Got Gold Report - Gold, Silver Thrust Higher
By Gene Arensberg
11 Feb 2007 at 02:35 PM EST
resourceinvestor.com
HOUSTON (ResourceInvestor.com) -- Both gold and silver showed remarkable strength in the two weeks since the last full Got Gold Report (GGR). Indeed both of the most popular precious metals are in the process of thrusting into zones above what many traders considered as at least interim resistance. That upward action has no doubt put most of the collective global short positions (and their owners) in an underwater condition with heightened sensitivity to any further advances.
Regular readers will remember that two weeks ago with gold in the $640s we had just witnessed an overly large spike up in the number of collective net short positions reported by large commercial gold traders on the COMEX (LCs) as the metal was approaching near technical resistance on short term charts. Also at that time liquidity-induced negative money flow had surfaced in gold and silver ETFs and the moves higher were not being satisfactorily answered by mining share indexes. All that led to this report raising caution flags for short-term traders with the suggestion that tight, “at resistance” trailing stops seemed appropriate. That was for “short termers” but for long term investors there was no change to the cautiously bullish attitude of this report.
As it turned out, gold didn’t even trade out of the $640s to the downside since then as a nearly continuous bid surfaced into even the most determined sell-down attempts in the several days following that January 28 report.
By last weekend, as gold and silver continued to challenge technical resistance and the large commercials continued to add net short positions at an exaggerated, but less torrid pace than the prior week, strongly positive money flow into the gold and silver ETFs resurfaced in direct conflict to the positioning of the largest COMEX gold traders as covered here in a February 4 supplemental GGR offering.
Now the indicators are showing that both metals have convincingly cleared their respective technical resistance and are attempting bullish thrusts toward the next line of the bear’s defense. As reported below, positive money flow into precious metals ETFs continued during the past week and although the LCs continued to add to their collective net short positions the pace of those additions noticeably slowed as the metals gained a foothold above near resistance.
The most glaring argument to these bullish developments is the lackluster action shown by mining share indexes, reported below, which so far are refusing to endorse the rallies by gold and silver in this report’s opinion. Dedicated readers will find other interesting and timely information contained in each of the indicator sections below.
Since this report turned cautiously bullish on September 17 with cash market gold at $570, the global standard of wealth for over four millennia has advanced a net $96.66 or 17% as of Friday’s close.
With that, let’s take a detailed look at some of the indicators this report follows closely.
COT Changes. The Tuesday 2/6 commitments of traders report (COT) shows that the large commercials (LCs) collective combined net short positions (LCNS) increased by 11,053 contracts or 8% from 135,611 to 146,664 contracts net short Tuesday to Tuesday while gold metal gained $7.19 or 1.1% to $653.59 for the period. The LCNS increased with higher gold, but the pace of increase noticeably cooled.
Since Tuesday gold added another $13.07 with the last cash market trade crossing at the unlikely price of $666.66. (Evidently a trader with a twisted sense of humor?) The yellow metal turned in a net gain of $19.03 for the calendar week and closed not far from its weekly high mark of $668.82 recorded mid-session in New York Friday 2/9.
Total COMEX gold open interest increased 12,901 lots to 360,936 open contracts having declined by 13,079 lots the week prior. Long-term December ‘07 and beyond COMEX forwards ended the current week just 2,964 contracts higher at 88,488 or a still high 24.5% of open contracts. The increase in the LCNS was roughly equal to the increase in the total COMEX open interest.
Tuesday’s LCNS is the highest since May 23, 2006 (149,003) with gold at $671.20 on its way down from roughly $730 two weeks prior. The LCNS just before the May 12 peak for gold topped at 172,524 contracts net short in the May 2 COT report with gold at $668.80. To state the obvious, gold is trading today about where it was when the LCNS topped just prior to the May gold peak. The total collective net short positions of the large commercial traders on the COMEX were 25,860 contracts less than then as of Tuesday with gold at $653. That suggests that if gold holds onto its gains through this coming Tuesday COT cutoff, another LCNS increase should be expected.
With that in mind, since the January 9, 2007 COT report (about a month ago with gold at $613.26) the LCs have been willing to increase their net short exposure by 64,990 lots or a huge 79.6% as gold added $40.33 or 6.6%. The majority of that increase occurred above $630. For each dollar advance in gold during those four weekly reporting periods the LCs added 1,611 COMEX contracts to their collective net short exposure, each contract representing a paper promise to deliver 100 ounces of fine gold in New York. So as gold advanced $40.33 the ounce the LCs added to their short side exposure a little over 202 metric tonnes worth of bets that the metal will head south. That’s about $4.2 billion in short side bets, by the way, nearly all of which are currently underwater.
Given the large increases to the LCNS over the past four reporting periods this indicator remains on the bearish side of the gold market indicator ledger short term. But we have to note that as gold metal challenged implied technical resistance the pace of additions to the LCNS decreased rather than the opposite.
Gold versus the large commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
Gold ETFs. This week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], increased a net 2.95 to 461.58 tonnes of gold bars held by a custodian in London for the trust. As reported in last week’s GGR supplemental update, GLD added a big 8.33 tonnes the week prior.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, remained steady at 87.09 tonnes of gold held, while Barclay’s iShares COMEX Gold Trust [AMEX:IAU] trimmed its gold holdings by a maintenance amount of .01 to 43.66 tonnes of gold metal held for its investors.
Over the past two weeks GLD alone saw liquidity-induced gold metal additions of 11.28 tonnes, so positive money flow (more wealth entering gold ETFs than leaving them) has certainly been underway in February. This indicator moves back onto the bullish side of the gold market indicator ledger.
Source for data streetTRACKS Gold Trust
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, jumped by a significant 168.94 tonnes from 3,719.96 to 3,888.9 tonnes (125,030,899 ounces) worth $1.73 billion as of Friday’s figures. Silver metal on the cash market gained a net $0.45 for the week with the last trade Friday printing $13.86.
In the two weeks since the last full Got Gold Report SLV has added an impressive 277.39 tonnes ($123.6 million worth) of silver to its hoard held by a custodian in London for investors in the trust. That is more than enough to replace the large reductions in metal seen in January and is direct evidence of positive money flow into the silver trading vehicle for the period.
Meanwhile, premiums on regional electronic bourses for some physical silver products were firmer than normal through Thursday, most notably for 100-ounce name brand bars. Name brands include Johnson Matthey and Engelhard, with no difference noted for poured or extruded versions of the investment bars.
This indicator returns to the bullish side of the indicator ledger.
Please see the short term graph for silver metal and the 1-year silver graph for additional technical commentary.
SLV metal holdings graph as of Friday, 2/9:
Source for data Barclay’s iShares Silver Trust
Gold Charts. The daily chart shows a rather convincing attempt at an upside breakaway above what had been resistance attempting to form in the $660 region on the cash market all week (roughly $665 on Stockcharts.com). On Friday apparently underwater bears had had enough and short covering helped to fuel the near-high close at $666.66 ($672.30 on Stockcharts.com).
Please also see the 2-year weekly version for context as well as additional technical commentary.
The last full GGR two weeks ago included: “With gold metal near implied resistance caution flags go up, but not for just gold bulls. Paradoxically the caution extends to both bulls and bears alike because in the off chance that an expected pullback does not materialize and instead a convincing upward thrust ensues, that would trigger a bevy of short trailing stops and buy stops which undoubtedly reside not far above expected resistance. The result could be another explosive romp higher similar to the March 2006 breakout above the $550-$560 consolidation resistance then.”
Well, it should be obvious that as of Friday gold is attempting that breakaway to the upside. Curiously this particular rally in the metal is not supported well by the collective action in mining shares, discussed below, but certainly is supported (now) by positive money flow into gold and silver ETFs. It is also supported by anecdotal reports from local and regional bullion dealers who report brisk physical gold business on both the buy and sell side, with demand getting the edge over supply.
“Buying has been strong (over the past two weeks) for 1-ounce gold bullion coins,” said Sonny Toupard, owner of Royal Coin, a 30-year rare coin and bullion firm in Houston. “We are seeing buying in quantity too, not just for gold, but for silver, especially 100-ounce bars and crates of U.S. silver eagles,” he added.
Add to that firmer premiums evident on electronic bourses for physical gold (and silver) seen through Thursday, moderating somewhat in Friday’s push higher.
With gold having broken though implied resistance short term traders can relax their stops just a smidge to “near resistance” levels to allow for a bit more volatility. A large number of trailing stops will migrate to just under the previous implied resistance (roughly $650 on the cash market) which technical theory holds should now become near support. This indicator remains bullish on the gold market indicator ledger.
U.S. Dollar. As the U.S. dollar index dipped 23 basis points from 85.00 to 84.77 Tuesday to Tuesday the LCs pared their collective net short position by 1,653 contracts to 2,639 NYBOT contracts net short. From Tuesday to Friday the index edged 11 ticks higher to close Friday at 84.88.
Please see the 1-year daily USD chart and the 2-year weekly USD version for additional commentary. The LCs are still net short the buck, but apparently not all that confident. Not as confident as one week ago when they had built up a net short position of 4,292 lots. The USD index has been trading in a tight range just underneath its 200-dma for a month now and is also sideways approaching an implied uptrend line. One gets the impression that the greenback won’t be traveling sideways much longer.
On the obverse side of the dollar index coin, a convincing thrust above the 200-dma here, after such a long period of congestion, will have allowed too many buy stops and short trailing stops to congregate just above the popular moving average. What that is suggesting is that dollar bears should get pretty nervous around, say, USD 85.60 or so.
On the reverse side, some hot money USD bulls will no doubt have been ratcheting up their trailing stops to just underneath an implied uptrend line off the December and January lows to an implied support located roughly in the 84.30 region. Others will be content to lay back to just under the 50-dma (crossing 84.16 as of 2/9). Sell stops would likely kick in somewhere in there too. So not far below 84 on the index is where fast money dollar bulls will start to sweat.
The USD index is very likely setting up for a much sharper move one way or the other. With the LCs set up on the short side, albeit modestly, this indicator squeaks over into the bullish side of the gold indicator ledger short term, but with little confidence.
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.
Mining shares continue to under-perform precious metals. As both gold and silver have broken through interim resistance the miners have yet to challenge theirs. The lethargic collective action of mining shares to the rallies in gold and silver has to be this report’s most bearish indication.
Please see the 6-month daily HUI chart and the 3-year weekly HUI chart for context and additional commentary on the graphs themselves.
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.
The one-year daily HUI/Gold ratio chart graphically shows the reluctance of mining shares to endorse the rallies in gold and silver. Please also see the 2-year weekly HUI/Gold version for context and additional, possibly significant commentary.
Cash Gold-HUI. Thanks to a late-day sell down for mining shares into the gold rally Friday, the cash gold minus HUI indicator skied upward to a teeth gnashing 326.60 which is 13.83 points higher (weaker) from the 312.77 reading two weeks ago using cash market closing prices. So far investors in mining shares remain relatively unconvinced in the gold and silver rallies. Once again, either mining shares need to advance or gold metal needs to pull back or both for this indicator to regain par.
Source for data cash market for gold, Stockcharts.com for HUI.
Short-Term Outlook: (Stops relaxed one notch to “near resistance” trailing stop strategy for short term traders. Medium to longer term continued cautiously bullish; Trailing stops normal for gold and mining shares for longer term investors.)
The last GGR two weeks ago noted that both gold and silver were challenging near resistance, noted a big jump in the large commercial gold net short positions, it noted negative money flow for gold and silver ETFs (then) and lackluster action by mining shares as good reasons for short term traders to adopt very tight “at resistance” trailing stops.
Since then neither gold nor silver dipped enough to trip reasonable “at resistance” trailing stops, and instead have now gone on to pretty convincing thrusts higher. Short term traders who employed reasonably tight trailing stops at the time are still comfortably in the trade with gold at $666.66. (Gold closed at $645.30 the Friday before that report and did not even get out of the $640s on the downside.) Also, since then positive money flow into the ETFs returned, in a big way for silver and remarkable demand for physical metal also surfaced during the period.
On the other hand the COMEX LCs continued to add to their now quite large gold net short positions, but we can observe that the pace of additions cooled once gold edged higher than implied resistance. Most bearish of the indicators is the non-confirmation by mining shares still underway as noted above.
Considering all of the indicators this report follows closely short term traders on the long side might now relax just one notch from an “at resistance” to a “near resistance” trailing stop strategy to allow for a bit more volatility while protecting significant profits.
The last full GGR also mentioned: “Caution flags apply to bulls and bears alike. While the indications are that a short term pullback has become more likely, gold and silver are challenging near resistance and a convincing upward thrust could ignite a dramatic follow through response in both the metals and the miners. So again, don’t forget the stops.” Obviously extreme caution is warranted for underwater gold and silver bears with a breakout attempt underway.
As mentioned two weeks ago, medium to longer term this report plans to remain cautiously bullish for gold and mining shares with normal trailing stops. For now longer term investors should only add into strong to very strong dips in this report’s opinion.
The next Got Gold Report is scheduled for the weekend of February 24-25 two weeks from now. Until next time as always MIND YOUR STOPS.
Long-Term Outlook: No change. 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 net long position in streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies. |
