ATLANTA – The largest of the largest traders of gold futures on the COMEX in New York seemed to be in a hurry to reduce their net short positioning in the latest Commodities Futures Trading Commission (CFTC) commitments of traders (COT) reports released Friday, January 29.
Over the last reporting week, very large traders the CFTC classes as “commercial” reduced their collective net short positioning by a very large 25,029 contracts or 9.1% while gold fell $40.84, or 3.6%, between reporting Tuesdays.
Long-time COT-watching traders will note that is the largest one-week reduction in commercial net short positioning since the April 7, 2009 report, when the commercials covered or offset a then startling 28,703 contracts, or 16%, with gold at $881.
We’ll have more about that just below, but first, here’s this week’s closing table:
This Week’s Bottom Line Summary (in bold)
We cannot help but notice the uneasy tenor of the markets over the past two weeks. There is no doubt there has been a flight away from risk and into “safety.” Events in Washington and in Europe have investors, portfolio managers and traders worldwide on tenterhooks and their reaction to that nervousness has been swift with the memory of 2008 still fresh. We note selling pressure on just about all asset classes including our favorite commodities, gold and silver.
As everyone knows, we have been neutral on gold since our December 2, 2009 report as gold flirted with $1,200 the ounce. We have been safely on the sidelines with the majority of our short-term gold ammunition since very late November. That may change very shortly, depending on how the gold market behaves over the next few trading days to two weeks. We see the gold market as once again very close to implied technical support as shown in the miniature chart just below.
Always more volatile silver is literally AT IMPLIED SUPPORT technically speaking. So, while silver is seen by some as vulnerable, it is also in the region where we can trade it from the long side with easily defined stops. There are also reasonably priced hedges available for the more cautious traders among us.
Despite material pressure on both gold and silver, we note only minimal reductions of metal holdings in gold ETFs and we even note some modest buying pressure for silver ETFs over the past week.
Large mining shares are still underperforming gold and that is worrisome. We will be on the lookout for when the big miners hold their ground despite gold and silver weakness, but until they do we have no choice but to respect their underperformance. This is the main reason we have not already returned to a bullish bias for gold.
Although shares of the largest gold and silver miners have taken a stomach punch over the past few weeks, we have been impressed with the relative outperformance of the smaller, less liquid issues on down the mining share food chain. We believe that when the “little guys” outperform the big miners it is usually a more bullish than bearish signal.
ICE commercials remain staunchly net short the greenback as they have now for nearly two months. They have paid dearly for that net short positioning. The U.S. dollar has benefitted hugely from the “fear factor” over the past week, but while some of the issues hanging over the market remain (Greece, Eurozone, Washington) some have now been settled or are moderating (Bernanke, Massachusetts, Bank bashing). It pays to remember that when the dollar index is rising, it is a measure of one sick fiat currency advancing against a basket of ailing basket cases in the huge global fiat currency leper colony.
Sooner or later more global wealth should be seeking refuge from government fiat currency IOUs - certainly in the true safe haven of gold metal and less certainly but probably in silver also.
Perhaps the most interesting change this week of all the indicators we follow closely is the very large reduction to the net short positioning by the largest gold futures traders in New York. Since gold challenged the $1,200 level in early December, COMEX commercial traders have maintained extremely large net short positions. This past week we saw a very large reduction in those short gold bets.
It is somewhat rare to see commercial traders reducing their net short positioning by more than 25,000 contracts in a single reporting week. That kind of heavy activity is usually associated with significant long liquidation and often (but not always) occurs at or near important turning points. Such large changes are, at the very least, a call to attention for sidelined traders. For more on this interesting development don’t miss the Gold COT section below.
We reiterate our longer-term view that the world will most likely continue down a path of fiat currency debasement, weakening confidence in all fiat currencies. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead – if the world “holds it more or less together.”
With China now putting the brakes on its banking system and with overly-large physical stockpiles of most base metals we suspect an overdue, much needed correction in base metals is finally underway. We suspect that some of the risk capital coming out of those industrial metals just might migrate back into precious metals later on in Q1 of 2010.
Therefore, we still believe harsh weakness in precious metals is to be bought rather than strength sold in Q1 2010, but we are not yet convinced the current corrective action is finished for gold. However, our “antennae are up” given the signals we cover in this report. Should we see the confirming signs from the other important indicators we follow closely we just might rejoin those on the long side very shortly.
Once convinced the corrective reaction currently underway is done, we intend to redeploy into gold via ETFs, options and futures. We may be close now to that attempt to reenter, but if we do decide to enter this coming week, it will only be with the appropriate new-trade trading or trailing stops for peace of mind and protection. Protection against unforeseen calamity, protection of trading profits, and protection against being just plain wrong in the market.
Trading without good stops is like skydiving without a parachute. Neither is a very good idea for most humans and both having the potential to end badly.
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Please note: Gold Newsletter (GNL) alert subscribers received this issue of the Got Gold Report Monday morning, February 1. GNL subscribers enjoy access to all Got Gold Reports, technical charts, analysis and information, as well as Brien Lundin’s timely and actionable analysis of specific resource related companies. For more information or to subscribe visit the Gold Newsletter home page.
Now, a closer look at a few of this week’s indicators:
Gold ETFs: SPDR Gold Shares (GLD), by far the largest gold exchange traded fund, reported no change to its 1,111.92 tonnes of gold bars held by a custodian in London. As of the Friday, January 29 close, GLD’s metal holdings were worth US$38.5 billion.
Source for data SPDR Gold Shares.
Despite material selling pressure on gold itself, that has not translated into an increase of selling pressure over buying pressure in the world’s largest and most liquid gold ETF - at least not yet. We remain on the lookout for when we might see more buying pressure than selling pressure as an indicator of near-term sentiment. We are especially on the lookout for increases in ETF metal holdings on dips for the metal as that can be a marker for short-term turning points.
More buying pressure than selling pressure shows up in at least two ways. The first indication is in tighter spreads between the implied NAV of GLD and the share price intra-day. The other is in increases in the amount of bullion the trust holds. The reverse is also true.
iShares COMEX Gold Trust (IAU) reported no change to its metal holdings this week, showing 79.30 tonnes of gold held in COMEX warehouses.
All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively recorded a very small 0.76 tonne reduction of gold metal, to a combined 1,303.20 tonnes (41,899,072 ounces) worth about US$45.2 billion as of Friday’s close.
If substantial amounts of wealth were indeed exiting precious metals, as some noted short sellers have suggested over the past week (George Soros, among others), shouldn’t we be seeing more selling pressure in the world’s gold ETFs?
The authorized market participants for gold ETFs add gold (and increase the number of shares in the trading float) in response to more buying pressure than selling pressure and vice versa.
Silver ETFs: Metal holdings for BlackRock’s iShares Silver Trust (SLV) increased by 45.79 tonnes to a reported 9,384.98 tonnes of average 1,000-ounce allocated silver bar inventory for the week. As of the Friday close the largest ETF silver hoard in the world (held by SLV) was worth $5 billion or about 13% of the value of the largest gold ETF.
Source for data, iShares Silver Trust.
Like GLD, the authorized market participants for SLV add silver (and increase the number of shares in the trading float) in response to more buying pressure than selling pressure and vice versa.
Like GLD we are on the lookout for signs of increased buying pressure over selling pressure and we see just a taste of it this past week despite a strong sell-down for the white metal. That’s dip buying showing up in SLV – a little.
Moving on, gold in U.S. dollar terms closed the week $11.19 (1.0%) below the previous Friday close (did it seem like more?), showing a last Friday print of $1,081.54 on the cash market. Both the weekly high ($1,104.21 Monday) and low ($1,073.99 Thursday) were lower, and gold closed closer to its low than its high. We note for the record that most of the hi-lo spread movement this week comes from the high side, which some believe is an indication that support is trying to form. High-low spreads have also tightened considerably, which means that near-term stops are closing in from both sides of the trading battlefield. The action hints that a larger, higher percentage move is imminent one way or the other. Please see the gold charts linked below for more technical commentary.
Silver has been strongly under-performing gold lately and, unfortunately, that translates into fear creeping back into the global markets. Silver posteda much lower high ($17.27 Monday) and a much lower weekly low ($15.998 Thursday and a nearly identical $16.005 Friday), reflecting the growing nervousness. The last trade Friday printed $16.20 on the cash market, down a big 79 cents, or 4.6%, from the prior Friday close (did it seem like even more?). Please see the silver charts linked below for more technical commentary.
ICE Commercials still staunchly short the Greenback
We concluded this dollar index section in the last report two weeks ago with: “We cannot know in advance what the U.S. dollar will do over the short term, but we can see what the ICE commercials believe it will do, or at least what they have positioned for it to do. They are positioned as if they believe the recent dollar rally is already over. It doesn’t mean they are “right,” but it sure does imply they mean business.”
Well, the dollar surged higher against a basket of other fiat currencies (euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc) on all kinds of fear-related issues this week. Everything from the possible expiration of the current term of the Fed chairman (Bernanke was reconfirmed 70-30) to sovereign risk in the Eurozone (Greece in trouble), to the politicians in Washington pushing their anti-business big-spending deficits-be-dammed thrust for more government command and control - scaring the very business leaders they want to begin hiring again.
We wonder why it is so difficult for the current cast in Washington to understand that one cannot expect businesses to expand when you keep throwing frightening changes at them?
When investors get scared, they sell “stuff” reflexively in shoot-first-ask-questions-later fashion, and that means that capital floods into dollars out of that “stuff.” Thus, the buck benefits when people are fearful. We still find that strange given what we know and believe about the long-term prospects for virtually all fiat currencies. When people are scared they “ought” to be moving into gold, which can’t be printed at the government’s whim or devalued with the stroke of a pen on a Friday night (as just occurred in Venezuela or here in the U.S. in 1933).
That’s an issue for another report.
This week, as the U.S. dollar index jumped a big 102 “pips” from 77.45 to 78.47 ICE commercial traders actually INCREASED their collective net short positioning by 8,614 contracts to show an extreme 41,748 contracts net short the DX with the open interest back up to a high 59,330 open. Whew! That means that the commercial DX traders are now net short equal to a stunning 70% of all the open contracts on the ICE exchange in New York. By the way, the ICE corporate HQ is located right here in Atlanta.
The ICE commercials are either gluttons for punishment, or they are convinced that this dollar rally is aberrant, or both. The U.S. dollar index chart, with additional commentary, is below in the charts section.
The Gold/Silver Ratio (GSR) is signaling fear. As of Friday, January 29, the GSR showed 66.76 ounces of silver to buy one ounce of gold metal. A sharply rising GSR is usually a bad sign as it reflects weakening confidence or an increase in investor anxiety. The reverse is also generally true. See the short-term GSR chart below in the charts section.
Larger, more liquid and well-financedmining shares have traded harshly and convincingly lower over the past two weeks, reinforcing our caution on gold. As of now we are on the lookout for signs of the miners holding their ground against gold weakness or perhaps even advancing into same. That’s the kind of signal that gets our bullish attention and would confirm our intention to reenter the gold trade from the long side. Please see more in the HUI index and HUI/Gold ratiocharts below in the charts section.
Smaller, less liquid and more speculative miners and explorers such as those in the Canadian S&P/TSX Venture Index or CDNX have also reacted lower over the past two weeks, but interestingly, they have been stronger than their larger cousins relatively speaking. The CDNX closed Friday at 1,492.15, which is down 57.52 points for the week (-3.7%), but that compares to the HUI losing about 7.4%. When the little guys are stronger than the big companies we like to think that is more of a bullish sign than not. It seems like when the smaller companies are way-underperforming, as they did in late 2007 and most of 2008, it is really time to worry. Please see the CDNX and CDNX/HUI ratio graphs below in the charts section.
Gold COT Changes: In the Tuesday 1/26 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercial’s (LCs) collective combined net short positioning (LCNS) plunged a huge 25,029 contracts, or 9.1%, from 273,647 to 248,618contracts net shortTuesday to Tuesday as U.S. dollar spot gold fell $40.84, or 3.6%, from $1,138.43 to $1,097.59 - while the total open interest dropped 21,359 to 507,565 contracts open.
Gold versus the nominal commercial net short positions as of the COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart above looks at just the nominal amount of commercial net short positioning. The chart below compares the COMEX commercial net short position for gold with the total open interest (LCNS:TO). That gives us a better idea of how the largest hedgers and short sellers are positioned relative to the rest of the COMEX traders.
As measured against all COMEX open contracts, the relative commercial net short position fell from 51.7% to 49% of all contracts open on the COMEX in the latest reporting week. This marks the first time since July 14, 2009, that the gold LCNS:TO has gone below 50%. That week the LCNS:TO fell from 51.3% to 49.2% with gold then trading in the $920s.
By September of 2009 gold was priced in four digits.
Source for data CFTC for COT, cash market for gold.
We view very large, spiky changes in the LCNS as signals to get ready to take action. Very large changes often, but not always, precede major movement and turning points in the gold market. The one thing we know for sure is that the status quo is changing in a big way when these giant changes occur.
Since December 1, 2009, as gold fell $98.77, or 8.3%, from $1,196.36 to $1,097.59 (as measured on COT reporting Tuesdays), COMEX traders classed by the CFTC as “commercial” have covered or offset 59,613 contracts of their collective net short positioning – about 19.3%. Their net short positioning has gone from a record 308,231 to 248,618 contracts net short as of January 26.
So, as gold sold off about a “C-note” in paper dollar terms, the largest, best capitalized and presumably the best informed traders in gold futures on the COMEX have reduced their net short positioning by an amount equal to about 185 tonnes of gold metal. In our notes from Thursday’s trading we believe we saw action that has been consistent in the past with further large-scale LCNS reduction as well. We’ll have to wait for the next COT report to confirm that, of course.
Given this obviously large change in the LCNS, and depending on how the trading develops this week, we may very well haul in the caution flags for gold very shortly. If so, we would likely be changing our neutral stance on gold to cautiously bullish.
Silver COT: As silver plunged $1.99, or 10.6%, COT reporting Tuesday to Tuesday (to $16.75 on the cash market), the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a relatively large 6,979 contracts, or 11.3%, from 61,690 to 54,711 contracts of net short exposure. The total open interest fell a similar 6,490 contracts to 124,895 COMEX 5,000-ounce contracts open, after adding 2,710 contracts the week prior.
Silver versus the nominal commercial net short positions as of the COT cutoff:
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 silver LCNS to the total number of open contracts on the COMEX (LCNS:TO). That gives us a better idea of how the commercials are positioned relative to all the COMEX traders. The relative commercial net short positioning fell from 47% to 43.1%.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
Although still high, the nominal silver LCNS is the lowest since September 1, 2009, when the silver LCNS was 48,056 contracts out of 106,671 open with silver then at $15.01.
We were stopped out of our last foray into SLV, with a minor gain since our last report two weeks ago. On Thursday and Friday, with silver literally AT IMPLIED TECHNICAL SUPPORT we reentered again with silver in the low $16s and SLV in the $15.70s to $16.02. Once again we are only interested in this trade if the Trading Gods prove us correct in the timing. Otherwise, given the pervasive squeamishness in the markets of late, if our entry proves premature we want out with only minor damage. Our new entry is with a reasonably tight, new-trade stop, in the low $15s, risking only a little less than what we gained in the previous trade.
General comments
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 via our Vulture Bargain Hunter Method. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin covers in his highly acclaimed Gold Newsletter.
Got Gold Report Charts
Below are few samples of the Got Gold Report (GGR) technical charts. Gold Newsletter subscribers enjoy access to all GGR charts and all the GGR reports, commentary and trading ideas.
That’s it from Atlanta this week. Until next time, good luck, good trading and as always, MIND YOUR STOPS. Got gold? Got silver?
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 and/or his family currently holds a long position in SPDR Gold Shares, net long iShares Silver Trust, long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last year: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Gold Port Resources (GPO.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V), Constantine Metal Resources (CEM.V), and currently holds various (approximately 10) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).