HOUSTON (ResourceInvestor.com) -- The past two weeks have been a mining share bargain hunter’s delight as shares of many mining companies, especially those on the lower end of the mining share food chain, were being aggressively sold into weaker and weaker bids as more and more buyers locked up, holding their collective breath in fear. Ridiculously “cheap” stink bids were executed and then made to look generous by mid-day on Thursday, August 16, as fearful investors panicked and over-leveraged hedge funds sold anything that could be sold into any bid, no matter how stupidly cheap it seemed.
How odd it was on August 16 to see multiple low-totem-pole AMEX, Canadian market and OTCBB companies down over 20% in one day, but on volume (in some cases) less than a measly 100,000 shares. And what a joy it was to be buying into those gifts from the fearful. At least that is what yours truly was doing that day, and enjoying it very much thank you. (Sure hope that ends up being right! But if not, owning all these new companies at lower levels than most thought possible a few weeks ago works for me for now.)
The stink bid was king for a two days and a half as brutal margin calls sent selling echoes from the big Thursday sell-down the following two trading sessions. As of right now it looks like astute, fast-on-the-trigger bargain hunters swooped in for a feast on the faux carnage.
End of the Great Gold Bull or One-Off Event?
An argument has erupted following this extraordinary sell-down event between mining share bulls and bears, with those in the bearish camp virtually certain that the divergence of mining shares harshly lower from gold signals the end of the Great Gold Bull and to their way of thinking it is only a question of time before gold metal answer’s the miner’s plunge off Credit Crunch Cliff. Miner bulls on the other hand are quick to point out that the catastrophic plunge of mining share indexes was an extraordinary credit market driven flight to cash and should not be taken at face value relative to the metal. Bulls think that this event is a gift from the summertime liquidity Gods to be bought aggressively in preparation for the much more fun part of the year to come.
Right or wrong, this report sides confidently with the bulls. Why?
Fundamentally gold remains on very solid ground. Want some examples? Well, the Chinese have a love affair with yellow gold. A little less than 2 billion Chinese can legally own gold again and can even buy it through their government sponsored banks. They may not buy much per capita, but there are a bunch of “per capitas” in China. That’s probably going to end up being demand on steroids in the not-too-distant future. And that doesn’t even touch on the big increases in gold imports into India last quarter or reportedly sharply escalating Japanese investor demand.
Used-to-be gold hedgers are getting out of the gold hedging business in a really big way. For years gold hedging kept a kind of wicked cap on the gold upside as just about all rallies were aggressively sold-forward into. Now those millions of sold-forward ounces are being un-sold forward, which is the same thing as an increase in demand as well as a decrease in the selling pressure.
Believe it or not central banks are selling less gold than they can and some are reportedly looking to add gold to their reserves. Some, like China for example, need to add small mountains of the stuff in order to just come in line with the percentage of western countries’ average gold holdings versus forex reserves.
And one more example (of many) for this report, global forex diversification out of U.S. dollars and into just about anything else including gold continues quietly, with the enormous pools of petro-dollars from Middle Eastern countries (and Venezuela) increasingly finding their way into anything-but-greenbacks. That has the double whammy effect of continued weakness for the buck and increasing demand for gold metal.
That’s just a few of the many fundamental drivers underpinning the historic global standard of wealth, ultimate safe haven and the only real money on the planet. We’ll mention more of them in future reports. Gold remains fundamentally sound when thinking in terms of what gold is “worth” relative to fiat, under-backed and consistently inflated paper currencies. Of course we all should realize that gold should not really be thought of in those terms. Actually, it is the paper that is being valued (lower) by gold. Not gold being valued (higher) by the paper.
Finally, in addition to the fundamentals for gold still being as bullish as ever, this report comes in on the side of the bulls because the rest of the indicators this report follows closely just do not support the notion of much lower prices for gold metal short term. Not yet anyway. In fact they pretty much all are pointing to the opposite near term. That doesn’t mean that another exogenous shock to the system couldn’t temporarily throw another anti-gold spanner into the global gold market works. Of course that could happen. No one can see the future. All we really have to work with are indications based on what is going on right now and what is going on right now is bullish for gold (and silver). For the details please read on about the most important indicators (of quite a few more) this report keeps up with daily and reports about biweekly. … We’ll see if that stand with the bulls is right or wrong soon enough. Got gold?
COT Changes. In the Tuesday 8/21 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) plunged a whopping 33,900 contracts or a big 27% from 125,894 to just 91,994 contracts net short Tuesday to Tuesday while gold metal dipped $10.48 or 1.6% from $668.26 to $657.78 on the cash market. That’s nearly a 17:1 ratio and strongly suggests that as gold tested the $650s the commercial’s appetite for the short side diminished considerably. Call that bullish.
Since the Tuesday COT reporting cutoff, the U.S. dollar got sick again and gold metal caught a Friday bid for a near-high close of $668.60 on the cash market, $10.92 higher than the COT cutoff date.
Total COMEX gold open interest fell 17,769 contracts to 330,204 total open contracts, its lowest level of the year.
While the total open interest dropped so much long-term August 2008 and beyond COMEX forwards bumped 3,417 contracts higher at 59,155 lots open or about 17.9% of open contracts, but that followed a reduction of long forwards in the prior week of 6,808 contracts.
Take a good look at the chart below and it will be apparent why this indicator remains on the bullish side of the gold market indicator ledger. The easiest way to think of it is that as gold is trading in its fairly tight range of between roughly $640 and $680 the COMEX commercial traders are not willing to add significantly to their collective net short positions and as of this last week were near the bottom of their tolerance for short positions even though gold hasn’t really sold off. If the large, well funded and presumably well informed COMEX commercials were convinced that gold was nearing a big plunge their positioning would almost certainly be much, much more net short, wouldn’t it? The obvious conclusion then is that the commercials are not, repeat not, confident of much lower gold prices.
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 hefty 8.3 to 515.44 tonnes ($10.9 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. That follows a small decrease of just 2.15 tonnes the prior week during the Big Market melee. Over the past week volume for GLD has not really been all that remarkable, suggesting that the unusual activity of the prior week was indeed a one-off liquidity-induced event.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, dropped a surprising 6.15 to 88.48 tonnes of gold held over the past week, suggesting that one or more U.K. based funds endured a liquidation there. It also helps to explain where the softness in the gold price was coming from earlier in the week (which has now abated). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings remained steady at 47.27 tonnes of gold held for its investors, after adding 0.77 tonnes the week prior.
Over the past week all of the gold ETFs sponsored by the World Gold Council increased their collective gold holdings by a net 10.14 to 632.75 tonnes of the precious metal worth $13.47 billion U.S. dollars as of Friday’s figures. Over the past two weeks WGC sponsored gold ETFs added a total of 2.08 tonnes as gold first moved as low as the lower $640s then back up into the mid-$670s.
Positive money flow (more wealth entering the ETFs than leaving) continued to be clearly evident over the past week, with total global ETF gold holdings now over 680 tonnes, (including all WGC sponsored ETFs and IAU) keeping this indicator firmly on the bullish side of the gold market indicator ledger for now.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained flat once again at 4,404.63 tonnes over the last week. Despite all the volatility on the actual metal there have been no liquidity induced changes in SLV metal holdings at all since a small maintenance reduction of 1.86 tonnes back on August 2. Essentially there have not been any changes to SLV’s metal holdings since July 23, when the trust reported an addition of about 30 tonnes.
The authorized market participants for the fund only need to increase or decrease the number of trading shares and add or subtract a corresponding amount of silver metal to answer unusual imbalances to liquidity from buying or selling pressure. So even when silver metal was being sold off to the tune of over $1.00 an ounce two weeks ago and there was wholesale panic in the markets, evidently buying pressure kept up with the selling pressure more or less over the period. That’s interesting if nothing else.
Silver clawed back $0.24 for the calendar week closing at $11.953 on the cash market after being righteously clobbered for a net plunge of $1.13 (and being as much as $0.65 lower than that at one shaky point) the prior Credit Crunch Cliff dominated week.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
As usual the much-smaller-than-gold-and-more-volatile silver market surprised even the relative few grizzled veteran traders who were actually in their battle stations during the extraordinary summertime low-liquidity sell-down event. Surprised in the sense of silver’s ability to cover chart real estate in a hurry both ways. Oddly enough, it’s the silver market continuing to under-perform gold that raises the most concern in this report’s read of the indicators. And if silver doesn’t do its usual snap back act in the next little while, especially once all the combatants are back from their extended vacations, it could begin dragging down the other indicators. Something to watch closely near term even though that notion is at odds with most of the indicators today.
Source for data Barclay’s iShares Silver Trust
Gold Charts. Despite the global flight to cash in just about all asset classes and the big moves lower across those markets (including silver) gold held up fairly well, only briefly challenging its popular 200-day moving average last week. It has since recovered back up to and above its 50-dma. That’s technically more bullish than not.
Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as additional technical and market commentary on the charts themselves.
U.S. Dollar. In the two weeks since the last Got Gold Report the U.S. dollar index followed though on its bounce all the way up to implied resistance just above 82 on the index before fears of a full blown Fed interest rate cut (as opposed to another drop in the discount rate) sent the dollar rally into headwinds. Traders classed as “commercial” on the New York Board of Trade (NYBOT) have been busy reducing their net long positioning during the period.
While the USD first traded as high as 82.13, then dipped back to exactly where the prior COT week ended at 81.48, (net flat for the Tues/Tues week) the NYBOT commercials reduced their net long exposure by a big 5,071 contracts to 12,666 lots net long. So as the buck was nearing implied resistance the largest of the largest dollar index traders were dumping long futures positions. From their point of view it’s a good thing they did too.
Since Tuesday the USD index fell sharply another 81 ticks to close Friday 8/24 at 80.67. Once again the greenback is nearing the long-term technical dollar index support line in the sand near 80.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Since the commercials opted to strongly reduce their net long positions on the DX on what was essentially a flat week-to-week closing number, let’s move this indicator to neutral from bearish 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.
Sometimes out of chaos comes order. Note that overwhelming support ended up forming more or less in line with where the very harsh sell-downs in June and September of 2006 formed support.
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.
Repeating comments from the last GGR two weeks ago: Until the Big Markets stabilize a bit more, until the world is not trying to raise cash with just about anything in response to extreme volatility, it’s kind of harsh to accept at face value the action in the HUI:Gold ratio (or the next indicator for that matter), but we ought to see this ratio firming more consistently once the Big Markets do settle out. If so, fine from a long-gold point of view, if not then we’ll haul out the caution flags then.
It is this report’s contention that people were not selling mining shares because they were mining shares in last week’s big move lower. They were selling them because they were selling anything and everything in fear and liquidation. And yes, the underperforming HUI index still should not be taken at face value relative to gold metal as of this moment in time, but if this and the next indicators don’t improve and improve convincingly near term it will be worrisome.
Cash Gold-HUI. This week the cash gold minus HUI indicator comes in at a frightening 343.61, but that’s 7.88 points lower (better) than where it was one week ago Friday. Ordinarily this would be considered “warning territory” but that’s usually an event found with an environment of rapidly rising gold against flat or lower mining shares. In this case we have pretty steady gold and a sharp spike lower for mining shares. Once again look for this indicator to moderate and head lower which would indicate returning confidence in the precious metals sector, but if it doesn’t once the Big Markets settle out then it will be time to go fishing and wait for another opportunity. Either gold metal needs to fall or mining shares need to rise in order for this indicator to get anywhere near par soon.
Source for data cash market for gold, Stockcharts.com for HUI
Short-Term Outlook: (Continued cautiously bullish. Trailing stops normal. Significant to strong dips can be bought.)
On the bullish side of the gold market indicator ledger, positive money flow has been clearly evident into gold ETFs over the past week. COMEX commercial traders bailed out of a big number of their gold net short positions with gold metal in the $650s. Physical demand for gold metal remains robust especially into dips. Technically gold once again tested and bounced up off its popular 200-day moving average, recovering the 50-day in the process. NYBOT commercial traders substantially reduced their U.S. dollar index net long positions on an essentially flat dollar (as measured on COT report Tuesdays) and the buck is once again within striking distance of a major support break. And, global uncertainty about credit derivatives ahead of next month’s end-of-quarter accounting truth machine will likely lead to at least a bit more safe haven buying pressure if not more than a bit.
On the less bullish side the cash gold minus HUI indicator has reached the sickeningly high 340s, but did so under extraordinary circumstances. Same worrisome story for the HUI:Gold ratio and if both don’t improve convincingly right quick (within a couple weeks to a month or so) then psychological damage to the sector may have been too much, setting up the possibility of an even harsher exodus of wealth from the sector to come.
Judging by the two dozen or so indicators this report follows closely, odds are that both the HUI:Gold ratio and the cash gold minus HUI indicators will show almost immediate and dramatic improvement over the short term, (they have already begun the process), but as always traders need to stay in touch with the daily action and adjust their protective stops accordingly without fail.
There is no change to this report’s cautiously bullish stance for gold, silver and selected mining shares. (Although a change to fully bullish for mining shares was contemplated earlier in the week when the HUI was a little lower.) Significant dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection.
A special note regarding the thinly traded companies residing on low liquidity markets in Canada and the OTC bulletin board.
A great many of the mining and resource exploration companies which trade on the Canadian exchanges, the U.S. OTC bulletin board and to a lesser extent on the American Stock Exchange, have been mercilessly clobbered percentage wise over the past six weeks or so and if traders believe that the precious metals sector will once again enjoy a resurgence of incoming liquidity, then right now, and into any further significant weakness, seems like it might be a good time to add your favorites in measured incremental bites.
Don’t get too caught up in trying to peg a bottom on those fast movers. That’s pretty hard to do on thinly traded issues. Just pick your spots and companies carefully, keep some ammunition handy to add into further weakness and hang on tight waiting for both the inevitable rush of investor money back into the sector sometime over the next year and that company’s release of interesting news (hopefully both at the same time). This might just be a summer to remember for us mining share bargain hunters.
Until next time, scheduled for two weeks from now, as always MIND YOUR STOPS. Some of the individual technical charts in this report may be updated next Sunday afternoon, just as they were last Sunday, especially if there are interesting market developments.
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.
