HOUSTON -- As the Big Markets, the big equity markets, continued to give bears heartburn over the past two weeks; as base metals enjoyed a kind of price renaissance, pushing higher despite troubling economic news; as governments continued to find new ways to “fix” major economic problems caused by excessive borrowing with much more, ridiculously excessive borrowing, relaxing accounting standards and now even using the U.S. government’s printing press to “buy” its own treasuries (diluting all dollars in the process) … while those seeds of inflation and eventual debasement of all fiat currencies wound up - gold and silver continued to correct lower.
Deflation is the mortal enemy of all fiat currency states. Governments and central banks have shown they will do anything and everything in order to reverse deflationary forces. The seeds of future inflation are now planted, well watered and amply fertilized. So we all wait patiently for the green shoots of all this global monetary inflation to sprout. Signs are showing now in commodities markets that the effects of immense artificial government liquidity, both intended and otherwise, are starting to show.
However, as we note gold and silver correcting, we also cannot help but notice what is happening in the indicators this report follows closely. We cannot, for example, ignore that as gold and silver sold off there have been no redemptions of shares or reductions in the amounts of metal holdings in the major gold and silver exchange traded funds (The details are in the gold and silver ETF sections of the report just below).
We also cannot ignore that the largest of the largest gold futures traders, the traders classed by the CFTC as commercial, have been reducing their collective net short positioning at a fast clip and those same commercial traders now hold a really quite small net short position for silver historically speaking (Gold Newsletter subscribers see the Gold COT and Silver COT sections for much more about that).
The bottom line for this report is that while momentum still probably indicates the path of least resistance is for lower gold and silver very short term, both are reaching levels that are much more attractive for longer-term investors. In the case of silver specifically, a bona fide global shortage of the second most popular precious metal looks to be getting underway.
Accumulate silver soon
While each investor really must examine his/her own circumstances carefully, study the issues and make their own investment decisions, it is this report’s strong recommendation that any significant to strong dips for silver should be accumulated opportunistically. That includes both physical silver metal (as long as one can find it with reasonable premiums) and silver ETFs provided one does not use leverage.
All the signs this report follows closely suggest strongly that the chances for an important and historic supply squeeze for physical silver metal developing have increased materially. We cannot know yet if general knowledge of that supply shortage will surface right away or if it will take yet more time to become acute enough to make into the mainstream press, but it sure does look like it is coming and we want to be there for it – in size – when it arrives.
With that, let’s look more closely at a few of the indicators.
Gold ETFs
Gold turned in both a lower high ($890.95 Wednesday) and lower low ($865.49 Monday) over the past holiday-shortened trading week. Gold ended the week $14.46 lower than the prior Friday, a dip of 1.6%. Odds of a test of the Fibonacci 50% to 61.8% retrace zone of the October – February move (from $681 to $1,007) improved in the process now that former $890s support seems to have given way. (See the gold charts linked below for more technical commentary.) Gold’s weakness in U.S. dollar terms was not because of selling in the ETF department, however.
SPDR Gold Shares, [GLD], the largest gold ETF, added 0.31 tonnes of allocated gold bars to its gold holdings over the past week to show 1,127.68 tonnes of gold bars held for its investors by a custodian in London. As of the Thursday 4/9 close, the metal held by the trust was worth $31.9 billion.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.
Barclay’s iShares COMEX Gold Trust [IAU] gold holdings were steady at 67.76 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added a small 0.29 tonnes over the past week, to show 136.15 tonnes of gold held.
All of the gold ETFs sponsored by the World Gold Council (WGC) showed a collective increase of 0.60 tonnes to their gold holdings to 1,305.66 tonnes worth $37 billion as of the Thursday, 4/9 cash market close.
As gold has been selling down, even challenging its support, please note there have been no meaningful reductions in metal holdings by global gold ETFs. Indeed, we have to take note of a small measure of the opposite. That suggests that buying and selling pressure for gold ETFs have been pretty evenly matched. It does not suggest an investor exodus out of gold ETFs - at least not yet.
SLV metal holdings
Silver took a 42 cents, or 3.3%, step lower for the week, with a lower high ($12.82 Monday) and a considerably lower low ($12.05 COT cutoff Tuesday) in a challenge of its roughly $12.00 implied support zone. The last trade on Thursday 4/9 crossed the tape at $12.34 on the cash market (See the silver charts linked below for more technical commentary).
For the week, metal holdings at Barclay’s-sponsored iShares Silver Trust [SLV], the U.S. silver ETF, remained steady at a record 8,413.01 tonnes of silver metal held for its investors by custodians in London. SLV reported adding 116.08 tonnes the prior week.
Source for data Barclay’s iShares Silver Trust.
Like GLD, the authorized market participants (AMPs) for SLV add shares to the float and increase the amount of silver held (in minimum basket amounts of 50,000 shares) to answer imbalances of buying pressure over selling pressure. So, we know that when the amount of silver being held increases, buying pressure is prevailing. The opposite is true when selling pressure overwhelms buying pressure.
Looking at the chart above it is clear that even though silver has been correcting price wise there has been no significant negative money flow from the largest silver ETF – at least not yet.
Still no new custodian for SLV
As of Friday, April 10, SLV still had not filed an amendment with the SEC either naming an additional custodian or increasing the amount of silver storage available under the current custodian agreement with JP Morgan Chase London.
The details are in previous Got Gold Reports, but briefly, SLV reported holding 270,484.574.5 ounces of silver as of April 9. The current custodian agreement was for up to 264,550,265 ounces. So SLV now holds 5,934,309.5 ounces, or about 184.6 tonnes more silver, than the current custodian agreement covered.
On April 9, Barclays announced a seller-financed $4.4 billion sale of its iShares division to San Francisco based CVC Capital Partners. Barclays retains an interest in iShares in the deal and stands to participate if CVC resells it in the future for a profit according to news reports.
According to a Wall Street Journal report by Marietta Couchi, iShares head honcho Lee Kranefuss, “said he didn’t anticipate any significant changes to the way in which the business would be run following the change in ownership.”
Earlier, on April 1, in response to the question of when an expansion of the current custodian agreement or announcement of another custodian might surface, Barclays spokesperson Christine Huckado said via email: “To date JP Morgan Chase Bank N.A. has accepted all creation activity since the contractual limits outlined in the custody agreement have been reached, and currently we have no reason to expect that not to continue. With regard to your question, there have been no changes made to the trust or the prospectus at this time. Please note that if changes are made to the prospectus, we are required to file it with the SEC.”
Repeating from the previous Got Gold Report: “In order for SLV to continue to accurately mirror the spot market for silver, its AMPs simply must have the flexibility and opportunity to take advantage of the NAV-SLV share price spread arbitrage that makes the ETF work. SLV has tracked in lock step with the spot price of silver flawlessly so far, but without the ability to add more silver, and if buying pressure for SLV continues to prevail over selling pressure, the large U.S. silver ETF could face a condition where the shares would trade at a premium to spot silver. Therefore, an expansion of the current silver storage arrangement or another custodian or sub-custodian is almost certainly to be announced by SLV imminently.”
Now that Barclays has reached an agreement for the sale of iShares to CVC, perhaps we will see who the new custodian for SLV will be very shortly. Perhaps more importantly, we will get an idea of how much silver storage (and the silver to put in it) the new custodian will be able to provide.
Until then, apparently JP Morgan Chase, London has consented to provide more than the amount of silver named in the custodian agreement. By extension, then, it is reasonable to conclude that SLV can continue its operations normally for the time being.
We will continue to monitor developments going forward.
Two U.S. banks dominate COMEX silver short sales
According to the Commodities Futures Trading Commission (CFTC) Bank Participation in Futures and Options Report, as of Tuesday, April 7, with silver trading at $12.27, two large U.S. banks held zero contracts long and 28,492 contracts short silver on the COMEX, division of NYMEX in New York. Obviously that is a net short position for the two banks of 28,492 contracts. A holder of a short position profits if prices fall.
As mentioned just above, all COMEX commercial traders as a group – all of them – held a collective net short position of 29,581 contracts. So, the two U.S. banks’ net short position represents fully 96% of all the commercial net short positioning for silver on the COMEX.
Regardless of whether or not the net short positioning of the U.S. banks represents “legitimate hedging” of corresponding long positions in other markets, as some analysts and the CFTC have argued, it is abundantly clear that these two banks dominate the COMEX silver market from a short point of view. A position capturing 96% of all the action on one side of a market as small as the COMEX silver market is, by definition, an extremely concentrated position.
The fact that the banks held only short positions and no long positions at all argues against the position being the collective action of multiple clients of the banks. The one-way trade on the COMEX also suggests that the banks have a considerable vested interest in silver trading in one direction – down.
Notice, however, that the last time that the two U.S. banks held so much of the net short positioning was in December 2008, with silver then trading at $9.57 the ounce. The banks then held 98.6% of all the commercial net short positioning on the COMEX. Silver went on to test as much as 50% higher to the $14.60s since then.
The enormously concentrated short positioning of the two large U.S. banks may not be sinister at all. It may be the result of “legitimate hedging” as we have been led to believe. Indeed, we have seen the price of silver advance in the past while the banks held such overwhelmingly large, one-sided short positions that would obviously have benefited from lower silver prices – even recently. Yes, even though the bank’s net short positioning appears sinister, it could possibly be benign, but to many analysts it just plain smells of rotten eggs served with anchovies.
So long as the regulators at the CFTC and the SEC continue to allow the banks to accumulate overwhelmingly large one-sided positioning on the short side (and to go unexplained) it will remain grist for the mills of the conspiracy-minded among us. That is a shame, because otherwise bright and sensible investors may end up avoiding the silver game entirely on the basis of conspiracy-minded complaints, concluding that the silver game is “rigged,” or something along those lines.
Please don’t allow the “silver-market-is-rigged” argument any sway at all. Even if the market is manipulated downward over the short term, this report contends that no one can manipulate the price of any commodity permanently, period. No one has the power to consistently disrupt or usurp the laws of supply and demand for a globally-traded commodity over time. Over time silver will relentlessly seek its own supply/demand/liquidity equilibrium no matter if there really is manipulation or if there really isn’t.
If the coming supply squeeze for silver is as real as it currently appears to be, it just doesn’t matter if the silver market is currently being stepped on by a couple of arrogant bullion-trading banks. At worst manipulation, if there really is any, just means a near term delay in silver prices assuming reality price wise. At best a continuation of artificially low silver prices just adds to the bullish “fuel” silver will have as increased demand meets diminished supply and that issue makes it to the mainstream press.
Either way, with silver prices at historically low levels relative to gold, investors have a “golden opportunity” with silver as long as the gold:silver ratio remains above 70 and as long as investment demand continues to outstrip the current decline in industrial demand.
What we are witnessing now, I believe, is a condition where longer-term investors are assuming that investment demand will continue to rise even when industrial demand picks back up not all that far into the future. That’s a potent recipe for silver, especially since silver production is set to plunge in at least the coming two quarters by most all accounts.
Bottom line
With the silver futures contango as flat as a slate pool table, rapidly dropping silver inventories at the COMEX, with the COMEX commercials apparently in a hurry to reduce their net short positioning and with extremely high premiums and spotty availability for retail physical silver products, we have to give silver a more bullish bias going forward.
On balance the indicators this report follows demand that we either be long – with good trailing stop money management - or on the sidelines for gold metal, futures or ETFs. We also now adopt a fully bullish, accumulate-on-weakness stance for silver metal (if it can be sourced with reasonable premiums) and ETFs provided they are purchased without leverage, for longer-term investment. Silver, in particular, can be bought into strong to very strong dips with a bit more confidence than normal and with more liberal than normal trailing stops to allow for more than usual volatility.
Larger, well-financed mining shares have more or less been tracking with gold over the past two weeks and although they have performed well since the October crash, as a group they remain well under their historic average ratio to gold. That said, significant to strong dips can be bought provided traders employ sound money management and appropriate new-trade trailing stops, as always, for protection.
Smaller, more speculative and more thinly-traded miners and explorers, such as the ones that reside in the Canadian S&P TSX Venture Exchange (CDNX) index, have improved a little over the past two weeks, but nothing even close to what that index is capable of when markets are more confident.
Click here to see the relative performance graph courtesy of Stockcharts.com.
Repeating from the previous Got Gold Report two weeks ago: “This report continues to believe that now, when just about no one wants them [the small miners and explorers] and prices are a quarter or a fifth or even a tenth of what they were just a year ago; now when meaningfully large positions in promising miners and explorers with good management and real prospects can be had with relatively tiny capital (the kind of companies Gold Newsletter is focused on for subscribers); now when there are oceans of blood in the proverbial streets; right now is a small resource company speculator’s opportunity of a generation.”
Got Gold Report Charts
2-year weekly gold
2-year weekly silver
3-year weekly HUI
2-year weekly Gold:HUI ratio
That’s it for this excerpt of the full Got Gold Report. GoldNewsletter.com subscribers enjoy access to all the Got Gold Report technical analysis and commentary as well as Brien Lundin’s timely advice and analysis of specific resource companies.
Until next time, as always, MIND YOUR STOPS.
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 iShares Silver Trust, net long SPDR Gold Shares and holds various long positions in mining and exploration companies.