COT Gold Report - Gold Sell-Down No Match for Mining Shares
By Gene Arensberg
12 Mar 2006 at 05:44 PM EST
HOUSTON (ResourceInvestor.com) -- As expected in the last report, both gold and mining shares took a dive. While gold’s downside move thus far has been modest, mining shares took a disproportionate whipping, suggesting the largest players are expecting further weakness for the metal. Momentum has also shifted in favor of the bears, but a few signs suggest bears should not get cocky. Not yet at least.
This Week’s Observations: Friday, March 10, 2006
It’s no secret that there is a general expectation among gold mining share investors and newsletter writers (good friends included) that the annual Prospectors and Developers Association Conference (PDAC) marks the beginning of the end of the annual “gold season.” Statistically coincidental? Probably, but one wonders if that’s the case, then why doesn’t PDAC move its annual event to JUNE? Would that mean the expected “gold season” would last longer? (A rhetorical question.) Maybe not, but it would sure be warmer north of the U.S. border for the annual gathering.
Since the last report (February 25th) Gold edged up to test the previous lower high of $569.00 and even managed to best it (on a news-assist) to $571.20 before a lack of physical buying and short-term technical selling tripped sell stops on Monday (3/6). That was a small, and lately rare, technical victory for the bears in the sense that the advance failed to challenge the February peak of $575.30. Given late comments from gold pundits, market watchers and gurus immediately following the sell-down it was clear Tuesday that the general impression among the gold elite is that the bulls had then gone on defense and the bears had the ball.
We should note parenthetically that gold had a mighty nice run up on extraordinary momentum and as noted here previously a pullback was expected on both gold and mining shares. Just as news out of the Middle East forestalled a pullback getting underway the prior week, it was news that the tensions might be relaxing that set the stage for Monday’s double digit drop for gold. Political and religious tensions can work both ways, it seems.
Inevitably, following major advances and especially after one good pullback, sell stops for in-the-money long traders bunched up near the highest technical trending lines, so it really didn’t take much to send the price into a sell-stop triggering event (SSTE). As always following a SSTE it was the next 48 hours that gave the “short-termers” and herd-running funds all the direction they needed.
Shares in the biggest names in the mining business (with coincidentally the largest herd ownership such as AU, NEM, and ABX among others) all got buzz-sawed in herd-selling. However, the damage to the gold share indexes was not universal as a fairly large number of companies on down the mining company food chain have not met with the determined selling of the bellwethers. There were even a few counter-trending upgrades late week, such as this one for Goldcorp [NYSE:GG; TSX:G] by Research Capital.
By the end of the trading week, while at the lowest gold had just pared 7.1% off it’s February peak of $575.30, at its intra-day low the HUI had been sliced a whopping 20.3% off its overheated 349.48 January peak.
Gold mining shares often move ahead of the metal and this week’s action suggests that the institutional heavyweights expect lower gold prices. Just as they move ahead on the down side, the mining share indexes often firm up well ahead of a bottom for the metal.
Contrary to a strongly bearish case, however, the strong selloff in mining shares has so far not been supported by general physical selling on the major bourses or by share redemptions or selling of gold by the exchange traded funds. This should be short-term very worrisome for the bears.
Anecdotal evidence from the field suggests that individual small investors have been doing a little more selling than buying of gold bullion coins with some rotation out of gold into silver.
“We’re seeing more selling of gold than buying over the last week,” says Sonny Toupard, head of Royal Coins & Jewelry, a 33-year rare coin and bullion firm in Houston. “We’re also seeing some rotation of investors from gold into silver, probably motivated by the new silver ETF news and the disparity of the gold/silver ratio. I think we are starting to see silver head back toward its historic relationship with gold,” he added.
However, as confirmed by other bullion dealers, selling action at the local and regional levels has not been particularly aggressive, at least so far. Generally, aggressive buying or selling by individual investors is a contra-indicator.
Moving on to the weekly rundown, the bears have the ball, but there are signs they need to convert on 4th and “short,” so-to-speak.
COT Changes. As of the Tuesday 3/7 cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) decreased their combined net short positions (LCNS) from the prior week by 7,110 contracts to total 149,751 contracts net short while gold metal dropped $9.80 or 1.7% Tuesday to Tuesday ($552.92).
That is a pace of only 726 contracts covered per dollar decline in gold, well below the average pace, suggesting that the LCs expect lower gold prices. However, since the Tuesday cutoff date, gold shed another $10.97 to close Friday at $541.95 and there were notable reductions in the open interest (by Thursday) of the April COMEX contract which were only partially offset by increases to the June contract open interest. If gold holds near its Friday closing price or declines further, it will be interesting to see the rate of change (ROC) of the LCNS in the next COT report.
As of the Tuesday cutoff, total COMEX gold open interest declined by 1,534 lots from 339,859 to 338,325 open contracts after having increased by 6,449 contracts the week before. Since the last report, there have only been insignificant increases in forward month contract open interest. No unusual increases in long-term forwards have surfaced, at least so far.
cont'd ... resourceinvestor.com |
