mining groups whose favorite weapon is the courtroom, no matter the jurisdiction. The latest example is the hopefully temporary closure of Eldorado Gold’s Kisladag mine in western Turkey due to a lawsuit brought by private interests. Miners not only have to gain the necessary approvals before plunging enormous sums of capital to bring jobs and social improvement into the region, once obtained they also have to defend those rights from legal terrorism, blackmail, eco-extortion and political interference.
With each “victory” the NGOs and anti-miners achieve, with each political regime that passes a ban on the chemicals that miners need to use to coax minerals from rock, some fraction of the globe is removed from the area which can add to the supply, at least temporarily, and those forces are and will likely continue to be on the increase. It’s just another of the many market forces that contribute in some way to keeping precious metals already above ground precious.
With that, let’s take a detailed look at some of the indicators.
COT Changes. The Tuesday 7/10 commitments of traders report (COT) shows that the COMEX large commercials (LCs) collective combined net short positions (LCNS) increased by a relatively modest 11,953 contracts or 13% from 91,232 to 103,185 contracts net short Tuesday to Tuesday while gold metal rose $10.41 or 1.6% from $653.15 to $663.56 on the cash market.
In the two COT reporting periods since the last full Got Gold Report two weeks ago gold metal advanced $21.41 or 3.3% from $642.15 to $663.56 (as of the Tuesday COT cutoff dates) while the traders classed by the CFTC as commercial on the COMEX were willing to increase their collective net short exposure by 19,601 contracts or 23.5%.
Since the Tuesday 7/10 COT reporting cutoff gold edged $3.76 higher for a last trade of $667.32 Friday 7/13 on the cash market. For the calendar week gold scored a net advance of $12.52 in U.S. dollar terms.
Total COMEX gold open interest rose 12,274 lots this COT week to 387,916 open contracts, but that follows a big 31,998 contract drop in total open interest the prior week. Long-term August 2008 and beyond COMEX forwards ended the current week at 63,132 lots or about 16% of open contracts. (Note the change to August for the back month. If June were still included we would have noted a drop of 3,991 contracts to 79,502 total or about 20.4%).
The last full Got Gold Report two weeks ago noted the then hot pace of net short exposure reduction by the commercials on the COMEX and the obvious conclusion, that they were not nearly as confident of further gold weakness with gold then in the low $640s. Sure enough, gold found a bid there and has since walked on up a double sawbuck and change. Interestingly, at least as of the Tuesday COT cutoff with gold trading in the low $660s those same commercials had not yet become strongly convinced that the move up for gold was near a turn. One look at the LCNS chart just below will confirm that statement. If they were convinced that gold had moved up too far too fast we could have expected a much larger increase in their net short exposure.
Since gold metal turned in a respectable $21 bump up over the past two COT reporting weeks (and is currently attempting a minor technical breakout), but during that period the largest of the largest traders of 100-ounce gold futures contracts on the globe were ginger footed in their willingness to take on new net short exposure we get to keep 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], increased by a big 11.39 to 484.84 tonnes ($10.39 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. That follows an increase of 9.08 tonnes the prior week. Over the past two weeks higher volume days for GLD have been on up days suggesting that more wealth has been flowing into the gold metal ETF than leaving it.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, were steady at 93.11 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] remained flat at 45.90 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 11.63 to 603.64 tonnes of the precious metal worth $12.94 billion U.S. dollars as of Friday’s figures.
Positive money flow (more wealth entering the ETFs than leaving) has been clearly evident over the past two weeks as 20.7 tonnes of new gold was added to ETF holdings for the period.
That action puts this indicator back on the bullish side of the gold market indicator ledger for now reflecting the surge in positive money flow. However, it’s still summer and short term traders will want to keep in daily touch with this valuable indicator 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, increased by 30.92 to 4,329.20 tonnes over the last week (now 139,186,961 ounces) worth $1.8 billion as of Friday’s figures. The silver ETF added 60.0 tonnes to its holdings the week prior.
For the second consecutive week silver clawed out a $0.33 gain on the cash market. Friday’s (7/13) last trade of $13.044 represents a 2-week snapback rally and a challenge from below of the popular 50 and 200-day moving averages.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
If silver can convincingly defeat implied near resistance which currently has to be marked around the convergence of the 50 and 200-dmas (in the area of $13.15 or so on the cash market give or take a nickel) and then stick it, a follow through short covering rally is a distinct possibility. However, should the advance stall here and the trading be repelled lower from the moving averages short term trading bears will become emboldened and the key metric to watch then would be where overwhelming support ends up forming. (Higher or lower than the previous example.) Given the robust physical metal demand surfacing into even the least dip over the past week the odds are pretty good that support would be forming north of the last turning low, but things can change quickly during the summer so, as always, short term traders mind your stops.
Source for data Barclay’s iShares Silver Trust.
Gold Charts. The 1-Year Daily chart for gold has the metal challenging its 50-day moving average (50-dma) from below and rising slightly above a short term trend line formed by the prior two descending highs which technicians will say is bullish if it holds or follows through convincingly. Indeed a goodly number of buy stops and short trailing stops probably reside not far above the current position. On the other hand gold market bears will be hoping for a failure to advance here and a short term bearish pullback below the technical lines in the sand which would probably trigger a host of recently raised long trailing stops (to just under the perceived breakout point, something bears love to exploit if they can) and set up a possible re-test of the rising 200-dma.
Please also see the 2-year weekly version for context as well as additional technical and market commentary on the charts themselves.
Aggressive dip buying and a surge of positive money flow surfaced as gold was testing the low $640s two weeks ago, but now that the metal has moved up to challenge important technical triggers the momentum evident in mining shares then seems to have paused, probably waiting for a direction-confirming catalyst either way. That catalyst could take the form of any number of potential events, including a major move by the next indicator…
U.S. Dollar. In a little over two weeks traders classed as “commercial” on the New York Board of Trade (NYBOT) have very strongly increased their collective reported net long position for the U.S. dollar index as the largest global currency neared long-term historic support (near 80 on the USD index). That means that the largest traders for dollar index futures (who can sometimes smell intervention ahead of time) are betting heavily that historic support for the greenback will hold here.
Importantly (and ouch for the commercials) they took most of the current dollar bullish stand two weeks and over 100 basis points ago.
The U.S. dollar index dove another 62 basis points from 81.47 to 80.85 Tuesday to Tuesday (the COT reporting cutoff day). While that was going on the NYBOT commercials topped off their net long tanks with another 2,080 contracts and are once again net long by a huge measure. They were exactly 22,472 DX contracts net long as of Tuesday 7/10, apparently very confident that “market forces” would intervene to prevent a long-term-confidence-shaking technical breakdown for the U.S. version of fiat paper promises.
Since Tuesday, in a bit of a Maalox Moment for those commercials, the USD index continued LOWER another 27 ticks to close Friday 7/13 at 80.58, tantalizingly close (for U.S. dollar bears) to very long-term historic implied technical support.
If those commercial interests are right then the buck should once again attempt an upward bounce very soon, but until it does the risk of a major technical dollar breakdown exists. Most traders feel that such a technical breakdown would be extraordinarily bullish for gold metal and could be just the catalyst to send the metal on up to new highs. However with the commercials very strongly betting on a bounce for the buck the odds probably favor a dollar bounce here rather than a breakdown. Either way this market is getting pretty interesting.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Since the commercials are once again hugely net long the DX, this indicator has to reside on the bearish side of the gold indicator ledger, but in the probably unlikely event that this happens to be the time the buck breaks down convincingly shell shocked traders worldwide will almost certainly be looking for a safe haven to park big sums quickly.
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.
In the two weeks since the last Got Gold Report mining shares jumped up ahead of a move up for the metals indicating a mini-rush of positive liquidity for the sector. That bullish action has now paused in the area of long term persistent resistance, perhaps waiting for short term market motivation to surface, bullish or bearish.
All eyes will likely be focused on the U.S. dollar in the upcoming days but just as a reminder the dollar is not the only potential market-moving catalyst maker in the ballgame. It’s just the most obvious at the moment. Keeping with the baseball metaphor it is also quite possible that a catalyst could suddenly and unexpectedly come out of left field. (Political and religious tensions are often elevated during the hot as hell summer months in the Middle East as one example.)
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.
Two weeks ago with gold then on a down move testing the lower $640s the HUI:Gold Ratio section included: “If gold is going much lower why isn’t this ratio plunging hard?” The idea was that mining shares were then refusing to oversell gold weakness which is kind of bullish. Mining shares were signaling hidden strength at the time.
Well, very shortly after that mining shares caught a bit of a bid in advance of gold’s move on back up to the upper $660s. It was as though someone had thrown an invisible switch and portfolio managers and funds all decided en mass to put a little capital to work in the precious metals sector at the same time. That showed up in the form of a nice bump up for this ratio (see the charts above) and a big one-week drop in the Cash Gold Minus HUI indicator (below) signaling a welcome surge of bullish positive money flow into the PM sector. The action spilled over into gold and silver ETFs over the past two weeks in the form of positive money flow evidenced by the additions mentioned above to their respective metal holdings.
Now, however, it’s as if the interests who were sending money into gold and silver have paused and are waiting for a sign or a catalyst for direction, or maybe confirmation, because for the past week the miners have just more or less tracked with gold. Short term traders will want to keep a close eye on the ratio and on the next indicator closely over the next little while to see if that surge of positive money flow was the start of something more meaningful or instead just a one-time summer dollar-related blip.
Cash Gold-HUI. The cash gold minus HUI indicator closed the week at 314.71 which is 12.52 points higher (weaker) than the 302.19 reading mentioned in a supplemental GGR one week ago. It is still significantly better than the much higher readings in “warning territory” seen in May and early June (in the 330s and 340s) and as the graph indicates, although it hasn’t gotten there yet, it has been moving in the direction to where it would indicate building confidence and/or significant liquidity inflows to the sector.
Again, if there was a more meaningful bearish exodus of capital from the gold mining sector underway by heavy hitting fund and portfolio managers this indicator would be higher and rising strongly again. The opposite has been underway now for about the past four weeks.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Cautiously bullish. Trailing stops normal. Significant to strong dips can be bought. Light liquidity summer trading caveats apply.)
On the bullish side of the gold market indicator ledger the COMEX commercial trader’s net short positions really didn’t increase all that much as gold moved back up into the lower $660s. After gold metal held its popular 200-dma following an important challenge 6/26, it has clawed back up and is attempting a breakout above its 50-dma and attempting a break above the current downtrend line in place since April. Strongly positive money flow into gold (and silver) ETFs has been underway for the past two weeks (over 20 tonnes of gold worth). Once mining shares telegraphed the move up for the metals with a burst of outperformance two weeks ago they have held onto that relative level and have not snapped back lower (but they have not continued to outperform either).
On the less bullish side rightly or wrongly U.S. dollar weakness has been largely credited by market commentators with being the primary influence behind the current gold rally and the NYBOT commercials have once again taken huge bets that the world’s reserve paper currency will pull a northward reversal here near historic support.
A U.S. dollar rally may indeed ensue near term which might put temporary pressure on gold and silver, but despite what commentators might be saying on a daily basis the greenback is not the only driver of this powerful bull market for precious metals. Consequently there is no immediate change to this report’s short term outlook.
Repeating from the last Short Term Outlook section from two weeks ago with gold in the $640s: “Right or wrong in this report’s opinion the two most popular precious metals have entered the area where traders may confidently add in measured increments into significant to strong 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, as mentioned in previous reports.
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.
