HOUSTON (ResourceInvestor.com) -- Isn’t it odd that when a financial crises threatens to get underway today hot money rushes to turn just about everything into fiat paper dollars? In something that has come to be called a “flight to cash,” for a little while it seems that just about everything is being sold at the same time, equities, commodities, even gold and silver. The odd part is that it really shouldn’t make much sense to sell gold and silver during a financial crises because gold and silver are what people should turn to when worried, not paper for crying out loud.
Let’s see, we have the Fed and quite a few of the world’s central banks injecting billions into the banking system Friday 8/10 to stave off sub-prime contagion jitters with the promise (in a rare Fed emergency statement) to provide more “if needed.” The idea is to keep interest rates from getting out of whack and to shore up confidence in the worldwide banking system. This central bank action followed a spike up in short term interest rates (to nearly 6%) following very large losses in global equity markets.
Highly leveraged hedge funds succumb to financial Darwinism, major pillars of the global financial system like Bear Stearns teeter a little on a (some say shaky) foundation of all kinds of investment derivatives heaped on derivatives, many with opaque valuation, suddenly weakened by a kind of confidence corrosion (which is real), but inflamed and over-hyped by the real time financial media.
No wonder the Fed and the other central banks are extending a soothing hand to attempt to calm the brewing storm. A sheppard should at least attempt to keep the wolves from eating the sheep. Please pardon the digression, but one wonders sometimes which of the actors are the ones with fangs.
We know that part of that rush to convert other stuff into dollars is from portfolio managers and funds having to raise cash for things like margin calls and anticipated redemptions, and some of it is fear selling in a kind of sell first and ask questions later mentality. Eventually though open markets are efficient and bargain hunters, arbitrageurs and investors do end up correcting what usually turn out to be very short lived market aberrations.
Other commentators have covered the subject ad-infinitum and there is no need to chronicle the whole bushel basket of worry corn in this report (it’s long enough already), but doesn’t it seem that with each financial market confidence puncture, be it minor or major, a little more wealth, a little more of the mountainous pile of excess liquidity sloshing around out there will end up finding a home in something tangible? Something that has always provided the ultimate safe haven? (Well, not always, but since the second or third century BC at least?) Something that has for over four millennia been regarded by humanity as something precious, worth keeping and exchanging for goods and labor? You know, gold (and silver) the only real money on the planet?
Liquidations worldwide (forced or fear/panic driven, it makes no difference) led to Thursday’s 8/9 $11.68 shot lower for gold as hot money funds and portfolio managers sold performing and nonperforming assets alike to meet liquidity obligations. However, very strong physical gold buying surfaced into Thursday’s sell-down as the metal neared the U.S. $660 level. That’s important on a short term basis because it is above where that strong buying surfaced in the last good dip.
As mentioned in the COT Changes section below, as gold returned to the $670s commercial traders on the COMEX were not all that interested in increasing their net short exposure. Modest positive money flow continued into gold ETFs over the past week and strong positive money flow has been evident over the past two weeks (see the Gold ETFs section for details).
So while the ongoing risk revaluation and fear of the unknown may (or may not) continue to weigh on financial markets as people who control enormous quantities of other people’s money try to figure out just what they actually own (and probably whether or not to cut short their extended vacation so they won’t get accused of fishing while the barn burns down), so far at least nothing has surfaced convincingly to alter this report’s cautiously bullish stance for gold (and silver).
Something to consider: Maybe we can judge the amplitude or severity of a potential crises by the knee-jerk reaction to it. Maybe if the instant reaction to something is to sell gold it really isn’t all that big a deal. Because, when there is something that is really frightening out there we ought to see the opposite.
With that, let’s take a detailed look at some of the indicators.
COT Changes. In the Tuesday 8/7 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) edged higher by a relatively small 8,601 contracts or 8% from 112,644 to 121,245 contracts net short Tuesday to Tuesday while gold metal rose $6.65 or 1% from $665.60 to $6672.25 on the cash market.
In the two COT reporting periods since the last full Got Gold Report two weeks ago gold metal actually declined $10.95 or 1.6% from $683.20 to $672.25 (as of the Tuesday COT cutoff dates) while the traders classed by the CFTC as commercial on the COMEX were apparently anxious to reduce their collective net short exposure, which they did by 40,357 contracts or 25%. (A very hot 15:1 ratio).
Since the Tuesday 8/7 COT reporting cutoff the U.S. dollar once again bounced, global Big Markets were bloodied, but gold survived this time more or less sideways with a last trade Friday of $672.70 on the cash market.
Total COMEX gold open interest was near flat, increasing just 1,723 contracts this COT week to 352,908 open contracts following the largest one-week open interest reduction of the year the prior week when the total open interest dropped by 50,418 100-ounce futures contracts.
Long-term August 2008 and beyond COMEX forwards ended the current week 2,932 contracts higher at 62,546 lots open or about 17.7% of open contracts. (Not far above average.)
The big two-week decrease to the LCNS puts this indicator right back over on the bullish side of the gold market indicator ledger short term. Evidently the appetite that the large, well funded and presumably well informed COMEX commercial’s had for short gold positions diminished greatly as gold probed the low $660s. As gold recovered to the low $670s the commercials were not yet aggressive in their net short positioning either, like they were two weeks ago with gold in the $680s.
Interestingly, the last two times that the price of gold ended up in the $670s on COT reporting cutoff Tuesday (May 1 and May 15) the LCNS was over 147,000 contracts both times. (The LCNS came in at 166,153 on May 1 and 147,293 on May 15). That suggests that the COMEX commercials are less willing to take on net short gold exposure than they were in May not all that far from the same price level, with the relative positioning easily seen in the chart below.
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 modestly by 2.77 to 509.29 tonnes ($10.9 billion U.S. dollars worth) of gold bars held by a custodian in London for the trust. That follows a hefty increase of 9.99 tonnes the prior week. Over the past two weeks significantly higher volume days for GLD have mostly been on up days, suggesting that more wealth has been flowing into the gold metal ETF than flowing out of it, as one would expect given the substantial positive money flow evidenced by 12.76 tonnes of gold metal additions for the period.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, edged lower 0.01 to 94.63 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings remained steady at 46.50 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 2.76 to 630.67 tonnes of the precious metal worth $13.57 billion U.S. dollars as of Friday’s figures. Over the past two weeks WGC sponsored gold ETFs added a total of 12.73 tonnes as gold moved as high as the lower $680s and as low as the upper $650s.
Positive money flow (more wealth entering the ETFs than leaving) continued to be clearly evident over the past two weeks 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 at 4,404.63 tonnes over the last week. Except for a small maintenance reduction last week of 1.86 tonnes there have not been any changes to SLV’s metal holdings for two weeks which seems a bit odd given reported robust physical silver demand into dips late this week on electronic metal trading bourses.
Silver gave back $0.27 for the calendar week closing at $12.847 on the cash market.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
Two weeks ago physical demand was relatively weaker. From about mid-week that seemed to be improving and improving considerably from late Thursday-on although the action seemed inconsistent at times with premiums more volatile than normal.
Source for data Barclay’s iShares Silver Trust.
Gold Charts. In the two weeks since the last full GGR gold has been confined within a narrow range between the high $650s and the High $670s more or less on the cash market. (Up to the $680s on Stockcharts.com which uses Thompson Financial data feeds that track a basket of near futures contracts.)
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.
The charts remain in short term and long term bullish territory for now.
U.S. Dollar. The U.S. dollar index took a very brief shot at a break of long term historic support near 80 right out of the gate this past week, but not a very convincing shot. Traders classed as “commercial” on the New York Board of Trade (NYBOT) seem to still be very strongly convinced that the USDX path of least resistance is northward if their positioning in futures contracts is any guide.
While the USD edged 24 basis points lower from 80.79 to 80.55 Tuesday to Tuesday (the COT reporting cutoff day) the NYBOT commercials actually reduced their net long exposure by a relatively small 1,311 contracts, reporting a still astronomically high 27,394 lots net long and not all that much less than the colossal 30,865 DX contracts net long as of Tuesday 7/24 two weeks ago.
Since Tuesday the USD index added 15 ticks to close Friday 8/10 at 80.70. The U.S. version of fiat paper currency once again avoided (for the moment at least) a global technical confidence puncture of the greenback. One wonders though how many near-80-on-the-index foxholes the buck can duck into before a forex confidence mortar shell lands a little too close.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
Since the commercials remain hugely net long the DX, this indicator has to reside on the bearish side of the gold indicator ledger.
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.
In the two weeks since the last Got Gold Report the Big Markets roller coaster kept more pressure on the HUI than we would normally expect relative just to gold metal as nervous traders and hot money funds with quick trigger fingers apparently just decided to get out of anything that would raise paper cash. However, the effect over the past week for mining shares was not as pronounced as in the two weeks prior to that.
Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves.
Mining share bulls will be quick to point out that the miner indexes all seemed to find support in line or slightly above technical expectations which perhaps is an indication of determined bargain hunting and early positioning by funds and portfolio managers. A fair number of those market professionals (the ones actually working this month and not on vacation) feel the markets are biding time prior to a vigorous (and perhaps early) influx of new capital into the precious metals sector should confidence in the financial and forex markets continue to erode.
Given the shaky stomachs of equities traders worldwide over the past three weeks it is not that far fetched to be looking for just such a scenario to unfold in this report’s opinion and if that turns out to be the case we might get just a bit of a warning from mining shares a little in advance similar to just what happened with the HUI in the first part of July. If so, one of the best places to look for that kind of signal is the next indicator.
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.
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.
Cash Gold-HUI. Believe it or don’t, the cash gold minus HUI indicator closed the week much improved from the prior week, but the prior week got a little hairy from a long-gold, long-mining shares point of view.
This week the indicator comes in at a still less than confidence building 326.68, but that’s 8.49 points lower (better) than the 335.17 reading in “warning territory” one week ago. Again look for this indicator to moderate and head lower which would indicate growing confidence in the precious metals sector, but if it doesn’t once the Big Markets settle out then it will be time to put on the worry caps.
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, we can still find no evidence of negative money flow from gold (and silver) ETFs. Indeed so far what we see is the opposite. COMEX commercial traders were loath to add to their gold net short positions with gold metal in the $670s. Physical demand for gold metal has been robust over the past two weeks, especially into dips. Technically gold continues its long period consolidation and support levels for mining shares have been on the increase slightly since January.
On the less bullish side NYBOT commercials continued to hold near-historic net long positions in the U.S. dollar index with the buck having survived one minor challenge of the 80-index level. The cash gold minus HUI indicator remains at a high level although it improved over the past week. Mining shares are so far not telegraphing an influx of new capital, but neither are they showing the opposite convincingly and they have had to endure the added weight of large sell-downs by the Big Markets.
There is no change to this report’s cautiously bullish stance for gold, silver and selected mining shares. Significant dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection.
The usual summertime caveats apply, as mentioned in previous reports.
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, 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.
