HOUSTON – Both gold and silver continued within the confines of their respective consolidations in the two weeks since the last full Got Gold Report. Whether bullish or bearish, the action is not the very volatile kind that short-term traders really prefer. “Boring” doesn’t quite describe it, but neither does “exciting.”
It’s August. Historically liquidity is thin in the last full month of summer. The last full week of August is particularly so. That is a subtle hint that the “dawg daze” won’t be with us very much longer.
Here’s a little of what we are watching and reporting on below: Weakness in the U.S. dollar continues as ICE commercial traders dump long-dollar positions; negative money flow from the largest gold ETF just stopped, and the largest of the largest of gold futures traders just covered or offset a bunch of their short-gold contracts a week before COMEX and OTC options expire.
The commitments of traders action was less than bullish on the silver front, but not frighteningly so. Meanwhile, over a billion Chinese are now silver bullion buyers, legally and openly, encouraged by the government there, which actually realizes that the gold:silver ratio is out of whack.
Much of this week’s commentary is contained in the actual technical charts linked below. As we let our trading stops do the trading, let’s let some of the indicators do the talking.
Please note: Gold Newsletter (GNL) subscribers received this issue of the Got Gold Report Monday morning, August 24. GNL subscribers enjoy access to all Got Gold Reports, technical charts, analysis and information, as well as Brien Lundin’s timely and actionable analysis of specific resource related companies. For more information or to subscribe visit the Gold Newsletterhome page.
Gold ETFs: As gold metal edged a net $4.96, or 0.8%, higher for the week (to $953.65 on the cash market), SPDR Gold Shares (GLD), realized a small net weekly increase of 0.92 tonnes to show 1,066.41 tonnes of gold bars held by a custodian in London.
This marks the first addition to GLD metal holdings since June 1 when the trust reported holding a record 1,134.03 tonnes of gold bars. From June 1 to August 20, GLD shed 68.54 tonnes of gold to 1.065.49 tonnes.
Barclay’s (soon to be BlackRock’s) iShares COMEX Gold Trust (IAU), reported no change to its gold holdings. IAU reported 73.47 tonnes of gold held in COMEX warehouses.
Silver ETF: Barclay’s (also for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), reported no change in its silver holdings, showing 8,824.67 tonnes of average 1,000-ounce allocated silver bar inventory.
Apparently there has been a shift from negative money flow in gold to slightly positive while buying and selling pressure for the largest silver ETF shows to be more or less balanced.
This week Gold recorded a lower low ($930.24 Monday) and a lower high ($958.15 Friday), but finished the week closer to its high than its low. Dollar weakness contributed to a Friday rally and the last print of the week showed $953.65 on the cash market. Please see the gold charts below for much more technical commentary.
Silver was slower to recover from the big Monday 70-cent plunge, turning in a lower weekly high ($14.71 Monday) and a much lower low ($13.49 Wednesday). The 50-cent follow through to the downside Wednesday ran into fierce and determined buying action, by the way. We have noted the $13.50 level, therefore, as a possible new support pivot. Notice how close that is to the converging seven-week and 28-week moving averages in the two-year chart below. Silver closed the week with a last trade Friday of $14.17, about 55-cents, or 3.7%, lower than the previous week’s close basis the cash market. Please see the silver charts below for much more technical commentary.
Although it didn’t print a new low for this move, the U.S. dollar reassumed the path of least resistance despite so many analysts thinking the short-dollar trade is “crowded.” (We believe what is “crowded” is the train of nations that wish they had more gold and less U.S. paper promises – hence the dollar weakness.)
The greenback index closed the week with a 76-basis point loss to 78.04. With so much new Treasury issuance on tap for the coming week, traders suspect there will be at least some support for the dollar as foreign interests buy dollars in advance of, or in connection with, bidding for the U.S. debt. We’ll see if that materializes, but whereas two weeks ago the ICE commercials were adding to their DXY net long positions, this week is an entirely different story.
As the DXY fell just a small 14 basis points, from 79.13 to 78.99 COT reporting Tuesday to Tuesday, ICE commercial traders dumped a whopping 4,198 contracts (38%) of their collective net long positioning. The “ICECOMs” reported a net long position of 6,850 DXY contracts out of a total open interest of 25,171 contracts (LCNL:TO = 27%) as of August 18. Having seen no material rally in the greenback, apparently the ICECOMS felt the safest place to be is the sidelines in the dollar.
Just two weeks ago, with the DXY then at 77.73, their net long positioning amounted to 50% of the open interest in the dollar index. As the dollar “rallied,” for lack of a less descriptive term, up to around 79 they saw fit to exit half of that positioning. That wasn’t much of a rally for the ICECOMs to unload half their net longs, was it?
One has to now wonder how much lower the buck will have to travel for the veteran Forex traders to be long 50% of the open interest again. That 77.43 intra-day low made two weeks ago (see the chart below) looms importantly large, then, doesn’t it?
One thing we know for sure is that as the dollar index meekly tested its seven-week moving average, the ICE commercials were shoveling out their long positions. The ICECOMS were LINOs – long in name only. Sure enough, the dollar “rally” fizzled at its 50-dma, then reversed lower and closed much closer to its low for the week.
Taken with the action by the commercial traders in the gold futures markets (see the Gold COT section just below) there was certainly a hint in the hot summer air that someone is expecting further dollar weakness. Why a hint? While we see the commercial traders getting sharply less long the buck, other commercials, the ones over at the COMEX were getting quite a bit less short gold at the same time. The U.S. dollar chart with technical commentary is below in the charts section.
The Gold:Silver Ratio (GSR) put in a bounce up to the 50-day moving average around 68 ounces of silver to one ounce of gold, which is probably a correction of the sharp break lower the first two weeks of the month. The GSR ended the week just over 67:1. We wouldn’t want to see this ratio above the 50-day moving average for more than a day or two as that would be a bearish signal short term.
For a number of reasons liquidity has been slower to return to silver than gold, but on balance so far the trend of this ratio continues in silver’s favor, albeit in fits and starts. Since October, when the GSR peaked at near a panic-driven 88 ounces of silver to one ounce of gold the relative purchasing power of silver has improved 24% to roughly 67 ounces. Prior to the 2008 stock panic the average GSR ranged from 50 to 55 ounces more or less, so the ratio has plenty of room to improve further just to get back to where it “used to live.”
As long-time readers know, eventually we fully expect that the GSR will blow right through the recent “normal” in the 50s on its way much, much lower as people come to understand just how little of the white metal is available for an entire planet. We would not at all be surprised to see the ratio comfortably in the middle 30s eventually, perhaps spiking lower at times to the 20s when fever for silver erupts among the public again.
Thanks to a decades-long period of global government’s dishoarding and distribution of silver metal that helped sate the collective rising demand, global prices for silver were artificially low for an extended period. The consequences of that artificial market are still being felt today and will be far into the future. The extremely low price for silver of the 1990s and early 2000s stifled exploration and new production of silver (on its own merit). Silver production increases during the period were merely as a result of byproducts of the mining of other metals like copper, zinc and lead.
We have covered all this in past reports, but we have been using up the world’s collective supplies of silver metal left over from when governments actually put silver metal in their coins and held silver as a quasi-reserve asset. Today there is little in the way of government silver inventory. It’s all gone.
The punch line of our reasoning for investing and speculating in silver starts with: Today there is probably less than half the amount of available silver in bar form as there was during the last great silver mania in 1980. (Some popular analysts say it is now less than a quarter.) Worldwide there is something close to 1,000% more currency in play today than then. In 1980 world population was on the order of 4.43 billion souls, more or less. In 2008 world population had grown 51% to 6.7 billion.
A side note here. For much of the period between 1980 and today a large fraction of the population, the people of China, were not allowed to legally own silver bullion. Well, today that has changed. People of China are now not only allowed to invest in silver, government-sponsored television is even recommending ownership of silver as a wise investment as this widely circulated YouTube video reveals.
Did you notice that the Chinese commercial mentions the gold:silver ratio? The Chinese are very value conscious. So should we be.
At any rate, when silver does become more popular again and its real scarcity is better understood (and probably then over-hyped) there will be something like 51% more humans using 1,000% more “dollars” to chase less than half as much physical silver in a world where anyone can participate in a silver ETF online or from their smart phone in seconds.
The last big mania in silver was based on a false premise; based on an attempted physical corner of a market in ample supply. What will happen when there is a popular resurgence in silver with a much bigger world population and precious little of the metal to go around?
The only surprise to some of us is that it has taken so long for the word about silver’s fantastic potential as both an investment and as a safe haven to get out there. That is not to suggest that word of the coming silver shortage has gotten out to the “body-public.” It certainly hasn’t, yet. Major emphasis on the word “yet.”
Maybe with over a billion Chinese now able to own it the countdown to a gold:silver ratio more in line with nature and historic monetary policy has started.
It really makes no fundamental sense for the GSR to be where it is today, but it takes major events, shortages and price anomalies in the global market to change people’s thinking about it. (Shouldn’t be too much longer now, but patience is still the name of that game.)
See the GSR chart below in the charts section.
Gold COT Changes: COMEX commercials lighten up. In the Tuesday 8/18 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercial’s (LCs) collective combined net short positioning (LCNS) FELL 18,360 contracts, or 8.2%, from 222,905 to 204,545 contracts net short Tuesday to Tuesday as U.S. dollar spot gold dipped a small $7.22, or 0.8%, from $946.17 to $938.95 while the total open interest FELL 11,192 to 373,810 contracts open.
The LCNS fell 5,288 contracts and the open interest fell 7,382 contracts the week prior.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart above looks at just the nominal amount of commercial net short positioning. The chart below compares the COMEX commercial net short position for gold with the total open interest (LCNS:TO). That gives us a better idea of how the largest hedgers and short sellers are positioned relative to the rest of the COMEX traders.
We should sit up and take notice that the large, well-funded and presumably well-informed COMEX commercial traders covered or offset 18,360 contracts of their collective net short positioning on what was a very small net $7.22 move lower. For each dollar lower the LCs covered or offset 2,543 net short bets. As measured against all COMEX open contracts, the commercial net short position falls from a dangerously high 57.9% to a still too high 54.7% of all open contracts (LCNS:TO).
Source for data CFTC for COT, cash market for gold.
Repeating from previous reports: “We fully expect that if gold does advance through the formidable resistance being thrown at it by the largest hedgers and short sellers now, and ultimately thrusts upward through the Great Wall of Gold, it will most likely do so in grand, explosive and historic style, sort of like it did when the $450 barrier gave way in 2005. We sure want to be on board if or when that day arrives.”
The large reduction in the LCNS on such a small move lower for gold is a “tell.” It suggests that a disproportionately large amount of hedging or short selling hopped to the sidelines on not much downside activity in the gold price. But the result is that the LCNS:TO merely fell from “extremely high” to still “very high.” In other words, the COMEX commercials are still quite well positioned for gold weakness should it occur.
Silver COT: As silver FELL 32-cents, or 2.2%, COT reporting Tuesday to Tuesday (from $14.31 to $13.99 on the cash market), the large commercial COMEX silver traders (LCs) ADDED 775 contracts or 1.8% to their collective net short positioning (LCNS) from 42,346 to 43,121 contracts of net short exposure. The LCNS also rose 3,305 contracts the prior week on a similar 31-cent dip. It is usually not a short-term bullish sign when the LCs are adding short positions while silver is falling in price. The total open interest FELL 1,263 contracts to 103,527 COMEX 5,000-ounce contracts open, after rising a big 5,313 contracts the week prior.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX (LCNS:TO). That gives us a better idea of how the commercials are positioned relative to all the COMEX traders. When compared to all the contracts open, the commercial net short positioning in silver futures rose for the fourth consecutive week, from 40.4% last week to 41.7%.
Of course that somewhat argues with the action in gold for the week, but this is August, when trading desks are lean and liquidity is as scarce as an honest politician.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
On a very short-term basis we do not like it when the silver LCNS is rising as the price of silver is declining. The opposite is usually more constructive. For now the numbers are not frightening, however. Since August 4, COMEX commercial traders have added 4,080 contracts (10.5%) to their collective net short positioning while silver corrected a net 63 cents (4.3%). Neither figure is out of bounds in a low-liquidity summer environment.
What is more bothersome, perhaps, is that for the same two-reporting week period (measured on COT reporting Tuesdays) silver shows us a net 4.3% loss in price as the COMEX futures open interest rose a net 4.1% to 103,527 contracts open.
When there is apparently more desire for commercials to hedge collectively with both a falling price and a rising open interest, that has signaled significant price pressure in the recent past. Especially just ahead of OTC options expiry. (OTC options expire this coming week on August 27. Don’t be surprised if we see pressure on silver until then.)
So, for short-term traders, our antennae must go up and our answer must be to watch the GSR carefully for signs of further deterioration (higher GSR). That, and to maintain our “near resistance” trailing stop strategies.
Longer term, and as an investing prime directive, we remain and will likely continue to be very staunchly bullish on physical silver metal, selected silver producers and silver ETFs. For our longer-term positioning we are apt to treat most any strong to very strong dip in silver as an opportunity to add to that positioning as soon as we believe the dip has exhausted itself.
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Summing up: The U.S. dollar remains sickly. Both gold and silver are bullishly consolidating, as if waiting on a starting gun to fire. The gold COT report shows us about as much improvement as the silver COT shows the opposite this week.
Negative money flow from the largest gold ETF has apparently paused, but we cannot yet say there is a surge of liquidity into gold ETFs. Gold and silver physical premiums remain close enough to normal to make conversion from ETFs fairly painless, but we doubt that condition will continue for much longer.
We remain on the hunt for special situations and “vulture opportunities” via “stink bids” for obvious lack-of-liquidity, non-news-related, over-reaction sell-downs on the miners via our Vulture Bargain Hunter Method. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin mentioned in the most recent Gold Newsletter.
While we must maintain short-term trading stops on gold at a “near resistance level” and while we cannot yet haul in our “caution flags” given the still very high 54% ratio of commercial net short positions to the open interest, we have to take note of the large reduction in commercial gold hedging last week. Of all the signals we have seen this week, that one has our interest the most.
Repeating from last time: Although gold may indeed fall in price, it will have to do so without our being short of it. Indeed we do not think it advisable to sell gold short (at least yet) in U.S. dollar terms (or in any other currency for that matter).
This is a gold bull market until proven otherwise. In a bull market speculators have but two possible positions: Long or on the sidelines. Definitely not short, except to hedge. (At least just yet.)
We firmly believe that if gold is to punch through the Great Wall of Gold it will likely be despite activity in the U.S. dollar, or rather, regardless of it. It will also be when gold makes another advance in all global fiat currencies at the same time as it did in 2005.
Gold may or may not be ready to make that next advance. No one can see the future and no one “knows” when such an advance will occur in advance. However, given the actions of the current “captain” and “crew” American voters saw fit to elect to run this badly leaking national flagship, it would not be all that surprising if the world (especially Asia) suddenly wanted a lot more gold metal and a lot fewer of our paper promises in the weeks and months ahead.
Got Gold Report Charts
Below are few samples of the Got Gold Report (GGR) technical charts. Gold Newsletter subscribers enjoy access to all GGR charts and all the GGR reports, commentary and trading ideas.
·2-year weekly gold
·2-year weekly silver
·3-year weekly HUI
·2-year weekly U.S. dollar index
·6-month gold:silver ratio
·2-year weekly UNG
That’s it from Houston, this week. Until next time, good luck, good trading and 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 and/or his family currently holds a net long position in SPDR Gold Shares, net long iShares Silver Trust, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), and currently holds various (approximately 25) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).