ATLANTA -- Whether or not gold actually responds to it short term, potentially bullish news surfaced for gold and silver this past week. The Swiss National Bank stunned the European capital and forex markets, hammering their own currency in the first salvo of probable competitive currency debasement across the pond. Who would have thought the Swiss - Switzerland! - would fire the first shot in the battle to weaken their own currency?
Apparently the price of chocolate and fine watches is going up in Zurich.
Swiss currency intervention, along with the U.K. currency printing presses in overdrive are sure to lend more, not fewer investors to seek a safe haven from the paper currencies of the world. Swiss devaluation of the franc is an open invitation to other central banks in Europe to follow suit.
Sooner or later the purchasing power of government paper of all descriptions should be taking a back seat to gold on such news. Gold, the one pure “currency” and always trusted measure of value for over four millennia, cannot be printed by fiat and can’t be produced fast enough to flood the market with too much of it, no matter the price.
To add supreme insult to injury, the Swiss are also apparently capitulating to international pressure and will now relax their formerly air-tight bank secrecy regulations to the great consternation of anyone who holds funds there in special, formerly uber-secret, numbered accounts.
China Syndrome meets “Rollover”
This past week Wen Jiabao, China Prime Minister, reportedly said in remarks following his annual press conference, “We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets.”
So the Chinese prime minister is publicly voicing the obvious. China probably now wishes it had invested a bit larger portion of its nearly $2 trillion in forex reserves in gold metal rather than in government paper promises. Rumors of Chinese gold buying are already crawling around the internet. With statements like that from high Chinese officials those rumors will grow wings.
Jiabao continued, “To speak truthfully, I do indeed have some worries… I would like, through you (the press), to once again request America to maintain their credit worthiness, keep their promise and guarantee the safety of Chinese assets.”
China certainly knows that if it were to sell off their U.S. bonds too quickly they would only be hurting themselves, but isn’t it rather bullish for gold to know that the Chinese are openly worried about their approximately $1.4 trillion in U.S. debt instruments? Is it more or less likely that China will be adding a higher percentage of gold to their now tiny reserves knowing that? It won’t be all that much of a wonder should gold seem to have a firmer bid under it for some time to come under the circumstances.
Moving on to other anecdotal news, think people are not changing their behavior during this global financial crises? Well, consider that according to news reports gun sales in the United States are at 20-year highs and some types of ammunition have become scarce as people become more fearful of the potential for civil unrest. We have a bullet bull market underway.
Among other gold bullish news, last week we saw a confrontation in international waters between a U.S. intelligence gathering ship and the Chinese navy. In yet another test of the new U.S. president Russia provocatively said they “could use bases in Cuba and Venezuela” for their long-range strategic bombers and that’s just a taste of what the wire services were serving up.
Gold and silver more or less moved sideways over the past week. The Big Markets staged an old fashioned bear market short covering rally up from way-oversold, but the news sure seemed more, not less supportive for precious metals since the last Got Gold Report. It makes one want to dive into the indicators to see what they are, well, indicating.
Gold ETFs
Gold once again tested the $890s and was once again repelled upward from that zone. That is the third time in six weeks that gold has tested the $890s and bounced. As we note that, we also have to take note that cash prices turned in a lower high for the week and a slightly lower low. The $890s have now become the gold bull’s defensive zone and the bear’s prime target. (See the gold chart linked below for more technical commentary.)
SPDR Gold Shares, [GLD], the largest gold ETF, added another 27.83 tonnes of allocated gold bars to its gold holdings over the past week. So far this year GLD has added a stunning 276.59 tonnes of gold to show 1,056.82 tonnes of gold bars held for its investors by a custodian in London. As of the Friday 3/13 close the metal held by the trust was worth $31.5 billion.
Source for data SPDR Gold Trust
Repeating from the last full report two weeks ago: “Clearly the majority of GLD investors are not convinced there is material weakness ahead for gold - at least not yet.”
Indeed, as gold retraced from the $1,000 mark to the $890s, instead of abundant selling pressure forcing GLD to redeem shares and sell gold, we have to take note of the opposite. It is quite clear that investors have so far taken advantage of the dip in gold prices to add more GLD, not less.
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 declined a small 0.92 tonnes to 66.86 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added 1.23 tonnes over the past week, to show 130.89 tonnes of gold held as of Friday, reversing a similar reduction the week prior.
All of the gold ETFs sponsored by the World Gold Council showed a collective increase of 29.54 tonnes to their gold holdings to 1,229.42 tonnes worth $36.7 billion USD as of the Friday 3/13 cash market close.
SLV Metal Holdings
Silver consolidated its downward thrust, turning in an “inside week” with a slightly lower high ($13.41) and a slightly higher low ($12.48), while bouncing neatly off the popular 50-day moving average which is currently rising through the $12.40s. The white metal closed the week on an advance with a last Friday 3/13 trade of $13.20 on the cash market. (See the silver chart linked below).
For the week metal holdings for Barclay’s iShares Silver Trust [SLV], the U.S. silver ETF, held steady at 7,898.37 tonnes of silver metal held for its investors by custodians in London. SLV reported a reduction in metal holdings of 159.42 tonnes the prior week.
Source for data Barclay’s iShares Silver Trust.
Still no new custodian for SLV
As of Friday, March 13, SLV still had not filed an amendment either naming an additional custodian or increasing the amount of silver storage available under the current custodian agreement with JP Morgan Chase London.
We remain vigilant, because there is very little “room” under the current custodian agreement for SLV to add additional silver as we reported in the last Got Gold Report. There is no doubt ample silver available in London (for now) from one of the other London Bullion Market Association (LBMA) members with large metal holdings in London warehouses, but so far we don’t know whom SLV will name as the additional custodian or sub-custodian and we don’t know how much silver “storage” that new custodian will be able to provide.
U.S. banks dominate the COMEX
While those of us with a long bias can take some comfort in the larger reductions of net short positioning by the commercial traders (covered in the full Got Gold Report), we need to remember that as of right now the short side of the market is literally dominated by just two big U.S. banks. When the regulators, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), consent to allow just two traders to take overly large positioning on either side of a particular market, it leads to mistrust and angst among the public and market commentators. Such overwhelmingly large positioning also provides ammunition to conspiracy-minded commentators who constantly blame price movements of silver (and gold) on deliberate action by sinister members of a secretive “cartel” intent on suppressing the price of gold and silver.
Some of the individuals advancing the notion of a conspiracy to suppress precious metals prices are bright, articulate and bring compelling evidence and research to the discussion regularly. We’ll undoubtedly have much more about that in future reports, but for now it has become increasingly difficult for the industry and regulators to ignore the so-called “conspiracy camp” and its growing legions of members.
Regardless if one believes in menacing cartel theories, and regardless of whether or not one takes the opposite view, (that most or all of the very large net short positioning of the two very large U.S. banks in silver futures are actually legitimate hedges offsetting long positions in OTC markets on behalf of the various clients of the banks), the current positioning by the two banks in COMEX silver futures is an example of an enormously concentrated futures position.
According to the latest Bank Participation in Futures and Options Markets report, as of March 3, 2009, two U.S. banks held zero long and 30,838 contracts short with silver then at $12.83 and with 93,051 COMEX 5,000-ounce contracts open. So, just two banks held net short positions equal to 33.14% of all the open contracts on the largest futures bourse in the world. The chart below shows the net positioning of the U.S. banks relative to the total number of all open contracts for silver on the COMEX, division of NYMEX.
According to CFTC COT reports, during that 3/3 reporting week all COMEX commercial traders as a group – all of them - were collectively net short a total of 38,704 contracts, so just two very large U.S. banks held a shocking 79.68% of all the commercial net short positioning on the COMEX. The graph below shows the two U.S. banks net short positioning relative to all COMEX commercials net short positioning since 2006.
One potential problem with allowing overly-large positioning by just a few players is the potential for those elite traders to get into the position of having to trade in a particular direction in order to protect their position. The incentive for a trader running 1,000 contracts to try to move the market with the weight of his own trading would certainly be much less than a trader (or two traders in this case) with 30,000 contracts of one-way exposure.
Sure, the COMEX is not the only market for silver in the world, but trading on the COMEX does indeed influence the trading for silver on all the other world markets, including the larger OTC markets based primarily in London. And sure, if silver were to be man-handled too low for too long buyers, acting in their own self interest, would step in and buy it back up to reality over time. Haven’t they already done exactly that in the real physical silver markets given the insanely high premiums for most physical silver products?
One could argue the silver market is relatively small, and therefore prone to manipulation because it doesn’t take all that much capital to move the futures markets. Perhaps over short periods of time it actually is. But, this report leans toward the idea that the silver market is global and deep enough to discourage even the larger players from messing around with it too much or too long.
On the other side of that silver coin, we also believe that the amount of physical silver available for investment by new investors is rapidly approaching a critical inflection point in the not-too-distant future. If we know it, anyone who would short the market knows it even better. We have to conclude that anyone who would consistently attempt to manipulate the silver market downward in the face of obvious and material supply constriction is either very stupid or is a phantom of coincidence.
With that in mind, in an era when regulators allowed the Bernard Madoff scam to go unchecked for many years, even though they were handed the scamster on a silver platter by others in the same business eight or nine years ago, a scam ruining hundreds or thousands of innocent investors; in a period when ANY silver product being sold on the street carries with it extremely high premiums due to overwhelming public demand; in a period when investors have had their confidence severely shaken in all markets; can the COMEX continue to allow such one-sided and concentrated trading action to continue? Perhaps more to the point, shouldn’t the COMEX explain publicly why it has allowed that very concentrated short positioning by just two U.S. banks?
Perhaps with more clarity would come more confidence.
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.