Thebig news this week is that the largest of the largest traders for goldfutures, the commercial traders on the COMEX, are now the least netshort gold they have been in years.
ATLANTA (ResourceInvestor.com)-- Regardless of whether or not the world is near the end of the giantfinancial “Charlie Foxtrot” we have all endured up to now, the largestof the largest traders of gold futures now have the fewest bets thatthe U.S. dollar price of gold will fall further than they have had inyears.
As of Tuesday, November 4, traders classed by theCommodities Futures Trading Commission (CFTC) as commercial held acollective net short position (LCNS) of just 76,406 out of a total303,908 contracts on the COMEX, division of NYMEX in New York. A netshort position means that the trader profits if the commodity goeslower in price.
Yes, the current COMEX commercial gold net shortpositioning is the lowest in years. Indeed, we have to go all the wayback to June 7, 2005 to find a reporting week which shows a lower LCNS(67,052 then), back when gold closed at $424.87.
That doesn’t mean that gold can’t go lower still, itcan. It just means that the big dogs in the futures trading arena arenot positioning like they think it will. To the contrary.
More about that very interesting and potentially bullish development below in the Gold COTsection, including what it might signal the commercials’ expect, butfirst, let’s look at the gold and silver ETFs and the CFTC Commitmentsof Traders Reports (COT).
Gold ETFs
In a much quieter trading week than the past several, SPDR Gold Shares, [GLD],the largest gold exchange traded fund, reported no change to goldholdings over the past week. The trust reports that 749.21 tonnes ofgold bars are held for its investors by a custodian in London.
If an anticipated pre-November 15 rush of fundredemptions was going on during the week, it apparently didn’t affectfunds’ positioning in gold ETFs. At least not enough to cause goldETFs to redeem shares and sell gold.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks veryclosely with the price of 1/10 ounce of gold (less accumulated fees),authorized market participants (AMPs) have to add metal and increasethe shares in the trading float when buying pressure strongly outstripsselling pressure. The reverse occurs when selling pressure overwhelmsbuying pressure.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased 1.90 tonnes for the week, to 123.20 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [IAU] gold holdings showed a 0.02 tonne maintenance reduction to 64.50 tonnes of gold held for its investors.
For the week ending Friday, 11/7, all of the gold ETFs sponsored by the World Gold Council showed a collective addition of 1.90 tonnes to their gold holdings to 910.20 tonnes worth $21.5 billion.
About the best we can say is that this week buyingand selling pressure were more or less equal for the world’s gold ETFsas there were neither significant additions nor redemptions of metalfrom gold ETFs.
SLV Metal Holdings
Metal holdings for Barclay’s iShares Silver Trust [SLV],fell by a tiny 3.05 tonnes this week, probably a maintenance reduction,to 6,748.16 tonnes of silver metal held for its investors by custodiansin London.
Source for data Barclay’s iShares Silver Trust.
SLV Benefits From the Silver Shortage
Contrary to what many people seem to think, SLV hasone and only one prime directive. That is for the price of the tradingshares of SLV to track very closely (within a very small percentagedeviation) to the spot price of silver metal. That’s it.That’s what SLV is supposed to do. So long as it does that it isfulfilling its prime function as a trading vehicle. SLV has performedsuperbly in that utility thus far.
SLV was never designed to be a substitute for actualphysical metal in hand. It was not designed as an investment poolwhere people put money in for a specific amount of silver and then getit out later in a choice of cash or metal (although one can redeemshares for metal if over the minimum basket size). It was notdesigned, as some physical silver purists wish, as a physical silverbank, although its value is derived from the fact that it holds justunder one ounce of silver for each trading share (currently .9875 ounceper share).
Forget all that. That’s not SLV’s job. SLV’s jobis to constantly track in lock-step with the futures-dominated spotprice of silver (less its accumulated reasonable 0.5% annual fees). Itis really quite simple and straightforward how SLV ends up doing thattoo.
For demonstration purposes, since it is what hasbeen occurring, let’s consider when there is much more buying pressurethan selling pressure on SLV. Left alone under those circumstances,that is, without adding shares to the trading float and selling theminto the market, the price of each share would quickly move higher thanthe price of spot silver when there are many more buyers than sellersin a given period.
When there is more buying pressure than sellingpressure, the authorized market participants (AMPs) for SLV have to addshares to the trading float in baskets of a minimum threshold of around50,000 shares (currently about $492,000 worth). The selling pressureof the new shares keeps the price of each share of SLV traded fromrunning too far above the prevailing spot price. In return for thebasket of new shares being sold the AMPs cause a predetermined amountof silver (very close to one ounce per new share issued) to bedeposited with the trust’s custodian in London. The current minimum basket amount of silver is 49,369.5 ounces for example.
The reverse occurs when there is significantly more selling pressure than buying pressure.
Isn’t it curious that as thepaper-contract-dominated futures spot price of silver was bludgeoned byover 50% since its highs in March that SLV, the largest, mosttransparent and most liquid silver ETF, has shown consistently morebuying pressure than selling pressure?
Take a good look at that chart above. Just sinceJuly silver, as measured by the world’s paper-contract futures markets,has careened lower from around 19 U.S. dollars to as low as $8 andchange. Yet, was that because people were dumping all their silver andSLV en masse? Apparently not. During the period from July 2 toNovember 7 SLV added a net 748.14 tonnes from 6,000.02 to 6,748.16tonnes of silver bars on hand.
Therefore, on balance, people were buying the heckout of SLV each time it tested a new low. We know because the evidenceof that continued buying pressure is crystal clear in the SLV metalholdings chart. SLV could not have been adding 24 million ounces ofnew metal in the face of overwhelming selling pressure. The AMPs onlyadd shares and increase the metal holdings in response to positivearbitrage opportunity which comes from more aggressive investor buyingpressure.
To be sure, the AMPs would have certainly redeemedshares of SLV and had the trust sell off silver metal if there had beenmore selling pressure than buying pressure, because that’s just anotherarbitrage opportunity for them in that direction. The AMPs don’t carewhich way the market is heading, they make money coming and going.They close gaps in the spread between the real-time current SLV shareprices and the trust’s per-share net asset value or NAV. (Good work ifyou can get it.)
So, we can absolutely conclude from the chart thatSLV has continued to see an abundance of buying pressure while futuresmarkets priced silver lower in U.S. dollars. That action, of course,removes some quantity of metal from the same sources that the futuresmarkets also trade. Namely the large, average 1,000-ounce, so-called“good delivery bars” found in London at the London Bullion MarketAssociation’s (LBMA) member vaults and their counterparts in New Yorkin the depositories of the members of the COMEX, division of NYMEX.
What we do not see is evidence that investorsoverwhelmingly wanted out of SLV and silver. What we do not see isevidence to support the theory that there has been more investorselling pressure than buying pressure for SLV. To the contrary on bothcounts. There are other, more sinister reasons for the plunge in spotsilver prices and we covered those in the last Got Gold Report.
Persistently High Premiums
Many think part of the strength of silver ETFs stemsfrom the enormously high premiums for silver (and gold) metal in thereal physical bullion market. As silver futures prices fell off acliff, already tight supplies for products like 100-ounce bars, silvereagles, 1-ounce prospectors, Mexican Libertads, old 90% silver U.S.coins in $1,000 face value bags and every other kind of small silverproduct, got so tight, so scarce, that premiums shot up to the highestlevels seen since 1980. Premiums are the amount paid and charged bydealers over the prevailing futures-dominated spot price.
Recently premiums have even gone quite high on thelargest bullion items such as the 1,000-ounce silver bars that futuresmarkets trade and ETFs use for their bullion storage. That’s odd andunusual. The reason? They are practically and actually the onlyphysical silver item left that can be sourced reliably in quantity,close to spot prices, but there’s a catch. If investors want them,they have to wait until December for delivery on the futures exchanges,so even 1,000-ounce bars that can be locked in and delivered todaycarry an unusually high premium to compensate for immediate delivery.
Heck, some well-known, very large and popularbullion dealers are charging the high premiums and also makingcustomers wait until December or January for actual delivery! That’skind of a middle man double whammy. If buying 5,000 ounces or more itmakes little sense, because anyone can open a futures trading accountand buy a contract for delivery in December. It’s easy. The detailsof how were in a special Got Gold Report two weeks ago.
It’s Demand Stupid, Not Stupid Demand
In case the point of mentioning that ETF demandaffects the futures market inventory was a little opaque, each bar ofsilver that gets allocated to the SLV custodial accounts is one lessbar that can have the name tag of an LBMA futures-trading member, aCOMEX futures trader, a manufacturer, or any other silver buyer in thebullion futures market warehouses. In other words, silver removed fromthe market by ETFs means less silver available in the overall bulliontrading market and therefore should be supportive of higher silverprices in the long term.
It is becoming more clear now that the lack ofphysical supplies relative to very high physical demand,extraordinarily high premiums for silver (and gold) on the street,coupled with a shortage of available contracts on the futures marketsthat could be delivered into the physical market until December,increased demand for SLV even while the price of silver was falling.SLV represents one way to participate in the lower price of silveruntil one can lock in and take delivery, either in a local bullionhouse, an online source or on the futures markets themselves.
Another New GGR Service
By the way, we hope to bring you a brand new chartin the next report that tracks bullion dealer premiums over the lastthree years for a few very popular bullion items. We’re in the processof compiling the very interesting data right now. Thanks to my friendBrien Lundin of New Orleans based Gold Newsletter for the excellentsuggestion.
Gold COT Changes
In the Tuesday 11/4 commitments of traders report(COT) for gold metal the COMEX large commercials (LCs) collectivecombined net short positions (LCNS) fell another 8,670 contracts or10.19% from 85,076 to 76,406 contracts net short Tuesday to Tuesday asspot (paper contract) gold ADDED $16.78 or 2.25% from $746.61 to$763.39.
Gold actually tested its weekly low near $722 on COTreporting Tuesday (11/4), so it is not surprising to see such a largereduction in LCNS, but gold rallied into the close that day to the$760s, over $40 higher than the lows.
It is usually kind of bullish when the commercialsreduce their net short positioning on an increase for the metal, but itis even more interesting is that this week’s collective commercial netshort positioning (LCNS) is the lowest since June 7, 2005 (67,052then), when gold closed at $424.87. In other words, the COMEXcommercials are the same level of net short as they were when gold wasin the $420s.
Readers might find it interesting that just sinceSeptember 23, when gold closed at $891.90, the COMEX commercials havecovered or offset 64,870 contracts of their net short positioning,which is 45.9% lower than the 141,276 net short contracts they heldthen. That’s as gold fell $128.51 or 14.41%. So, roughly speaking, asgold took that very last down leg on the chart below, the COMEXcommercials got out of about 202 tonnes worth of gold downside bets.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
Perhaps even more interesting and dramatic is thereduction of commercial net short positioning since the period BMO’sDonald Coxe calls the July Massacre (the peak of LCNS and when the U.S.banks hammered the oil, gold and silver markets with an avalanche ofshort sales).
On July 15 the commercials came in at a staggering246,577 contracts net short with gold then at $977.31. In the 16 weekssince, the COMEX commercials have reduced their short side bets by awhopping 170,171 contracts or 69% as gold fell $213.92 or 21.8%. Inother words, as paper-futures-contract-dominated spot gold fell 21.8%(as measured in U.S. dollars) COMEX commercials reduced their net shortpositioning by over three times as much percentage wise and covered oroffset contracts representing a mind boggling 529 tonnes of gold (about$12 billion worth as of Friday’s gold price). The reduction in shortside bets has been colossal by the commercials.
We should also mention here, that the $213.92 or21.8% drop since July corresponds with a truly titanic 22.5% rise inthe U.S. dollar index. The dollar’s relative purchasing power (to abasket of other fiat currencies) increased from just over 71 to around87 on the index in only 16 weeks, so using constant U.S. dollars, goldreally hasn’t sold off all that much. Gold has even made new highs inother currencies, such as in euro and in pounds sterling as examples during the extremely volatile July-November period if one wants a little proof of that.
Here in the U.S. we’ve seen “gold falling” when inEurope or in the U.K. they’ve seen gold holding up quite well in otherwords. The current very low LCNS is probably every bit as much astatement of the COMEX commercial trader’s expectations of thenear-term direction of the U.S. dollar index (they expect the dollar to fall soon) as it is for their expectations for gold metal itself.
The chart below compares the COMEX commercial net short position with the total open interest (LCNS:TO).
Source for data CFTC for COT, cash market for gold
As is readily apparent in the above chart, the mostrecent commercial net short positioning is quite low both in nominalterms and as a percentage of the total number of contracts open. So isthe open interest. Low, that is. As of Tuesday the total openinterest for COMEX gold was a paltry 303,908 contracts. That’s thelowest total open interest since July 4, of 2006 when gold was at$616.91.
Under more normal market conditions such a very lowLCNS would be extraordinarily bullish, especially the low percentage ofLCNS to the total open which, up to now at least, has been a fairlyreliable bullish indicator below 27%. Now that we have transitionedinto a market that is abnormal in the extreme, it will definitely beinteresting to see if this indicator remains reliable.
Should gold catch a bid in the coming few weeks, then this indicator is (excuse me) ‘as good as gold.’
Silver COT
As silver rose $1.01 or 10.99% COT reporting Tuesdayto Tuesday (from $9.19 to $10.20 on the cash market), the largecommercial COMEX silver traders (LCs) increased their collective netshort positioning (LCNS) by a large 4,396 or 18.70% to 27,908 contractsof net short exposure, while the total open interest on the COMEX fellyet another 1,351 contracts to a low 94,365 COMEX 5,000-ounce contracts.
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 silverLCNS to the total number of open contracts on the COMEX, division ofNYMEX. When compared to all the contracts open, the commercial netshort positioning amounts to a still low 29.57%.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
It might surprise some readers, but spot silverfailed to mark a new low over the past trading week. Having tested aslow as $8.40 the week prior, the best the bears could muster on thedown side this past trading week was the $9.70s Monday and Tuesday.Silver did manage to record a slightly higher high for the week, butonly briefly.
Repeating from the last Got Gold Report, writtenwith silver then trading at $9.35: “In a normal market the extremelylow silver LCNS and LCNS:TO would be extraordinarily bullish. This is,however, a market that is anything but normal. Nevertheless, theintrepid among us should be on the lookout for signs of a breakaway runon the silver market. Most likely that will not get started untilthere is the threat of stability in the rest of the global financialkingdom. Virtually anything is possible short term.”
Odds and Ends
The gold:silver ratio (GSR), which reached a 16-year high a month ago of 88 ounces of silverto one ounce of gold, continued the expected contraction. As of theFriday close the GSR was 73.61 ounces of silver to one ounce of goldusing cash market closing figures.
To that we add that just since October 17, theinventory of silver metal of COMEX depositories has dropped by3,372,466 ounces and now threatens to drop below 130 million ounces.That’s metal leaving the COMEX for the physical market or for industryas suggested in the last Got Gold Report.So long as the futures markets continue to grossly under price silverrelative to the popular physical markets, we can expect that trend tocontinue and probably to accelerate into December.
Some very respected mining and metals analysts thinkthat as production of silver declines much more dramatically over thenext few quarters (due to multiple mine closures) an actual physicalmetal squeeze could quite easily develop, so keep one eye on thevisible metal inventories. Manufacturers that must have silver inorder to keep the factory doors open will start hoarding physical metalinstead of relying on paper futures contracts if even a hint of asqueeze surfaces, similar to what happened with copper a couple yearsago.
End Notes
We managed to get through the worst of the worstnews in the credit freeze and now the TED spread, although still high,has returned to levels that no longer suggest financial Armageddon. Atleast for now.
We had the potential guillotine of the U.S.elections pass and the riots some feared didn’t materialize. Onceagain we see a peaceful and orderly transition of power in the U.S.Thankfully, the way too long election season has ended. Pity thewinners.
The height of fund tax loss selling season came andended October 31. Now people are holding their breath, wondering howmuch of the $1 trillion in hedge fund investments (it used to be justunder $1.7 trillion) will be called out for redemption between now andNovember 15.
In all the panic and market mayhem it’s easy toforget about geopolitical risk and what happens to gold when a wheelfalls of the global security wagon. It seems quiet right now, butthat’s probably only because the crazies of the world decided to coolit until after the U.S. presidential election. Well, actually they areprobably waiting until Mr. and Mrs. Bush hand the keys to the WhiteHouse over to the next occupants.
Terrorists seem predisposed to push theirworld-domination ideas more when they sense weakness in theiradversaries. Right now, with the western world dealing with afull-blown financial crisis and a U.S. in government transition, itwould not be at all surprising to see them resurface.
Now the Russians are deploying missiles to theirborders in a provocative act in the waning days of the current U.S.administration…
Finally, the governments and central bankers of theworld have pretty much all decided that printing currency is the answerto this financial and banking threat. Lots and lots more dollars,euro, pounds sterling and yen will now be out there. What leverageused to accomplish is now being replaced by an actual mountain of paperand electronic dollars. That’s ironic, isn’t it?
At the same time the newswires are flooded withreports of mining companies having to close existing mines due to lowprices of metals. New mines that were due to come on line are alsobeing shelved. So, at the same time that we have the highest premiumssince 1980 for physical gold and silver – when one cannot actually findgold and silver bullion at anything even close to the futures-dominatedspot price - we learn that there is a huge increase in the number of“currencies” out there about to be chasing a vastly reduced amount ofphysical production.
Short term virtually anything is possible in thiscrazy futures-dominated market, but shouldn’t that be a potent recipefor an explosion in precious metals prices over the longer term? Gotgold? Got Silver? Got mining shares?
Got Gold Report Charts
That’s it for this offering of the Got Gold Report.Until next time, hopefully in about two weeks, as always, MIND YOURSTOPS.
__________________________________________
The above contains opinion and commentary of theauthor. Each person should study the issues carefully and, as always,make their own informed decisions. Disclosure: The author currentlyholds a long position in iShares Silver Trust, SPDR Gold Shares andholds various long positions in mining and exploration companies.