HOUSTON (ResourceInvestor.com) -- As gold just turned in its highest monthly close of the Great Gold Bull, having broken above its May 2006 high of $730 and change, the metal has become technically short term overbought, increasing the likelihood of a near term pullback. However, longer term it would be difficult to imagine a more bullish set of technical (and fundamental) circumstances.
Gold has been in a consolidation formation since its May 2006 peak and last week the metal pulled a convincing breakout above its 16-month long technical consolidation. Breakouts from long period consolidations, such as the one which occurred in October/November 2005, are notoriously bullish. However, it would not be at all surprising if we were to see a re-test of the breakout point (arguably somewhere in the $680s give or take a $10 bill) from above in the near term. (See the gold technical charts in the Gold Charts section below.) Given the huge net short positions (detailed below in the COT Changes section) of the very large, very well funded and presumably well informed COMEX commercial traders, that possible retest of the breakout has to be viewed as a distinct possibility.
Very short term a lot probably depends on if or when we see global government and central bank intervention in the currency markets to prop up an ailing U.S. dollar, but the longer term fundamental factors which underpin gold’s march higher (as measured in all the world’s fiat paper currencies) remain as bullish as ever and the prospects for a continuation of the rising floor for gold metal are most definitely not dependent on further weakness of the greenback (or any other brightly printed piece of paper).
For those who hold onto the mistaken notion that gold’s advance is purely a function of a weak dollar, when gold put in it’s last parabolic peak in May of 2006 the “buckster” was no where near its long-term historic support much less cutting new all time lows. If that’s not enough then one might take a look at gold as measured in euro, yen, or pounds sterling to see that the metal is consistently advancing (as defined by rising lows) in all paper. Just more in some than others.
No human can see the future and there is certainly no guarantee of any pullback for gold now, but since much of the current move is perceived by many in the market as an anti-dollar currency move, if the buck doesn’t catch a bid pretty soon this could indeed be the mother of all runaway gold breakouts. A breakout fueled in part by covering of the massive net short positioning by COMEX commercial traders and their counterparts in Asia and London. Also fueled by an increasing lack of confidence in fiat paper currencies worldwide. That’s if the dollar craters further remember.
More likely very short term though we can look for the usual harsh bull market style pullback to retest the breakout before gold powers much higher as measured in paper currencies.
Since this report turned long term cautiously bullish on September 17, 2006 with gold then trading at $570 on the cash market, the undisputed global standard of wealth has risen a net $173 or 30.3% to Friday’s cash market close of $743.00. As we all know in 1980 gold briefly traded above U.S. $800 the ounce, so the metal is closing in on that historic nominal peak. However, using just the government measure of inflation $800 gold in 1980 dollars is equivalent to about $1997 today, about two and a half times the prices back then.
That was before there were ETFs for gold and silver and before electronic trading for individuals became widely possible. In order for gold to begin to approach the same buying power it garnered in 1980 the metal has a very long way to go, but before that can happen more public involvement will be required. As of right now very little of the general public is involved in the gold and silver markets, but the number of portfolio managers, funds and individuals that are adding gold to their portfolios is on the rise globally, the number of individuals that have the means and ability to own and trade gold has increased substantially over the past decade and it is this report’s confident expectation that a virtual explosion of wealth into the two most popular precious metals is almost a certainty now. It’s just a question of how long into the future we are talking about.
Because the gold and silver markets are so very small relative to the currency, bond and equity markets, it just won’t take all that much of a shift of the percentage of global investment wealth flowing into them to have very dramatic, very bullish effects. If conditions continue on the path they are on now it really won’t be all that long before the increases in wealth chasing the metals snowball, reaching self sustaining and probably mind boggling critical mass.
While everyone should study the issues carefully and make their own investing decisions, it is this report’s conviction that adding gold now, when the buying power of the metal is still in the lower one-third of its historic peak real purchasing power, buying before there is a worldwide mass influx of wealth into the metals and buying into significant to strong dips to improve the entry still seems to be a good long term strategy for at least a fifth of one’s investing ammunition.
Using Stops to Trade Short Term
So how does one play a potential-mother-of-all-breakout-but-probable-pullback-first situation? Well, the short answer is to mind your stops and get ready to pounce on any significant to strong dips in both gold and silver.
Bull market pullbacks tend to be abrupt and harsh, but usually don’t last very long. For short term ETF traders it’s a simple matter of placing a trailing stop which allows for reasonable and expected volatility, but gets the trader out in the event the sell-down gets downside traction. Done well, trailing stops allow the trader to protect substantial profits from sudden, harsher than expected downside moves while being able to participate in further continuation advances.
Most online brokerages now allow percentage trailers for ETFs these days, so it’s just a matter of determining what percentage of downside represents a high probability of an expected downside turning point (the point at which momentum would shift short term to the downside). The beauty of percentage trailers is that they continuously ratchet upward with the price of the commodity so the trader doesn’t have to continuously enter new stop prices. One disadvantage of percentage stops though is that at the very beginning they force the trader to choose between wider stop points than if just using a fixed price stop which can be narrowed to within one cent. The difference between, say a 3% and 4% stop is a wide spread when the price of the ETF is, say $70, but the flexibility and functionality percentage stops afford more than make up for that.
We’ll undoubtedly have more about trailing stops in future reports, but for now, let’s take a detailed look at some of the indicators.
COT Changes. In the Tuesday 9/25 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) jumped a big 32,748 contracts or 19% from 175,264 to a staggering 208,012 contracts net short Tuesday to Tuesday while gold metal ground upward $7.75 or 1.1% from $723.85 to $731.60 on the cash market.
Since Tuesday the global standard of wealth added another $11.40 for a Friday close of $743.00 on the cash market. Gold for December delivery (the most active COMEX contract) tested as high as $752.80 before settling for a last trade of exactly $750 Friday 9/27.
So as gold moved up into the $730s COMEX commercials were becoming supremely confident in lower gold prices. How do we know? Because Tuesday’s 208,012 (100-ounce) gold contracts net short is the second largest LCNS ever, second only to the October 11, 2005 LCNS of 212,714 contracts net short. More about that, uh, “shortly.”
To give an idea of just how hugely net short that is, as of the Tuesday 9/25 COT reporting cutoff traders classed by the CFTC as commercial had a net short gold position in contracts representing a whopping 647 tonnes of gold worth notionally about $15.2 billion. Just to be clear, that represents the net position of the largest futures traders there are, and they are betting the big bucks that gold is about to pull back.
You know what’s interesting about the COMEX commercials being near record net short? Well, the last time they set a record net short position, in October of 2005 with gold then trading in the $470s (not a misprint), there was a teensy pullback shortly after that down to the $450s (first week of November 2005) and the COMEX commercials managed to get the heck out of about 60,000 of those net short contracts just before gold took out the psychological $500 barrier on its 5-month, 59% romp higher to $730 in May of 2006.
So the last time the COMEX commercials were this confident of lower gold prices, they were very short term right, but they were long term very, very wrong.
Over the past week total COMEX gold open interest mushroomed 48,197 to 440,945 total open contracts. A record total open interest on a COT reporting Tuesday. NYMEX said Friday that the total open interest peaked Thursday, 9/27, at a new record 443,765 open contracts.
Long-term October 2008 and beyond COMEX forwards added 3,619 contracts higher to 58,712 lots open, but with the big increase in total open interest long forwards now only account for about 13.3% of open contracts which is below average. (Still no bearish big jump up in long forwards.)
Because of the large bump up in the LCNS, this indicator has to go over to the bearish 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], edged higher by a small 0.93 to 578.03 tonnes, $13.8 billion U.S. dollars worth of gold bars held by a custodian in London for the trust. Money flow was still positive for the week, but nothing like the previous three weeks which saw quite an inflow of wealth as can be seen on the chart below.
Over the past week volume for GLD remained strong, but it seems to be moderating somewhat with roughly equal portions of up and down volume. The rush of new positive liquidity into GLD we saw over the past four weeks seems to be pausing at least temporarily in other words.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased by a relatively large 4.87 to 95.46 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings also reported an increase of 0.61 to 50.02 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 6.33 to 705.48 tonnes of the precious metal worth $16.8 billion U.S. dollars as of Friday’s figures. With Barclay’s IAU added to WGC sponsored ETFs globally, gold holdings now measure 755.5 tonnes. According to the WGC that’s more gold that all but 7 countries in the world hold in reserves and is just about 9.7 tonnes below Japan’s (No. 7 on the list) reported 765.2 tonnes as of the September figures.
Positive money flow (more wealth entering the ETFs than leaving) continued to be clearly evident over the past week, but the amplitude of the flow has moderated substantially. For now we can leave this indicator on the bullish side of the gold market indicator ledger but traders will want to keep an eye on the daily metal holding reports from global gold ETFs for signs, bullish or bearish.
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 61.77 to 4,464.49 tonnes over the last week, indicating continued positive money flow, but not at all that exciting a pace for SLV.
Silver managed to carve out a $0.24 weekly gain showing a last trade of $13.746 Friday 9/27 on the cash market.
Ominously, as silver added $0.48 from COT reporting Tuesday to Tuesday (from $12.98 to $13.46) the large commercial COMEX silver traders (LCs) were willing to take on an additional 12,939 to 42,160 contracts of net short exposure to the white metal. That’s a 31% jump in net short exposure on a 3.7% hike in silver prices for the commercials. By itself that’s a short-term bearish sign, but unlike gold the current net short exposure by COMEX silver commercial traders is nowhere near a record.
Please see the 1-year silver graph and the 2-year weekly version for additional technical and market commentary on the graphs themselves.
While we continue to see positive money flow into the silver ETF it is this report’s read that the velocity of inflow is weaker than it could be and probably should be, possibly a lingering effect of the big sell-down of silver metal during the credit crunch and mini-liquidity crises of a month ago. It is still somewhat troubling that silver continues to lag gold’s march to new 27-year highs.
For now though, the positive money flow allows this indicator to sneak in on the bullish side of the ledger. But with the spike up in COMEX commercial net short positions short term traders may want to move their stop strategy to at least a “near resistance” level (if not an “at resistance” level) very short term. No guarantee, but a pullback has become much more likely over the past week.
Longer term traders need not change their positioning or trailing stops in this report’s opinion, and significant to strong dips should still be taken advantage of as they occur in measured incremental bites.
Thru 9/27. Source for data Barclay’s iShares Silver Trust.
Gold Charts. 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.
Please also see expanded commentary about gold in the introduction of this report.
Gold is currently in the ninth major advance of the Great Gold Bull as measured by this report’s tracking chart. At 50 weeks in duration, this is now the longest advance measured in time and it is the second highest advance measured in percentage terms.
U.S. Dollar. As the USDX fell a bone shattering 90 basis points Tuesday to Tuesday from 79.21 to 78.31 shell shocked NYBOT commercials added just 580 lots to their net long exposure, but are now a whopping 28,448 lots net long.
Since Tuesday (the COT cutoff) the USD index broke through all previous support, falling another 54 ticks to a new all time low close of 77.77 Friday 9/27. The greenback is officially in uncharted technical waters and all eyes will be on the dollar index in the coming days.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional technical and market commentary.
The possible long term implications of even further and even harsher dollar weakness heightens the possibility of official emergency forex intervention as well as competing central bank interest rate cut action abroad to prop up the now skinned and gutted buck.
The currency markets have evidently convinced themselves that the U.S. economy is headed for the economic recession trash heap. One problem with that is that the Big Markets are not signaling that at all, not yet. In fact they continue to signal the opposite.
When (not “if”) the greenback catches the inevitable phoenix bid against all the other fiat currency lepers, short term that just might put considerable downside pressure on precious metals. So again, continue to mind those trading stops. Eventually though it will more likely be furious global investment and safe haven demand that powers gold and silver to new all time highs, not fiat currency movement. If this report’s contention is proven true, the metals will eventually be revalued toward or well above the upper range of its historic real purchasing power in every one of the world’s fiat paper currencies before this Great Gold Bull expires.
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.
Mining shares had been answering the up moves for gold but just lately they haven’t really been doing so. Not as they are capable of and certainly not outperforming the metal. That adds a little to the idea that a short term pullback is more likely, but a new surge of liquidity into the sector would erase that notion quickly should the miners start outperforming again.
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.
Cash Gold-HUI. This week the cash gold minus HUI indicator remains quite high at 350.03 adding weight to the idea that gold might pull back short term.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Caution flags flying for both short term trading bulls and bears. Short term traders might move trailing stops up a couple notches to a “near resistance” strategy. Significant to strong dips, if any, 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, but the velocity has slowed. Technically gold has broken out of a long period consolidation, which is strongly bullish, but the metal is short term overbought. The U.S. dollar has completely broken down and further weakness would be supportive to firmer gold prices. Global confidence in fiat currencies is beginning to become more of an issue now that the U.S. dollar is cutting new all time lows.
On the less bullish side the cash gold minus HUI indicator remains very high. COMEX commercials were the second most net short gold ever as gold moved into the $730s and are very probably even more net short now with gold in the $740s. Mining shares which had been answering up moves of gold in more or less lock step seem to have hit headwinds over the last week. The lackluster performance of silver versus gold in this latest up move also weighs in on the less bullish side of the ledger (probably a temporary development).
Physical demand remains robust locally for both gold and silver. “Business has been brisk,” said Sonny Toupard who runs Royal Coins in Houston, a 30-plus year rare coin and bullion firm servicing both wholesale and retail clients. “We’re selling more than we are buying from our retail customers so we’re having to go out into the wholesale market to fill orders,” he added. Anecdotally that is probably a very short term contra indicator as retail buyers often end up more aggressive nearer to highs than lows.
The odds probably favor a gold pullback very short term, (as they usually do during major breakouts), so it’s time to haul out the caution flags for both short term trading bulls and bears. Short term traders might consider ratcheting up their trailing stop strategy to at least a “near resistance” level (if not even tighter) in order to protect significant gains. However it is not out of bounds to stress that just because the more important indicators are pointing to a pullback, that doesn’t guarantee that there will be one. The indicators almost always do that at major breakouts for the simple fact that the metal is near or at what has stood as resistance until it does break out.
Gold has broken out of a long period consolidation and is cutting new highs, so by definition nearly all short positions are underwater and any further advances can sustain themselves for a while through short covering alone. Something that is sometimes exploited by the (possibly mythical) hedge fund bull “wolf pack.” That and very fast-on-the-trigger gun slinging hedge fund momentum players who just love to participate in anything that is hot (hence the term “hot money”) can make life miserable for bears.
On the other hand the very large traders classed by the CFTC as “commercial” on the COMEX (and their counterparts overseas, a.k.a. the “Gold Cartel”) do have considerable muscle and they’ll almost certainly be trying to engineer a way to get out of their now off side downside bets. The point is that both sides of the gold market battlefield can and should expect heightened volatility near term. Both short term trading bulls and bears should exercise caution and meticulously manage their respective trailing stop strategies accordingly.
If the expected harsh pullback materializes for gold, silver and selected mining shares, it is this report’s contention that significant to strong dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection.
Until next time, scheduled for two weeks hence, 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, but new positions should only be added into weakness. 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.
