ATLANTA -- Both gold and silver continued to get sold down this past week, probably a case of fearful investors raising cash ahead of a perceived storm brewing. However, both metals are nearing obvious areas of implied technical support and the news lately sure seems to be more supportive of gold and silver prices than not.
Trouble is that public support for the “governistas” in Washington has become the new bear market. Barack Obama and the current majority in Congress were elected by people who expected them to fix a broken economy. Instead there is a rapidly growing sentiment in the U.S. that the new majority representation decided to take advantage of the situation (and take advantage of every American) to force their radical, big spending, socialist agenda through on the basis of their “mandate.”
“Yes we can,” has become, “Yes we can because we are in power.”
“Hope” is quickly morphing into disillusionment, mistrust and despair as more and more Americans end up in the unemployment line and the official unemployment rate approaches double digits.
Americans don’t like it when their elected officials take obvious advantage of them.
For the national economy, confidence is a prerequisite to recovery, but when the government is more interested in pushing through controversial new, higher tax plans and shaky-science “green” save-the-planet-at-our-expense proposals during a crisis (when the economy is reeling and the taxpayers are just plain unable to pay for them) … well, confidence can be hard to come by.
The economy is just going to have to recover in spite of, not because of all the “help” being thrown at it.
It may not be too late for the in-your-face politicos to reverse course and salvage or repair some of the damage done, but that seems unlikely. Moderates and independents are already distancing themselves from the crew they voted for this past big election. Unless there is a real recovery showing soon, it won’t be long before even the president’s rank and file supporters turn on him, just like they did with another smiling democratic president ridden in to “correct the economy due to Republican abuses” in 1976.
The “good news?” It was under that 1977-1981 “leadership” by Jimmy Carter that we last saw a parabolic spike higher for gold and silver.
We have a lot of ground to cover in this report, so let’s get right to it.
Gold ETFs: As gold metal declined a net $19.26, or 2.1%, for the week (to $913.02), SPDR Gold Shares (GLD), saw a net weekly reduction of 10.74 tonnes to show 1,109.81 tonnes of gold bars held by a custodian in London. We have to take note that there was more selling pressure than buying pressure for the week then. No surprise there with the Big Markets apparently now rolling over.
Perhaps the surprise is how little gold has been sold and shares redeemed by GLD in this current pullback for gold. Since June 3, when gold traded for $976.75, gold has declined as much as $71, or 7.2%, while GLD has shed a total of 24.22 tonnes, or 2.1%, of its gold metal hoard in London.
Silver ETF: Barclay’s (for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), reported no change to their silver holdings. Despite silver dropping a sizable $3.50, or 22%, from its early June pinnacle, SLV’s metal holdings have been steady since June 17.
The trust continues to hold more silver than the original custodian agreement with J.P. Morgan Chase London called for, reporting 8,724.86 tonnes of silver bars held for investors by the custodian.
Although we noted tighter than normal spreads early in the week again, apparently buying and selling pressure for the silver ETF have been more or less balanced over the past week, otherwise the prospectus says we would have seen changes to the metal holdings and number of tradable shares.
One quick side note here. With premiums for physical silver metal products back to normal or near normal and availability seemingly adequate regionally, now might be an excellent time to convert shares of SLV into the real deal physical metal. Investors might want to check with their local dealer and even “lock-in” such a transaction ahead of the actual “exchange.” Investors will want to make one more phone call before hand, to their accountant, who can advise them on strategies to make the like-for-like item conversion tax friendly.
In our opinion premiums for gold products remain too high to overcome the spread between the equivalent GLD price and premiums for gold coins (the price over spot gold), but to each his own there.
Gold turned in both a lower high and low, but an obvious attempted New York sell-down late-day Wednesday ran into determined support in the $905 neighborhood. Bulls will be encouraged that gold refused to break the big round number level of $900. Bears will point to the fact that gold finished the week closer to its low than its high. Interestingly, the last trade on the cash market of $913.02 was actually higher than the near active August COMEX contract, which ended the week at $912.50. Backwardation is a rare condition in the gold futures markets and it is usually more bullish than bearish short term. 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 failed to hold onto upper technical support, moving lower for the sixth consecutive week as fear about the economy trumped all other concerns. Having fallen below the uptrend line in place since October, silver is rapidly approaching the next obvious zone of potential technical support as shown in the GGR charts. See the one-year daily silver chart at this link. The two-year weekly version is here.
With the Big Markets under selling pressure, larger, better financed and more liquid mining shares answered the metals lower 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, moved lower for the fourth consecutive week, but again this current move lower is on decreasing and really quite low volume of 637.3 million shares for the 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.
The U.S. dollar was hemmed into a very tight range this week. Although it moved hither and thither during the week, at the end of the day Friday the U.S. dollar index had only moved three basis points higher than the previous Friday close. See the two-year weekly dollar index graph and commentary at this link.
The Gold:Silver Ratio (GSR) rose to over 70 and has remained above that level now for four trading days. Our antennae are up now and we caution everyone to pay close attention to this ratio in the days ahead. This ratio should fall rather quickly over the next few weeks from its current 71.97 ounces of silver to one ounce of gold, but if it doesn’t, then we will become much more defensive in our positioning. A high and rising GSR is warning. It signals rising fear. See the nine-month daily GSR graph for more commentary.
From online Web sources it is apparent that physical premiums for some, but not all, gold and silver bullion coins and bars jumped higher this week as gold tested as low as $905.09, and silver as low as $12.53 the ounce. Premiums were firmer especially for gold bullion coins with popular U.S. eagles notably firmer late week. Dealers reported modest increases in traffic and customer calls with a clear majority of the traffic on the buy side. Inventories apparently remain robust for some silver items, however, such as 90% U.S. silver coins in $1,000 face value bags, which continue to be offered at or near spot prices. We doubt that will continue much longer, thus our suggestion to convert SLV to silver metal PDQ.
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.
U.S. bank positioning
Each month the CFTC publishes its Bank Participation in the Futures and Options Markets Report, which shows the positioning of reporting banks in the U.S. futures markets for commodities, including gold and silver.
The most recent report was for bank positioning as of July 7. As of that report exactly three U.S. banks held a total of 528 COMEX contracts long gold and a total of 116,985 contracts short gold for a total net short position of 116,457 COMEX 100-ounce contracts. A net short position benefits if prices fall.
A net short position of 116,457 contracts is equal to 11.65 million ounces, or about 322 tonnes of gold metal.
What we believe is a pure case of too much one-way concentration in the gold futures arena becomes clear when we look at the three banks’ net positioning in terms of the overall commercial trader net short positioning on the COMEX. In other words, what percentage of all traders classed as commercial does the position by the three banks represent?
The answer is that on July 7, when all commercial traders held a collective net short position of 191,307 contracts, these three banks accounted for a whopping 60.9% of all commercial gold net short positioning as shown in the graph below.
Source CFTC for bank positioning, cash market for gold
Just three U.S. banks, the largest of the largest hedgers and short sellers, accounted for six-tenths of all the large commercial net short positioning on the COMEX. It doesn’t take a Harvard economics degree or a Goldman Sachs quant box to understand that the short side – the side which benefits if prices fall – is dominated by a very small, very powerful elite group of financial “wizards” whose ability to manage risk is now highly questionable.
The banks are able to amass such large positioning in the futures markets under exemptions from position limits, which many have argued were designed to favor hedgers at the expense of speculators. Indeed, more recently numerous analysts and market watchdogs have charged that the overwhelming net short positioning of a few very large, very well-funded and uber-connected banks amounts to “speculative short selling abuse.”
We have no doubt that the U.S. banks would strenuously argue that their net short positioning amounts to “bona fide hedging” under the current rules and therefore should remain exempt from strict limit enforecement.
Interestingly, on July 7 CFTC chariman Gary Gensler issued a statement that the CFTC would hold hearings to review “aggregate position limits” and that the commission intends to undertake “a careful review of the appropriateness of exemptions from these limits for various types of market participants.”
The statement also seemed, repeat “seemed,” to raise a question as to whether even hedgers would be allowed to amass overly large one-way positioning. Mr. Gensler said:
“It is incumbent upon the CFTC to ensure a fair and transparent price discovery process for all commodities. The Commission will be seeking views on applying position limits consistently across all markets and participants, including index traders and managers of Exchange Traded Funds (ETFs); whether such limits would enhance market integrity and efficiency; whether the CFTC needs additional authority to fully accomplish these goals; and, how the Commission should determine appropriate levels for each market.” (Emphasis added.)
While some analysts might be hopeful that the CFTC is about to radically change the futures landscape, we are doubtful that they will make any meaningful modifications that might result in real, beneficial change. Certainly not a change that would result in equal position limits for the largest hedgers and short sellers versus long-side speculators. Specifically, we sincerely doubt that the CFTC will come down on the side of investors and speculators at the expense of the big bank hedgers and short sellers of gold and silver.
We believe that the current focus is more designed to attempt to limit access to futures markets from the long side than the short side for two primary reasons for precious metals. The first is obvious – that if the CFTC were to limit the positioning of the short sellers it would limit the U.S. government’s ability to influence or “manage” the gold price. That’s not going to happen under this chairman.
Secondly, and less obvious, the current thrust is a not-so-veiled attempt at limiting prices in energy from commodity pools and other investor vehicles, which are predominantly operating from the long side such as the United States Oil Fund and the Untied States Natural Gas Fund, which some congressional types (and some flamboyant market watchers) have used as a scapegoat for high energy prices.
Isn’t it ironic that the very people who put up roadblocks and barriers to oil and gas exploration in ANWR in Alaska, off the coast of Florida, in parts of Colorado and New Mexico, et al, … the same utopians who now seek to punish all taxpayers with ridiculously expensive and completely unproductive taxes on carbon during a time of economic crisis, … are some of the same people who now vilify and blame investors and speculators for high energy prices? The irony is too rich. If it wasn’t so ridiculous and just plain harmful to our own economy it would be funny. Instead it’s just another of the maddening results a semi-socialist semi-managed economy breeds. (Please pardon the political digression.)
At any rate we caution investors not to get their hopes very high that the status quo in the metals futures arena is about to change very much for the better, not that it needs to for gold and silver to reflect legitimate global pricing. At the end of the day metals are a global market. Prices of the metals will ultimately and inevitably seek their own supply-demand-liquidity equilibrium over time regardless and in spite of attempts to “manage” them.
In past reports we have shown where the over-sized commercial net short positioning ended up not being able to limit price increases at key technical resistance, such as in 2005. We fully expect that if or when gold finally thrusts through the four-digit price barrier for good it will be when COMEX commercial net short positioning is extremely high.
Back to the scandalously large one-way short-side concentration of the U.S. banks in precious metals. We’ve already seen how three big U.S. banks dominate the COMEX short side for gold, but where it has become untenable to many analysts is in the much smaller silver futures market.
As of July 7, exactly two U.S. banks held a total of 527 COMEX contracts long silver and a total of 32,407 contracts short for a total net short position of 31,880 COMEX 5,000-ounce contracts. A net short position of 31,880 contracts is equal to 159.4 million ounces, or about 4,958 tonnes of silver metal.
On that same reporting date all traders classed by the CFTC as commercial, all 30 of them, reported a collective net short positioning of 37,432 contracts. Therefore these two very large U.S. banks very much dominated the short side of the silver futures market in New York as their highly concentrated one-way positioning represented a nauseating 85.2% of all commercial net short positions.
The chart just below tracks only the net positioning of the two U.S. banks relative to the net short positioning of all COMEX commercial traders.
Source CFTC for bank positioning, cash market for silver.
From June 2 to July 7, the two U.S. banks increased their net short positioning in silver by 4,402 contracts as the price of silver dropped from $15.97 to $13.13. Over the same period the total open interest declined 4,610 contracts, magnifying the downward effect of that new short selling by the banks.
Regardless of whether or not the overly large net short positioning by the banks is legitimate hedging, as defined by the CFTC, so long as just one or two entities are allowed to literally dominate one side of the market it will continue to frustrate and enrage those who believe that the small silver market is manipulated by the bullion banks.
Frankly, while we can understand their concerns, and while it’s obvious that the banks have taken advantage of weaker market conditions to help push silver prices lower over the past month, we see it as just another opportunity in the making.
We believe that lower silver prices should be bought in a long-term accumulation by thick-skinned, risk-be-dammed, forward-looking investors. We believe that silver should occupy a reasonable percentage of one’s overall investment arsenal. Existing global physical silver stocks have been depleted to their lowest levels in over 100 years. While that condition is presently not widely known, sooner or later it will be. Silver is currently very strongly undervalued relative to gold and with the GSR now over 70 ounces of silver to one ounce of gold it makes sense to us to sell gold in order to buy silver.
Summation: With the Big markets now rolling over, possibly more quickly now that a little downward momentum has developed, we have to become more short-term defensive. That means taking out “insurance” (long dated, slightly out of the money puts, for example) on long positions and moving up stops on spec positions.
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 Brien Lundin mentioned in the just-off-the-press Gold Newsletter.
Finally, I’m happy to announce that I’ll be presenting at the New Orleans Investment Conference in October. We’ll have more details about this exciting and important conference and the spectacular speaker lineup in future reports. For more information or to register for the conference, please visit the conference website at this special link.
That’s it from Atlanta, 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).