HOUSTON – We’re going to let the charts do most of the talking this week.
First up, as gold and silver have retreated a bit, there has been remarkably little in the way of negative money flow from the two largest precious metals ETFs, SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), as shown in the two graphs below.
As gold metal edged a net $5.31, or 0.6%, higher for the week (to $939.85), GLD saw a very small net weekly reduction of 6.41 tonnes to show 1,125.74 tonnes of gold bars held by a custodian in London. We note, then, slightly more selling pressure than buying pressure, but only slightly so as shown on the chart below.
Barclay’s (for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV) reported no change to their silver holdings. The trust continues to hold more silver than the original custodian agreementwith J.P. Morgan Chase London called for, reporting 8,724.86 tonnes of silver bars held for investors by the custodian. Apparently buying and selling pressure for the silver ETF have been more or less balanced over the past week in other words.
Gold turned in an “outside week” (a lower low and a higher high), but a persistent seller or sellers in the $940s Friday put late pressure on the yellow metal and turned that into a “spinning top” (as the technicians would say) on the weekly gold chart. The two-year weekly gold chart is here. The one-year gold chart is at this link. Readers will find additional timely commentary on most of the Got Gold Report charts.
Silver is attempting to find support about where technicians expected it to, which is to say that it bounced kind of near its 50-day moving average, in line or above a developing uptrend since October and pretty close to a 61.8% Fibonacci retrace of the last, April-May surge higher. See the one-year daily silver chart at this link. The two-year weekly version is here.
Larger, better financed and more liquid mining shares began the week on the weak side, but then outperformed the rest of the week as shown in the one-year daily HUI chart. For context see the three-year weekly HUI version and the commentary on it.
We can see how the larger miners performed relative to gold metal in the HUI:Gold Ratio, perhaps one of the more important charts we track. Please see the two-year weekly HUI:Gold ratio.
Smaller, more speculative and more thinly-traded miners and explorers, like those in the Canadian S&P TSX Venture Exchange orCDNX, were generally a little weaker on the week as the CDNX moved marginally below its seven-week moving average. It did so, however, on lower relative volume and the CDNX attempted a bounce late week. The lower volume suggests a lack of buying pressure more than an increase in selling pressure. See the three-year weekly CDNX graph and the commentary on it.
Vulture bargain hunting season open
Perhaps the summer “dawg daze” are getting underway in Canada after all. If so we “vulture bargain hunters” could still have a good “hunting season,” feasting on the small resource company road kill bonanza from the 2008 stock holocaust. We believe it could just be the best hunting season ever. There are still so many promising small resource related companies that have gone nowhere, yet, but almost certainly will once a bit more confidence returns to this fascinating, but very volatile sub-sector. It is truly a target rich environment.
As we have said in the past, it takes (at least) three things to be a good vulture. Vultures have knowledge (which telephone pole to wait on), they are very patient (to wait for the road kill) and they have a cast-iron strong stomach, strong enough to allow them to eat most anything once it has been “killed.”
We resource company “vultures” either do our own independent research to gain the knowledge or we rely on experts in the industry to help us to focus on the right place to wait patiently for opportunity. Subscribers to Gold Newsletter understand what that means as Brien Lundin narrows the list of hundreds of public resource companies down into a manageable dozen or two to focus on for us each month.
A smaller number of companies in our target universe means that one can get to know them, become comfortable with them and that can provide the confidence to act decisively when the time comes.
We resource company vultures are patient opportunists in the extreme. We will relentlessly follow the news and progress of the companies for weeks, months and years on technical charts and in carefully constructed files, waiting ever so patiently for that wonderful time when the company we follow has been unmercifully pummeled by non-company-specific market forces, or by a market over-reaction sell-down on news, rendering them uncommonly, undeniably, ridiculously “cheap” relative to their potential.
Then, instead of just pouncing all at once, we take partial positions, in manageable units and follow up with lower-than-low good-till-cancel “stink bids” so as to add to that already low priced position into the all-too-common secondary selling over-reactions and vicious tax loss sales that follow, all with an idea of building a low-cost position for brighter days ahead.
Because we have gained superior knowledge, we also have the courage to buy into that unusual weakness when others are fearful or disgusted. Then we have the patience -- tremendous, unwavering, uncommonly devout patience -- to wait out the storm. Finally, we possess a very strong stomach to endure the extreme volatility which goes with owning these highly illiquid “options.”
That’s right, we said “options” intentionally. We will undoubtedly have more about the Vulture Bargain Hunter Method in future reports, but for now it helps to think of the shares of stock of these small resource companies as very long term options. They are very inexpensive options that have no time limit. They don’t expire unless the company does. They are marvelously volatile options with an extreme “beta” and the potential for multiples on the investment in the relative blink of an eye.
Moving on, as compared to gold, the CDNX continues its slow recovery from the historic bludgeoning it took late last year, but it still has a long way to go to regain the mean (We think that translates into tremendous opportunity for us vultures).
Remember, the CDNX is still in territory that was unthinkable just a year ago. The ratio shown below is an eight-year monthly chart of the CDNX measured in gold.
Take a good look at that chart and own it. Had someone said that the CDNX:Gold ratio would be driven down to 2.0 in January of 2007, two and a half years ago, anyone would have thought them crazy. The index ratio had never been that low and both gold and silver were on the rise. Up to then the lowest the ratio had ever been was a horrible 2.7 following a historic 20-year bear market for precious metals in 2002 and the ratio was nearly double that in the first part of 2007.
However, during the sell-anything-with-a-bid panic of 2008, when people truly panicked in total terror, nothing the least bit speculative was spared. The CDNX, home of so many fledgling resource companies, was quite literally decimated. The raito didn’t stop its bizarre plunge at a ridiculous 2.5, or 2.0, or even a murderous 1.75. No, by December of 2008 the CDNX as measured in gold metal had fallen to an unbelievable, unimaginable and shocking 0.76, an incredible 85% from its 2008 highs! We have very likely been witness to the worst-ever plunge of relative value the CDNX:Gold ratio ever has, or ever will see in our lifetime.
It is as if an entire herd of thousands of animals were all run over in one night for us vultures to feast on.
We continue to believe that the junior miners and explorers offer one of the best opportunities for thick-skinned, risk-tolerant investors seeking above-average returns for the speculative part of the portfolio, but of course they are certainly not for everyone. Not everyone has what it takes to be a vulture. Few do actually. As is patently obvious now, this game is not for people with weak stomachs and little or no patience. They are the ones that sell to us … and buy from us, and with that my point is made.
Back on point, the CDNX and many Canadian (and U.S.) resource companies could literally double or triple from here and still be “cheap” historically speaking. The companies in Brien Lundin’s Gold Newsletter lineup are a good place to start the hunt.
Moving on, a successful treasury auction notwithstanding, the U.S. dollar was unable to rally this week. Although it declined 48 basis points as measured on the dollar index, to many it “felt” like the dollar was weaker than that for the week. We sense that a new wave of dollar weakness looms as the world understands just how much wealth the U.S. is asking the rest of the world to loan to it. See the two-year weekly dollar index graph and commentary at this link.
The Gold:Silver Ratio (GSR) has been rising since the first of June and ended the week at 66.75. A rising GSR is usually not a good sign for precious metals bulls, but the rise is probably corrective in nature, in the context of a much longer trend going back to October. Since the panic peak then, the propensity of the GSR has been to contract or get smaller, meaning that it is taking less silver to buy an ounce of gold as time goes on, as expected. We should expect that contraction to continue so long as the world holds it together.See the nine-month daily GSR graph for more commentary.
Along those lines, we are convinced a quiet, but nonetheless very real reduction in world silver stockpiles over the past three decades, coupled with the fantastic success of investor-driven silver ETFs since 2006, has resulted in a material tightening of remaining global silver metal stocks to their lowest level in over 100 years. Gone are overly large government stockpiles of silver.
That is one of the reasons we are all so interested in SLV and whom the new custodian or sub-custodian will be. Perhaps more important than who, is how much storage and the silver to put in it the new custodian will commit to in the new agreement. At 280.5 million ounces, just one ETF, SLV, probably controls a quarter or more of the static silver available in London warehouses. London is inarguably where the largest known private reserves of silver on the planet are stored and those reserves form the basis for the OTC market, the largest silver market, which clears there through the London Bullion Market Association or LBMA.
The consistent annual deficit of silver production to consumption has resulted in much of the world’s readily available silver in storage having been consumed in myriad uses since the 1980s. Analysts say it is now likely that something less than two billion ounces of commercial-sized bar silver is currently extant world wide. If true or even half true, that isn’t very much silver stockpiled for an entire world and if the current pace of escalating investor interest continues, it won’t be all that long before news of the coming silver shortage blasts its way into the mainstream press.
When that day finally arrives we will want to have already topped off the tanks in our silver holdings, because once the general public learns of the shortage (they don’t have a clue yet) they’ll want in. Just like they did in 1979 when silver mushroomed up to a mania-driven $50 the following January. Only this time there will be less than half the amount of physical silver to go around and many more people able to instantly buy into the action via the world’s silver ETFs. If that run-on-silver scenario unfolds, then the GSR could plunge to record lows and a mere $50 per ounce will seem “cheap.”
Some ideas have staying power. People who were alive and sentient in the 1970s remember that silver spiked up to $50. They also remember that it collapsed thereafter in controversy leaving a sorry, bad taste in their mouth for the metal. We submit that there was no legitimate reason for silver to have shot up to $50 in 1980. There was nothing like the kind of scarcity of physical metal then as we believe there is today. We also believe that today there certainly is a legitimate reason for silver to reach that level and more. We’ll see.
Speaking of physical metal, from emailed dealer reports and from online web sources it is apparent that physical premiums for gold and silver bullion coins and bars firmed up a little this week as gold tested the $920s and silver tested the $13.60s. The up-tick in premiums was apparently limited to the most popular bullion items as some physical silver products were still offered at minor discounts as late as Thursday.
Please note this is an excerpt of portions of the full Got Gold Report (GGR). Gold Newsletter subscribers enjoy access to the full GGR as well as Brien Lundin’s timely and actionable analysis of specific resource companies. For more information visit GoldNewsletter.com or New Orleans Investment Conferences.
We remain long-term silver (and gold) bulls at Got Gold Report and view pullbacks and corrections as opportunities to add to our long-term physical and ETF positions. Shorter-term, the positioning of the commercials suggests they have gone from very confident of lower silver prices three weeks ago with silver pushing obvious resistance near $16, to aggressively removing those hedges and short sales with silver in the $13s. The action suggests that the largest of the largest hedgers and short sellers see less reason and were less willing to hedge when silver has a $13 handle in other words.
We believe the COT action in silver (covered for GNL subscribers in the full report), the action where the commercials are rapidly reducing their net short positions, is more bullish than the action in gold presently and intend to take advantage of any strong to very strong dips via ETFs and futures. That is with appropriate new-trade trailing stops in place and constantly managed, of course.
Summation: No significant negative money flow from gold and silver ETFs, but no positive money flow either. The precious metals are attempting technical bounces at or near logical technical marks. The miners outperform on balance, a little. A weakening dollar helped. Physical gold and silver premiums firmed, a smidge. The largest hedgers and short sellers are reducing their net short positioning, arguably aggressively so for silver. Provided the HUI:Gold ratio (see above) stays “tame” we intend to add into significant dips for gold and silver, but only and always with appropriate new-trade trailing stops or, occasionally, long-dated out of the money puts for protection.
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 on our list. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates about to be mentioned in the next Gold Newsletter very shortly.
Finally, for those interested in the natural gas market, please see our recent comments from Friday, June 26, at this link.
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 currently holds a net long position in iShares Silver Trust, 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 Radius Gold (RDU.V), long Columbus Gold (CGT.V), long Endeavour Financial (EDV.T), 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).
Read more Stockhouse articles by Gene Arensberg