HOUSTON -- This is kind of an informal update as the Got Gold Report transitions from its normal, overly-long format into a shorter, more chart-centric new model to be out in the near future (That just means the same message via more charts and less verbiage, probably).
In addition, there is a chance that your correspondent will be taking the summer off in order to recharge the batteries and explore some of the various interesting opportunities available out there in the conference, analyst and bullion communities.
What an exciting and potentially profitable time we are living in today. With the possible exception of 2002, never before has there been so much opportunity for individual investors as there is right now, in 2009. The investing landscape is treacherous, but within the danger lays the seeds of great fortune for the nimble and the alert among us.
We’ll see how it goes and decide what the game plan will be for the Got Gold Report over the next little while, but for now let’s get right into the reason we decided to send out this unscheduled update.
Gold and silver runas the buck wounded
What a great week it was for those of us invested in gold, silver, mining companies, oil and natural gas. What a horrible week for the U.S. dollar, U.S. taxpayers, for bond holders in GM and for anyone worried about North Korea, Iran, Pakistan and Nigeria.
Below are updates to a number of the Got Gold Report charts, including the gold, silver and natural gas related charts at the links below, near the end of this report. Because of the impressive movement in them we decided to update them this week, a week ahead of schedule.
But first, just below are the usual graphs for the positioning of the very large, well-funded and presumably well-informed traders classed by the CFTC as “commercial.” They are the largest gold and silver futures traders in North America.
Raise the caution flags
Sound the klaxons and raise the “caution flags.” Commercial traders really piled on the short side. As gold rose $26.44, or 2.9%, COT reporting Tues/Tues, from $925.70 to $952.14, the COMEX commercials added a whopping 25,071 contracts (13.7%) to show a very high 208,136 contracts net short. This, as the open interest for gold rose 29,034 to 396,965 contracts open.
This past week saw the largest one-week increase in the net short positioning by the commercials since the December 16, 2008, report, when they clobbered the gold market with an increase of 28,239 net short contracts as gold was in the $850s. That action did result in a (modest) pullback for gold, but not really for all that long a time, by the way.
This is also the first time that the COMEX commercial net short positioning has been over 200,000 contracts since the infamous July Massacre, as BMO’s Donald Coxe dubbed it, in 2008 (shown in the two-year chart for gold).
No surprise
It really shouldn’t surprise us that we are seeing a big increase in the commercial net short positioning now, because gold is rapidly nearing an obvious technical resistance zone and the commercial traders nearly always load up heavily net short at such times. Forget the reasons why for a moment, both legitimate and otherwise, it’s just a fact of life in the gold biz that the commercials always seem to stand in the way of gold to the best of their ability.
It has been a while since we have been at this kind of condition on the gold market, so it is probably a good time to repeat that we expect there will be colossal commercial net short positioning when gold finally does go vertical or parabolic to the upside. Although it has nearly always been the case that the very high commercial net short positioning has proved to be more of a bearish signal than not (thus the caution flags), at some point in time that condition will instead become like 100-octane aviation fuel for the ultimate gold rally engine.
In other words, when the Big Breakout (the day when gold powers on up above and well into four digits) finally arrives -- just as the last big short covering breakout did in 2005 as gold finally advanced through the $450s -- it will almost certainly be while the COMEX commercials are very, very strongly net short just as they were then, in 2005, with over 212,000 contracts net short and the open interest at 370,844. The LCNS:TO read a staggering 57.4% of all open contracts just before gold powered on higher that October.
However, most of the time the commercial’s concentrated sales are enough to absorb the collective buying pressure, so when they become overwhelmingly net short it is definitely time to raise short-term trailing stops up to tighter settings. Like right now. Right or wrong, it is the correct play for short-term traders.
Gold short sellers throw down the gauntlet (again)
Some goodly portion of that commercial short selling is probably legitimate hedging. Hedging of offsetting positions owned or sold via derivatives in other markets. After all, the big short sellers are bullion banks and they and their clients hold or produce large physical positions. We know now, from the good work of really dedicated people that the very same bullion banks who hold the lion’s share of the commercial net short positioning in gold and silver are also direct agents of the U.S. central bank (the Federal Reserve) and the U.S. Treasury Department. We are talking about only three big U.S. banks at most, by the way, but they are the big dogs in the bullion kennel and one of them is uno perro grande for sure (JP Morgan Chase).
It is not hard to imagine that our Uncle Sam takes offense when the price of gold might look “too high,” which could threaten confidence in the under-backed paper dollar. Such “management” of a global market for gold metal might seem essential to people in the business of printing paper “money” and keeping citizen’s confidence in it. Everyone interested in that “management” should study the mountain of evidence complied at the Gold Anti-Trust Action Committee (GATA) website, which points to just that.
Speaking of GATA, Chris Powell, the long-time secretary-treasurer of the organization did a recent interview with my friend, Jay Taylor, on Jay’s Voice America Business Radio show. It’s certainly worth the time in my opinion and folks can catch a replay of it at this link.
Moving on quickly, the upshot of this section on caution is that if we are to see the very heavy hand of government management of the gold price, it just might be pretty soon now. However, I think we can see that the ability of the government and central banks to “manage” commodity prices may now be on the wane. Now that China and Brazil have come to terms to trade in each other’s currencies instead of dollars. Now that China has publicly chastised our Treasury officials for quantitative easing and debasing the dollar. Now that the current administration has shown that it has absolutely no intention of putting the brakes on out-of-control government spending, even in times of a full-blown financial and banking crisis.
If the United States of America is foolhardy enough to take the world’s willingness to lend it money for granted; if the U.S.A. thinks that it can pull a Zimbabwe and just print paper to pay for “stuff” because it couldn’t say “no” to stupid spending; if our current leadership won’t act like grownups; it won’t be all that long before the world decides to teach American “leadership” a harsh lesson in world economics.
Choose stops carefully
At the risk of being somewhat redundant, our premise has been that when gold approaches obvious implied resistance (see the gold charts below), if there is going to be government intervention to hold gold back and keep confidence from eroding further out of paper dollars, that’s when we should expect it -- when gold attempts a breakout or perhaps is merely near to breaking out. Advantage then goes to the short sellers and the hedgers who have the powerful tailwinds of the hand of government intervening behind them.
However, we believe that some day that just ain’t gonna’ work, and we sure want to be involved on the long side of gold (and silver) when that day arrives. It is actually easier for the government to interfere in the larger gold market, because of their access to physical metal and their ability to use the bully pulpit to announce sales and phantom sales, such as the recent news about sales of IMF gold.
It is, perhaps, less easy now for governments to interfere in the much smaller silver market, because their access to physical supply is approaching zero. Indeed, we believe that world physical supplies of silver are at astonishingly low levels compared to the last major rally for silver in the late 1970s, but that story will have to wait for another report.
Before getting too far into that silver supply tangent, the possibility of a major, short-murdering, rocket-launch-style blow-out rally is why we don’t just sell outright and attempt to book “all the profits” when we near obvious implied technical resistance. What, and miss the rocket launch breakout? That and it is arrogant in the extreme to suggest we know in advance where the current rally might roll over. We don’t, and nobody does for sure in advance.
Instead, as long time readers know, we let our carefully chosen trailing stops do the trading for us in miners, ETFs and futures. While that guarantees we won’t get the last dollar higher, it gets us out, safely to the sidelines, preserving the majority of our hard-won profits, if a selling raid turns the market south and temporarily ugly in a hurry. That way we at least have a shot of being on board when the long-expected short covering stampede for gold does finally arrive, just as it did in October of 2005, the last time the COMEX commercials threw down the gauntlet (wrongly) with gold in the $450s (On its way 63% higher to the $730s the following May, 2006).
When we compare the COMEX commercial net short positioning to the total open interest in gold, we learn that the LCNS:TO has risen up to a worrisome 52.43% as of Tuesday, May 26 with gold then at $952.14. Below is the graph.
Source for data CFTC for COT, cash market for gold.
I’m sure I don’t have to tell regular readers that all short term trading positions for gold ought to be at their tightest, “at resistance” trailing stop levels. Very tight stops, but not so tight as to get nailed on ordinary daily volatility is the goal.
That can get tricky at times like these, but sometimes it helps to break up the stops to answer several trading assumptions instead of just one. It other words, it’s sure better to be “right” on a portion of the stop levels than to be “wrong” and stopped prematurely on all of it.
Moving on, next let’s put up the same graphs for silver, which are surprisingly not quite as onerous.
Remember, silver has advanced over $1.00 higher since the COT report cutoff.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
One quick look shows that the large, well funded and presumably well-informed traders classed as commercial have been much more willing to take on net short positions over the past few weeks as silver has escalated in price and the gold:silver ratio has fallen (see charts below). Curiously, this past week, as silver added 44 cents from $14.17 to $14.61, the COMEX commercials only added a scant 1,232 contracts to show 42,779 contracts net short as the open interest rose 2,041 to 98,120 contracts.
Still, with silver on a tear (and up another $1.00-plus since Tuesday) and with the COMEX open interest now north of 100,000 contracts, it is also time to jam those trailing stops for short-term traders on up to an “at resistance” strategy. Either that, or one can buy “insurance” in the form of long-dated out-of-the-money puts for protection.
This has already been one heck of a great trade so far (see the silver charts below), and we sure don’t want to offend the Profit Gods by giving back what they have given us, do we?
Not much action in ETF metal holdings
Another factor that leads us to raise the caution flags this week is the big plunge in premiums on the Street for gold and silver bullion products coupled with almost no positive money flow into the major gold and silver ETFs with the metals on a rise. Here are the usual charts for GLD and SLV.
Source for data SPDR Gold Trust
GLD metal holdings steady at 1,118.76 tonnes.
Source for data Barclay’s iShares Silver Trust
SLV holdings steady at 8,348.18 tonnes.
Arguing for the bullish case, however, is the really solid showing in the larger, well-financed mining shares (represented below in the HUI chart). We are also starting to see warming in the smaller, more speculative and much more thinly traded junior miners and explorers that primarily trade in Canada (represented below in the CDNX chart).
Naturally, it’s a gas
Finally, a word about natural gas. Please check the comments on the NatGas charts below carefully and the UNG chart linked below.
Gold has become egregiously, amazingly, ridiculously expensive relative to NatGas.
Said the other way, natural gas has become extremely, woefully, undeniably cheap in terms of gold metal. Either gold must fall in price or natural gas must rise in price, or both, for this ratio to begin the trek back toward the mean. It isn’t often we get such a clear long-term opportunity in a liquid, heavily-traded market such as natural gas. Shame on us all if we fail to take advantage of that opportunity.
While gold could continue higher and NatGas could continue lower very short term, longer term this ratio will not suffer such an aberration as is currently shown. Like a plumb bob on a string, the ratio will only swing out so far before gravity reasserts itself and it inevitably heads back to where it belongs.
Currently the contango for NatGas is overly-wide (amazingly wide), which is usually bearish, but as of this past week we may have begun to see it contract a bit at the margins. As just one example, the near NYMEX July NG contract closed Friday, May 29, at $3.835 while the November contract closed at $4.873, some $1.038, or 27% higher. That’s 27% for four months storage and carry? Really? It must be great to be in the natural gas storage business about now.
As ridiculously wide as that sounds, it is actually about 10 cents tighter than it was just one week ago, so the contango appears to have begun to contract -- a little … maybe.
On Thursday, the U.S. Energy Information Administration (EIA) announced an injection into storage of 106 billion cubic feet. The EIA also reported that gas in storage is currently above the five-year average for this annual time period. What was the market’s collective reaction to that bearish news? The NatGas market rallied smartly. Check the action in the natural gas ETF UNG just below.
What’s the old saying? A market that refuses to go down on bearish news is no longer bearish?
Perhaps the natural gas market is just plain tired of going down after 10 straight months of doing so. Incidentally, May is the first month in 11 that UNG failed to print a new low. May is also the first month in 11 where UNG has printed a higher monthly high than the previous month. Really, it is.
Perhaps the NatGas market is, as we move into the Atlantic hurricane season and after the onshore rig utilization rate has been more than halved since last summer, looking for an excuse, any excuse, to rally. Any excuse at all to send the very heavy speculative short positions in natural gas off to other markets.
Given past action in natural gas, the first moves back toward the mean just might be violent, high-percentage spikes well BEFORE the fundamentals or the contango suggest they should. We look for a violent, short-covering reversal higher on NatGas to get underway in the not-too-distant future and continue to add to our long positioning on weakness, opportunistically, in small, measured incremental units, as suggested in prior reports.
NatGas may be in the process of a reversal right now. If not right now, then very likely soon, so long as the world holds it together. And, since we are never so arrogant to think that we know for certain anything in advance, we are prepared to “buy it down” even further if the Trading Gods will let us.
Easy does it. Stick to the game plan.
Since I originally intended to update and send out just the charts this week, consider everything else a bonus, “at no extra charge!”
There are a good number of changes in the charts just below.
Got Gold Report Charts
·1-year daily gold
·2-year weekly gold
·1-year daily silver
·2-year weekly silver
·1-year daily HUI
·3-year weekly HUI
·1-year daily HUI:gold ratio
·2-year weekly HUI:gold ratio
·2-year weekly U.S. dollar index
·2-year weekly CDNX:HUI ratio
·2-year weekly CDNX:gold ratio
·6-month gold:silver ratio
·2-year weekly UNG
·This Week’s Surprise Small or Micro-cap Resource Company
This week’s surprise micro-cap is one I have personally been involved with for longer than I wish to admit. One that for all intents and purposes “died” and is now being resurrected by the good folks with ties to the Dundees. The Dundees and management (through James Crombie and David Fennel in Nassau Capital Partners) control more than half of it, there are only about 10 million shares in the float, they just announced a new project with Virginia Mines (VGQ.T in Canada) (two projects actually) and Virginia will be the operator on the primary. The new executive chairman of the company is none other than Mr. David Fennel, the founder and former CEO of Golden Star Resources, which now trades on the NYSE Alternext (AMEX) under the symbol GSS.
Management and the Dundee folks took nearly all of a recent private placement for C $4.4 million at C 25 cents. For what it’s worth, some are speculating that this is merely the first move in a new chess game for Mr. Crombie, Mr. Fennel and the Dundees. Ned Goodman of Dundee fame personally took two million shares of the placement according to public records.
It’s obviously very speculative, untested and entirely a bet on a new ride with the Crombie, Fennel and Dundee powerhouse jockeys. It is probably not for those looking for a quick rip, but rather those who enjoy getting in on the ground floor of something new. Please see the disclosures below before clicking on the link above to see who this week’s surprise small resource company is.
That’s all for this abbreviated offering of the Got Gold Report. 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 currently holds a net long position in iShares Silver Trust, net long SPDR Gold Shares, net long oil ETN DXO, net long natural gas ETF UNG, long Timberline Resources (TLR), long Paragon Minerals (PGR.V), long Forum Uranium (FDC.V), long Natcore, (NXT.V), long Odyssey Resources (ODX.V), long SDS as a Big Market hedge and currently holds various other long positions in mining and exploration companies. To contact Gene use LLCCMAN (at) AOL (dotcom).