ATLANTA (ResourceInvestor.com) -- As the end of the second quarter came to a close gold seemingly survived a determined sell-down attempt which occurred Tuesday 6/26, that happened to coincide with the last reporting day of the quarter for large traders of gold futures contracts on the COMEX division of NYMEX in New York. That sell-down ended up driving the cash market price as low as $640.32 that day and triggered the first significant challenge of the popular 200-day moving average on gold technical charts since January.
Silver, a much smaller and much more volatile market, actually broke below its own 200-dma, exciting market technicians and silver bargain hunters alike.
As mentioned in the Gold ETF and Silver ETF sections below, the selling action spurred negative money flow (more wealth leaving than entering) for the largest gold ETF and the U.S. silver ETF over the past week.
Right after we witnessed a huge exodus of large commercial traders out of enormous net long positions for the U.S. dollar index just last week, this week those very same commercial interests have piled back onto the long side of the greenback in a big way. And they did so just BEFORE a 40 basis point dip on the index. Read more about that in the U.S. Dollar section below.
Meanwhile, despite these seemingly unsettling developments and amidst a veritable deluge of gold-bearish commentary globally, the largest traders of gold futures on the planet have been furiously reducing their collective net short exposure to gold. Indeed, in the COT Changes section just below readers will learn that as of Tuesday, 6/26, the COMEX commercials are now the least net short gold since Janaury 9 when gold closed at $613 and change on the cash market.
Based largely on the action displayed by those large, well funded and theoretically well informed interests on the COMEX and despite mixed and confusing signals (primarily over the past end-of-quarter-light-liquidity-summer-trading week) this report maintains its cautiously bullish stance for short term traders of gold, silver and selected mining shares provided traders are disciplined in the use and management of appropriate new-trade trailing stops for protection. Right or wrong both gold and silver have entered technical zones that have consistently rewarded opportunistic incremental capital deployment during this 6-year bull market.
Could this be the time that precedes a much harsher and dramatic true bull market correction and major liquidity exodus from the sector that is just now getting underway? Yes, of course it could. If so, then gold and silver could move dramatically lower and our trailing stops from entries today will get nailed along with a host of other like-minded contrarians. If that happens we’ll lick our relatively small wounds and prepare for the next opportunity. But if gold and silver were going to plunge much lower from here why are the largest traders of gold futures getting the heck out of their net short positions? Why aren’t the mining share indexes falling off the proverbial cliff as well-informed and very large portfolio and fund managers hit the exits? And why hasn’t there been a much more meaningful exodus of wealth out of gold and silver ETFs?
Until those events show it is difficult to accept the notion that demand for gold and silver is falling faster than the available supply over time.
With that, let’s take a detailed look at some of the indicators.
COT Changes. The Tuesday 6/26 commitments of traders report (COT) shows that the COMEX large commercials (LCs) collective combined net short positions (LCNS) plunged a significant 25,636 contracts or 23% from 109,220 to 83,584 contracts net short Tuesday to Tuesday while gold metal sold off $19.15 or 2.9% from $661.30 to $642.15.
Tuesday’s LCNS is the lowest collective net short position for the COMEX commercials since the January 9 COT report (81,674) when gold closed at $613.26, so as of Tuesday, 6/26 with gold in the low $640s, the LCs were about the same level of net short as when gold was trading in the $610s. One difference between now and then is there are about 60,000 more contracts open on the COMEX today.
Since the Tuesday COT reporting cutoff gold added $7.35 for a last trade of $649.50 Friday 6/29 on the cash market. For the calendar week gold showed a net decline of $4.47 in U.S. dollar terms.
Total COMEX gold open interest edged 2,684 lots lower this COT week to 407,640 open contracts. The prior week saw a similar mini reduction of 1,826 contracts. Long-term June 2008 and beyond COMEX forwards ended the current week at 85,363 lots or still about 20.9% of open contracts.
To put a little more focus on the current LCNS, consider that since the April 17 COT report, when the COMEX commercials (the LCs) reported a collective net short position of 174,598 100-ounce gold futures contracts with gold metal at $687.35, they have reduced their net short position by 91,014 contracts or 52% as the metal dipped $45.20 or 6.6%. That’s just about an 8:1 ratio over time (but of course it is accelerated at lower gold prices).
Are bullion banks furiously covering their short positions? With gold in the $640s? (Not just on the COMEX.) Are they not nearly as confident in much lower gold prices near term? With gold metal hanging tough in the $640s following a spirited period of central bank metal sales and ETF sales we just about have to answer yes to those questions. This COMEX COT report does (repeat does) support the idea that the LCs have grown considerably less confident of lower gold prices with gold in the lower $640s.
By comparison, the COMEX commercial’s net short position has only been less than Tuesday’s 83,584 contracts in 5 COT reporting weeks out of the last two years. For those that like things in percentage terms, the Tuesday 6/26 COMEX commercial collective net short position has only been this low or lower 4.8% of the time out of the past 104 weeks.
In terms of the amount of gold represented by those paper contracts, since April 17 the amount of gold exposure on the short side for the commercials has been reduced by about 283 tonnes (a little more than the Swiss said they would sell over the next two years).
The low absolute level and the hot pace of LCNS reduction keeps this indicator on the bullish side of the gold market indicator ledger short term. If the largest traders on the planet for gold futures were looking for much lower gold prices the LCNS would not be falling so much.
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], fell a big 10.16 to 464.37 tonnes ($9.7 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. GLD gold holdings added a small 1.54 tonnes the prior week. Volume for GLD has been mostly below its 60-day average over the past two weeks but since June 7 higher volume days have tended to be on down days for the period. That suggests that more liquidity has been leaving the gold metal ETF than entering just recently.
On the other hand, gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, rose by a relatively large 2.32 to 93.12 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] remained steady for the third straight week at 45.91 tonnes of gold held for its investors.
While we have to note significant negative money flow for the largest gold ETF in the U.S. over the past week we can note larger than average positive money flow (more wealth entering than leaving) into the U.K. equivalent vehicle. Overall for the week metal holdings for all gold ETFs sponsored by the World Gold Council declined a net 7.6 to 582.94 tonnes of gold worth $12.2 billion U.S. dollars as of Friday 6/29. If gold were about to plunge lower shouldn’t we be seeing a much more meaningful exodus of capital from gold ETFs?
Let’s move this indicator back to the bearish side of the gold market indicator ledger for now to reflect the net negative money flow, 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, declined 77.31 to 4,238.28 tonnes over the last week (now 136,263,706.6 ounces) worth $1.7 billion as of Friday’s figures. The silver ETF added 30.92 tonnes to its holdings the week prior.
Silver got hammered along with gold last Tuesday 6/26 on the cash market and Friday’s (6/29) last trade of $12.37 represents a calendar week dip of a net $0.68 the ounce. A pretty big one-week net drop.
Please see the 1-year silver graph for additional technical and market commentary. A significant dip has been underway since that 6/26 sell-stop-triggering event took the trading below the popular 200-day moving average.
A quick look at the 2-year weekly silver graph underscores the repeated notion by this report that short term traders use and manage appropriate new-trade trailing stops if taking on new positions because of silver’s propensity to move harshly, especially in thin market summer trading conditions.
However, the metal has now traveled below its 200-dma and 40-wma which has consistently proven to be pretty profitable buying territory since the bull market for silver got underway in earnest in 2003. That being the case bargain hunters worldwide are in the process of buying this significant dip in incremental purchases (as they should) with the idea of establishing a reasonably low entry cost basis for a new long position in anticipation of the next bull leg up for the white metal.
It should be apparent, but the time to buy is when liquidity has just stopped leaving the metal and is about to flood back in. The problem with silver is that it is such a relatively small market and the amount of incoming or outgoing liquidity it takes to move it strongly is so much less than, say, gold that it can move much farther (and faster) than most traders prepare for mentally.
To combat that condition some traders adopt a buy-down strategy which allows them to deploy their capital into silver in incremental bites once their initial buying level has been reached to the downside. Keeping in mind that silver can surprise even the most hardened trading veterans with its ability to cover chart real estate both ways, each incremental purchase should be i) large enough to be the last purchase but small enough to allow a number of others into further significant weakness, ii) made only when there is the reasonable expectation that an upside reversal is imminent or near, i.e. when the trader suspects that liquidity is about to pour back into the sector, and iii) always backed up with an appropriate new-trade trailing stop which protects against unexpected catastrophic panic-driven adverse movement but allows for reasonable, expected volatility.
Although there are multiple implied areas of potential support not far below the current trading, no one can see the future and it is the height of arrogance to presume any potential support level will prevail in advance. Having said that, now below its popular moving averages, silver has once again entered the area preferred by short-term trading bargain hunters.
For a bit more context consider a monthly silver graph since 2000. For what it’s worth, as shown on the chart, it is this report’s contention that silver is currently within a second long period consolidation following the second major parabolic advance of the silver bull market. Again for what it’s worth, each time silver has approached or gone slightly below its 18-month moving average since mid-2003 it has been a buying opportunity.
While it is arrogant to suggest that this current test of the 18-mma will also prove absolutely to be yet another buying op in advance, it is the logical zone to begin to deploy capital in measured bites into silver futures, selected silver mining shares, physical silver metal or the silver ETF provided the trader is convinced liquidity will be returning to the silver sector soon and he/she uses sound trailing stop management in case this turns out to be the biggest runaway downside surprise of the silver bull so far.
Source for data Barclay’s iShares Silver Trust
Gold Charts. The daily chart for gold shows the metal testing its 200-day moving average with a neat bounce precisely in the neighborhood of it. This, despite a good measure of supply lately including vigorous recent selling by central banks and a reduction in ETF metal holdings of as much as 37 tonnes sold back into the market since April 19.
Please also see the 2-year weekly version for context as well as additional technical and market commentary on the charts themselves.
For some longer term context please also consider a monthly chart going back to 2001. Just one simple observation here. June is now closed and in the books. The last two monthly trading bars on that chart are red, meaning that the monthly close was lower than the monthly opening price. For what it’s worth since the Great Gold Bull began in 2001 the metal has yet to record more than two consecutive down months. That is certainly no guarantee that July of 2007 won’t be the first time we see three consecutive red monthly trading bars and of course the month could get off to a weak, scary start and still finish higher than where it began, but with the COMEX commercials bailing out of a big pile of their net short positions even before the metal tested its 200-dma and really no dramatic selloff of gold mining shares (relatively speaking), shouldn’t the odds favor a continuation of the trend?
U.S. Dollar. What a difference one week can make. In a supplemental update one week ago this report noted what had been a remarkable exodus OUT of commercial USD net long positions on the NYBOT. From a staggeringly high level of over 23,000 net long contracts on May 1 the commercials had gotten out of all but a couple thousand or so of those long dollar positions on just a measly 130-tick move up on the index. As of the previous COT report it certainly appeared that the commercials had lost just about all confidence in a higher greenback.
Evidently they regained that confidence in a hurry.
The U.S. dollar index dipped 23 basis points from 82.54 to 82.31 Tuesday to Tuesday (the COT reporting cutoff day). While that was going on the NYBOT commercials jumped back in on the long side of the buck index by an absolutely huge one-week addition of 8,217 contracts and now report being 11,028 contracts net long.
Since Tuesday the USD continued LOWER another 40 ticks to close Friday 6/29 at 81.91! Ouch for the commercials, but where are they positioned now with the dollar index only about 60 bps from implied support?
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Since the commercials jumped back to big net long the DX, this indicator returns to the bearish side of the gold indicator ledger from neutral short term, but with the index apparently attempting to break lower out of an upward flag this will be one heck of an interesting market to watch over the coming holiday-influenced week.
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.
If gold is going much lower in price why haven’t we already seen a more meaningful plunge for the miners?
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.
If gold is going much lower why isn’t this ratio plunging hard?
Cash Gold-HUI. The cash gold minus HUI indicator closed the week at 320.15, not much different from the 318.86 reading in the last full GGR two weeks ago. The indicator has come off the much higher readings in “warning territory” seen in May and early June (in the 330s and 340s) but remains higher than a level would indicate building confidence or significant liquidity inflows to the sector.
What we can observe is that at least as of this past week mining shares are more or less tracking with gold metal as opposed to over-selling it. If there was a more meaningful 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. (That’s what to be on the lookout for, that and the opposite of course.)
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Cautiously bullish. Trailing stops normal. Light liquidity summer trading caveats apply.)
Despite a silver break and into mixed and confusing signals this report maintains its cautiously bullish stance for short term traders.
On the bullish side of the gold market indicator ledger we can once again note a significant (and again accelerated) reduction in COMEX commercial net short positions as gold tested the lower $640s, the LCNS has reached what has proven to be an unsustainably low level over the past two years, gold metal holding its 200-dma following an important challenge 6/26, and a refusal of mining shares to over-sell relative to gold (so far).
On the less bullish side we have to note significant (and somewhat troubling) negative money flow for most ETFs, a break of the 200-dma for silver, and the NYBOT commercials jumping back to strongly long the greenback in a hurry.
Despite the apparent confusion by the market and an undercurrent that suggests liquidity is still more apt to leave than enter short term it is this report’s observation that gold metal has held up remarkably well during a period of somewhat unusual central bank supply (and threatened supply) and survived liquidity-flowing-to-other-markets-momentum-chasing distractions pretty well too.
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. Given the proximity of the indexes to potential breakdown levels though, do not fail to initiate those important trailers for insurance.
The usual summertime caveats apply. As we have just witnessed summertime trading can be thin and overly volatile both ways.
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.
