Gold Bucked Down But Remain Long-Term Bullish

ATLANTA (ResourceInvestor.com): While it may feel to some traders like gold is down big, the metal actually only registered a decline of $0.83 or 0.1% on the cash market for the calendar week ending December 14. Friday’s last trade of $794.34 rests very close to the popular 50-day moving average and technically minded traders will be watching that line in the sand closely near term. While gold may face near term headwinds, the long term outlook remains decidedly bullish in this report’s opinion.
Gold “feels” like it has sold off more than it has partly because of continued persistent weakness in mining shares (as mentioned below in the Gold Indexes section graphs), because of the large bounce in the U.S. dollar against other global currencies (as shown in the U.S. Dollar section graphs below), and because of a number of large U.S. brokerages calls to take profits and or sell gold and gold stocks over the past two months. (One of the most recent comes from Goldman Sachs after they were probably already net short.)

With the 200-day moving average well below, around $710 currently, the charts must have technically minded gold bears salivating especially with the recent strength in the U.S. dollar to support their gold-should-get-cheaper cause. Gold could sell down another 10% and not even challenge its most popular moving average. The $64 trillion-dollar-credit-market--nervousness question is, then, how low will gold go?

As with anything dealing with the future, the correct answer is we just don’t know, but a very strong case can be made that gold metal will find undefeatable support somewhere between right here ($790s) and $700.

On the right, or Dexter hand, we just witnessed a big jump in the U.S. producer price inflation figures, reportedly the highest since the 1970s (reflecting what most people expected $90 oil would mean) and isn’t higher inflation bullish for gold? We just saw the CRB index mark a new all time high as all commodities adjusted to increased costs and demand. The ongoing credit crises has the FED and the other large global central bankers pumping a flood of yet more liquidity (over $110 billion in one coordinated move) into the global monetary system.

In a few weeks China opens the door to in-country spot bullion trading, opening up a new source of demand. Rumours of very large and concentrated recent gold buying out of the Middle East, Asia, Japan and Russia persist (and are likely true) and we continue to see sizable increases in the amount of gold being held by the world’s gold exchange traded funds (see the Gold ETFs section below). This gold-bullish list could go on for paragraphs, but suffice it to say that demand for gold is on the rise for a gaggle of reasons and the amount of the yellow metal available to serve that demand is relatively constant.

On the left, or sinister hand, in addition to the recent calls by brokerages for their clients to sell gold and gold stocks, we have to note that the largest of the largest gold futures traders on the COMEX boosted their collective gold net short positions even though the metal was a little down in the latest commitments of traders report from the CFTC (detailed in the COT Changes section below). The long overdue bounce in the U.S. dollar (relative to other fiat paper currencies) is underway as the most one-sided trade of 2007 gets unwound.

Mining stocks continue to under-whelm and under-perform and thanks to general Big Market weakness look even worse than they might otherwise, but clearly a contraction of liquidity in the mining sector continued as of the past week. In short, for whatever reasons liquidity has been leaving the metals and mining sectors faster than entering.
What’s the bottom line for this report? Well, the argument between the indicators continues and we have to keep short term caution flags flying. Long term fundamentals for gold are positive, but short term gold has to navigate into some more headwinds.

The short term prospects are for further contraction in the mining sector, but for how much longer? With more and more gold being taken off the market into global gold ETFs, the prospect of more investment into gold from sovereign wealth funds seeking currency safe harbour, more and more investment in the metal coming from China, Japan, Russia and the Middle East (not to mention the U.S.), growing uneasiness with all fiat paper currencies and less gold being dumped onto the market by the world’s central bankers, gold should, repeat should, see a rising floor for the foreseeable future. We’ll see.

Scheduling note: Due to extended out-of-country holiday travel plans this is the last Got Gold Report of 2007. The next report is scheduled for the weekend of January 12-13. Thanks for reading and Happy Holidays!

On to some of the indicators.
COT Changes. In the Tuesday 12/11 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) INCREASED 5,845 contracts or 2.8% from 204,898 to 210,743 contracts net short Tuesday to Tuesday as gold metal FELL $4.52 or 0.6% from $802.18 to $797.66 on the cash market.

Since Tuesday gold edged another $3.32 lower for a Friday last trade of $794.34 on the cash market, which, despite the weaker “feel” of the market, was actually only down $0.83 for the calendar week. Gold actually turned in higher high ($816.74) and a higher low ($789.35) for the trading week.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest inched lower by 511 to 486,198 total open contracts, but that follows another big 34,073 contract reduction the week prior. Interestingly, since the total open interest peaked on November 6 at 556,856 COMEX 100-ounce contracts, the total number of open contracts has decreased by 70,658 lots or about 12.7%. Over those five reporting weeks the price of gold fell $27.34 or about 3.3%. So while gold pulled back $27 about 220 tonnes worth of gold futures contracts were closed out.

Long term December 2008 and beyond COMEX forwards added a small 706 contracts to 91,405 lots open, which is about 18.8% of open contracts. That is still a little above average, but still no ultra-bearish big jump in long term forwards. Considering the large drop in total open interest and recent dollar strength it is a little surprising there haven’t been more long term forwards put on over the past few weeks.

It wasn’t a large increase in LCNS this week, but the increase in commercial net short positions on slightly lower gold is more bearish than not and it abruptly ends what had been a trend of decreasing LCNS for four consecutive weeks on relatively flat gold. That suggests that COMEX commercial traders are expecting lower gold prices a bit more aggressively once again. It doesn’t necessarily mean they are right of course.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], jumped 13.53 to a new record 615.9 tonnes. As of Friday’s figures that’s equal to $15.6 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased 1.08 to 97.50 tonnes of gold held over the past week. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings remained steady at 54.13 tonnes of gold held for its investors.

Over the past week all of the gold ETFs sponsored by the World Gold Council increased their collective gold holdings by a net 16.2 to 751.34 tonnes of the precious metal worth $19.1 billion.

Despite no real advance for gold metal, gold ETFs worldwide continue to see increasing demand and positive money flow (more wealth entering gold ETFs than exiting) as evidenced by the 16-tonnes of new gold metal put away by the gold trading vehicles over the past week. That argues with the action in mining shares over the past week, which acted as though a mining sector liquidity exodus has gotten underway.

Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 4,567.03 tonnes after adding 44.32 tonnes the prior week. Silver turned in a decline of $0.55 on the cash market with a Friday last trade of $13.82.

As silver showed a $0.15 gain from COT reporting Tuesday to Tuesday (from $14.30 to $14.45) the large commercial COMEX silver traders (LCs) added a relatively large 3,564 contracts to their collective net short positioning (238 contracts per penny advance) to 53,139 contracts of net short exposure. Since then silver took a $0.63 hit down to its support of $13.82.

Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and market commentary on the graphs themselves.

Repeating from the last Got Gold Report: “Those who have yet to begin building a long term position in physical silver or the silver ETF ought to consider doing so opportunistically, during the next fade, pullback or correction in this report’s opinion. Sooner or later, in this secular silver bull market, the second most popular precious metal will approach or eclipse its historic peak purchasing power barring unforeseen catastrophic geopolitical or natural calamity.”

Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.

U.S. Dollar. As expected, the U.S. dollar caught a bid this week, but judging from their positioning ahead of the event the NYBOT commercials missed out on the dollar bullish fun. As the USDX added 59 basis points Tuesday to Tuesday from 75.67 to 76.26 NYBOT commercials actually reduced their net long exposure again by 2,713 to just 6,556 contracts net long. Then, the greenback index mushroomed a whopping 117 ticks higher for a Friday 11/30 last trade of 77.43.

Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.

Gold Indexes. The AMEX Gold Bugs index, which follows a basket of fifteen of the most popular mining companies that generally do not use hedging and therefore should have more leverage to the gold market, is one of the most popular gold indexes and is the index that this report tends to focus on.

Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.

HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performance of mining shares versus gold. When the ratio is rising mining shares are putting in a stronger performance relative to the metal and vice versa.

Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.

Cash Gold-HUI (G-H). This week the G-H comes in at a stratospheric 407.47. Long time readers will know that is a howling warning that a liquidity exodus is underway in mining shares.

It is unsettling that this indicator failed to improve as gold more or less traded sideways over the past two weeks and by itself it is flashing a short term sell signal. That argues with the continued positive money flow into global gold ETFs and some of the downside pressure to mining shares can be attributed to continued general Big Market weakness and multiple profit taking calls by major U.S. brokerages overly focused on dollar strength relative to other fiat currencies.

Repeating from the last Got Gold Report two weeks ago: “Look for this indicator to improve (decline) … as gold nears or marks new support. That will mean mining shares are outperforming the metals. If that fails to show, then gold will probably establish a lower base before the next major up leg of the Great Gold Bull. That’s on the theory that the largest and best informed institutional traders will be pouring in new wealth into the sector ahead of the next bull market romp higher for gold.”

Short-Term Outlook: (Caution flags remain flying for both short-term trading bulls and bears. Trailing stops elevated a couple notches to a “near resistance” strategy. Strong dips, if any, can be bought.)

While short term caution flags have to remain flying for now, meaning the indicators show headwinds short term, make no mistake as to this report’s long term bullish view for gold, silver and mining shares. Liquidity is currently leaving gold and the mining sector faster than entering, but that situation can reverse very rapidly and has reversed quickly in the recent past.

Repeating from the previous report: “For the battle-hardened, strong-stomached, high-risk-loving veterans who know what they’re doing and understand that it’s extremely difficult to peg the exact bottom on any highly liquidity dependent, thinly traded junior miner or explorer, it’s not too soon to go bargain hunting opportunistically on the already beaten up and tax loss pummeled future mining industry consolidation fodder. But think cheap when adding and be prepared to be surprised at how cheap they can go during the next two weeks of peak tax loss selling pressure.

Both sides of the gold market battlefield can and should expect heightened volatility near term. Both short term trading bulls and bears should exercise caution and meticulously manage their respective trailing stop strategies accordingly.

If a harsh pullback materializes for gold, silver and selected mining shares, it is this report’s contention that strong dips can be bought in measured increments provided traders are disciplined in the use and management of new-trade trailing stops for protection.”

Long-Term Outlook: (Continued cautiously bullish, trailing stops normal.)
This report remains long term cautiously bullish, but new positions should only be added into weakness. Strong dips can be bought provided traders are disciplined in the use and management of appropriate new-trade trailing stops for protection.

Long term gold market drivers have not changed: A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies, probably continued de-hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing.

In real terms gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world’s fiat paper promises.... The Great Gold Bull has a long way to go. It just won’t go straight up. Got gold?