ATLANTA -- Some coin dealers and bullion outlets report that they have seen a shift to a condition where they are seeing a bit more selling of gold and silver bullion from individuals over the past two weeks. However, from a contrarian perspective that can be more bullish than bearish and it is in conflict with what some of the indicators this report follows closely are, well, indicating. That is especially true for silver.
There is no arguing that more people have decided to cash in some gold or silver following the seven-week rally in equity markets, but it isn’t only because they are moving funds back into the stock markets or chasing the big-percentage moves higher for wounded, about to be stress-tested, banks. Some are doing that, selling bullion and moving back into the equity markets, but sadly some are also selling because they just plain have to.
“We’ve been seeing more selling this week,” says the perky, but very busy and capable Keri Hanicak, bullion sales director for Royal Coin in Houston. “But I think people are selling more because they have to, not so much to take profits. They got their hours cut, they lost their job or we’re seeing people selling so they can keep their business running,” Hanicak added. “I think most of the people selling wish they could hang on to it.”
Royal Coin, run by close friend and prince of guy Sonny Toupard, who hails originally from Louisiana, is a great choice for Houstonians looking for honest, reliable rare coins and bullion services.
My friend Bill Haynes, who runs the very well respected CMI Gold & Silver (CMIGS) based in Phoenix, echoed Hanicak’s observations. “Demand was strong, as it has been for months, but demand fell as the week went along,” Haynes reported via email Saturday. “Additionally, significant sellers showed on the scene for the first time in months. We actually bought so much gold that we had to lay off some to wholesalers.” Bill says that hasn’t happened since the world's financial woes surfaced last year. “As a result, premiums dropped on many products,” Haynes said. Premiums are the amount paid and charged by dealers over the prevailing spot prices for bullion.
Gold and silver premiums fall – to high levels
Premiums apparently declined late week, but from very, very high levels. By the way CMIGS has been around for over 30 years and Bill knows his stuff, so when he speaks people, like me, tend to listen.
What a very savvy bullion trader friend (who doesn’t want his name used, so I’ll call him “James”) says is happening is, (that) “… bullion dealers got so used to the market being one way – all buying and no selling – they have forgotten what it was like to see both sides of a market.” Meaning, of course, that he sees the market returning to a more normal phase, a phase that actually includes some sellers, but still currently with more demand for bullion coins than supply.
To support that contention, James quickly noted, “Look at the premiums if you want to know demand. They have come down on deliverables, yes, but they were, like, in orbit when gold had an $860 handle. Now (with gold in the low $900s) they are just in the stratosphere!”
Hanicak confirmed what James was relating. She said that Royal had moved their charged premiums for one-ounce gold bullion coins down about $20 “To $70 over spot for gold U.S. eagles, $50 over spot for South African one-ounce kruggerands,” as examples.
Isn’t that still something like 5% or 7% over the cash price? That is high, not anywhere near what most observers would consider normal premium territory. The joke is that gold bullion premiums just fell - to an extremely high level!
After returning to Houston Sunday from a local Texas coin show in Waco, Toupard checked in with an afterthought. He said, “Retail and wholesale market activity picked up once gold hit $900 … (but) sales still exceed purchases over the counter by a 10 to 1 margin …. We’re making up the needed product shortage by buying from whoever has it in the U.S. dealer network,” Toupard said.
Apparently the up-tick in people selling is a relative thing then.
Silver still scarce
Although premiums for silver bullion products also came in a little according to dealers, they say they just aren’t seeing as much of some silver products as they might like. Nearly all still have waiting lists and priority call lists, some still with orders unfilled. Products like 90% silver U.S. coins in $1,000 face value bags, called “90% bags” or simply “90%” by dealers which contain roughly 715-ounces of pure silver, remain difficult to source in quantity and continue to fetch near-record premiums of around $2.00 to $3.00 the ounce over spot. The bags of pre-1965 dimes, quarters and half dollars used to sell at a slight discount to spot – as recently as last year.
“One-hundred-ounce name brand bars (of silver) are going for $2.50 an ounce over spot now,” Hanicak said Saturday with cash market silver at $12.88. “Generic 100-ounce silver bars bring $2.25-over,” she said.
So, dealers saw a gush of gold and silver selling toward the end of the week as gold and silver surged higher following the news that China finally confirmed persistent rumors that it has been buying gold. The Chinese reportedly added some 454 tonnes of gold since 2003 and now hold about 1,054 tonnes of gold metal.
Incidentally, 454 tonnes of gold in the six years since 2003 is roughly equivalent to the amount of gold SPDR gold shares (GLD) added to its holdings over the past six months, and China’s 1,054 tonnes now ranks 7th in global gold holdings, right behind GLD’s 1,104.45 tonnes.
In the “old days,” the days pre-2008 crash that is, we veteran traders used to regard periods of the public doing more selling of gold and silver as a contrary indicator. It used to be when we saw that the general public was rushing in to sell it meant that the market was about to go substantially higher, and vice versa.
If my trader buddy James is right, and we are transitioning into a more balanced, more “normal” market, perhaps we will get a chance to test that contrary indicator PDQ. Haynes agreed, saying, “My sentiments exactly. Probably higher prices next week.”
Either that or else the public has it right this time, we’ll see.
While dealers deal with a late-week rush of individuals cashing in gold and silver, the largest of the largest traders in gold and silver futures are also sending signals. Those signals range from neutral in gold to really quite bullish in silver. (Much more about that for Gold Newsletter subscribers in the gold and silver COT sections below.)
A week ago we finally saw meaningful redemptions from gold exchange traded funds, 21.7 tonnes worth from GLD alone, but since then zippo either way. There have been no redemptions of shares or reductions in the amounts of metal holdings in the major silver exchange traded funds, however. (The details are in the gold and silver ETF sections of the report just below.)
With that, let’s look more closely at a few of the indicators.
Gold ETFs
Gold turned in an outside week, first printing a lower low ($865.45 Monday) and then surging well past the previous weeks’ high (to $916.50 Friday) before slight profit taking resulted in a Friday 4/24 near-high last trade of $913.00 on the cash market. Gold ended the week $43.88 higher than the prior Friday close, a surge of 5%. Odds of a test of the Fibonacci 50% to 61.8% retrace zone of the October – February move (from $681 to $1,007) diminished given the third bounce above or off of the 40-week moving average in as many weeks. (See the gold charts linked below for more technical commentary.)
SPDR Gold Shares, [GLD], the largest gold ETF, saw a small net 1.53-tonne reduction of allocated gold bars over the past week to show 1,104.45 tonnes of gold bars held for its investors by a custodian in London – probably a maintenance reduction. GLD saw a reduction of a large 21.7 tonnes of gold metal the week prior as gold cracked the former $890s support. As of the Friday 4/24 close, the metal held by the trust was worth $32.2 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 increased 0.61 tonnes to show 68.37 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added 2.21 tonnes over the past week, to show 135.25 tonnes of gold held after declining 3.11 tonnes the prior week.
All of the gold ETFs sponsored by the World Gold Council (WGC) ended up near flat for the week, showing a tiny net 0.18 tonne decline to their collective gold holdings to 1,281.34 tonnes worth $37.4 billion as of the Thursday, 4/24 cash market close.
Last week, the week ending April 17, saw the first meaningful reduction in gold ETF metal holdings since last year. However, judging by the reported metal holdings apparently buying and selling pressure were more evenly matched this past week despite the surge in retail gold selling.
SLV metal holdings
Silver jumped an eye-opening $1.01, or 8.5% higher, this past week, but would you believe that this week’s high and low were identical with last week’s? That’s right, this week’s high of $12.94 on Friday 4/24 and low of $11.82 Monday matched the prior week’s limits, but this week silver closed much closer to the high. The last trade on Friday 4/24 printed $12.88 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. This, despite another, attempted cash market test, to as low as $11.82 Monday 4/20. Apparently traders sensed there was too much determination on the part of buyers to attempt a third test of the $11.82 level for now.
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.
Still no apparent negative money flow from the largest silver ETF and spreads, the difference between the net asset value, or NAV, and the SLV share price, narrowed considerably in late trading Thursday and early Friday, suggesting a bit more buying pressure than selling pressure returned to SLV.
Still no new custodian for SLV
As of Friday, April 24, 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. Analysts and investors are becoming more interested in this development, maybe for good reason.
The details are in previous Got Gold Reports, but briefly, SLV reported holding 270,484.574.5 ounces of silver as of April 24. 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.
This report speculated two weeks ago that now that Barclays has reached an agreement for the sale of iShares to CVC, perhaps we would see who the new custodian for SLV will be “very shortly.” More importantly, analysts and investors are interested in how much silver storage (and the silver to put in it) the new custodian will be able to provide.
Until then, as reported earlier, JP Morgan Chase, London has consented to provide more than the amount of silver named in the custodian agreement. By extension, then, it was reasonable to conclude that SLV could continue its operations normally for the time being, but not forever. SLV needs a new source of silver soon.
However, there is growing speculation that the 270.5 million ounces accumulated and allocated to SLV (for its many fully-paid-in investors) represents a significant percentage of the entire available “static silver” inventory available in and around London. Indeed, by some estimates the SLV hoard of silver could represent as much as a quarter or even one-third of all the bar-silver currently in storage there.
That includes the largest known private bullion depositories for London and European dealers and their management and storage facilities for commercial physical bullion. This London silver inventory is important to the silver market as the basis for the largest silver market in the world, the over-the-counter (OTC) trade that clears through the London Bullion Market Association (LBMA) where over 100 million ounces of silver change hands daily.
If, as some analysts and observers now speculate, the SLV inventory has begun to tighten availability of silver bullion in London for all the other markets that rely on silver stashed there, it may become difficult for SLV to secure a new source of silver with enough size to accommodate a larger expansion of the fund’s holdings.
We will know more (and comment more) when SLV finally files a now overdue amendment to its custodian agreement or announces a new custodian or sub-custodian. We plan to keep an eye on this going forward, but for now the lack of a new custodian supports the voices that say silver is already in very tight supply worldwide.
If true, a global tightening of available silver good delivery bars helps explain the very tight contango in forward futures and the extremely low level of commercial net short positioning shown below for Gold Newsletter subscribers in the silver COT section.
Bottom line
When the silver LCNS:TO is under 30% like it was in the last COT report and the COMEX commercial traders are at historically low net short levels; when the gold:silver ratio is still closer to 70 than it is to 50 (or lower); when we have been witness to company after company announcing production cutbacks or outright closures meaning much less silver will be produced ahead; when the largest silver ETF has to name (and is late in naming) a new custodian because they have run out of storage space and the silver to put in it (and that’s from the largest possible custodian there is); when premiums for anything and everything silver are sky-high on the Street and some products are just plain scarce to boot and when the contango for COMEX futures has a razor-thin, six-cent difference between the near active May contract and the December contract, we have to have a fully bullish, buy-on-weakness bias for silver metal, silver futures and ETFs.
We simply cannot find anything of substance that argues with our thesis that the smartest and largest silver traders on earth are positioning as though they believe a sure-enough physical shortage of silver metal is developing, or about to surface.
Again all investors need to study the issues carefully and make their own investment decisions. With that firmly in mind, over the very short term silver may do just about anything price wise, given that so much of the silver short futures position on the COMEX, which largely influences the price, is controlled by just two very large and dominant U.S. banks. However, with the possible exception of 2002, we just cannot remember a time where silver looks and feels so downright bullish.
Always with the caveat of: If the world holds it together.
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.
Two weeks ago we once again adopted 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.
We suggested then and we now strongly reiterate that silver 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. If silver falls significantly, great, we can add some. If it rises from here that’s great too because we have some.
Larger, well-financed mining shares continue to track with gold over the past two weeks. 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, showed us a little more spunk since the last report, but unfortunately the emphasis is on the word “little” instead of “spunk.” At least so far the CDNX isn’t even close to what that index will be 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 Reports: “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
End notes
After eight weeks of generally weaker gold prices, seven weeks of stronger Big Markets, and after five weeks of a generally stronger U.S. dollar, it’s not very surprising that we are seeing an up-tick of retail physical gold selling. What will now be surprising is if that turns out NOT to be a contrary indicator. Got gold? Got Silver?
Oh, and lest I forget, please check out my friend Thom Calandra’s take on one deep value driller/miner I have taken a shine to recently, Timberline Resources (AMEX: TLR). Thom pens the popular and growing Ticker Trax service for Stockhouse.com and the story is in two short parts, the first of which is available here.
That’s it for this Got Gold Report. 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 net long position in iShares Silver Trust, net long SPDR Gold Shares, net long ETN DXO, net long UNG, long TLR and holds various long positions in mining and exploration companies.