Confusing gold and silver

ATLANTA (ResourceInvestor.com): Gold and silver continued to confound those who bet against them despite an apparent weakening of some of the indicators this report follows closely over the past two weeks.

In this report we find that the largest of the largest gold futures traders, those classed by the Commodities Futures Trading Commission (CFTC) as “commercial,” are once again net short gold metal in record proportions. For the details see the COT Changes section just below.

We also discover that the world’s gold exchange traded funds have not had to issue many new shares or add gold to their respective hoards over the past week, so positive money flow (more wealth entering than leaving) into those metal trading vehicles also seems to have paused with gold in the $900s the ounce. Read more about that in the Gold ETFs section below.

The most glaring bearish indication to surface this week is the continued apparent disconnect between mining shares and the metals. Although gold literally traded higher than it ever has this past week in un-inflation-adjusted nominal terms (into the $950s Thursday), and silver closed at a new 27-year high (Friday’s $18.02 last trade on the cash market), mining shares just couldn’t make a new high or even come close to doing so.

This report believes that the primary reason that mining shares, which usually lever gold gains aren’t levering, is the ongoing global fearful re-pricing lower of risk in all equities markets. Diligent readers will find more about that in charts in the Gold Indexes and Gold Charts sections below.

Perhaps the most interesting item to note in this offering of the report is that while the COMEX commercial gold futures traders are record net short nominally (252,740 contracts net short) and also pretty well on up there in percentage to total open interest terms (51.60% of all open contracts), meaning they are well positioned for a gold pullback, the commercial net short positioning for silver is actually pretty tame relative to where it has been over the past three years in percentage terms. For more about that and one possible explanation why see the Silver COT section below.

Finally, as the Big Markets continued to be fearfully sold off ahead of what is being billed by gleeful fear mongers as any number of catastrophic possible outcomes to the very real problem of global tightening credit, a problem caused in no small part by previous Fed loose money policies and over-leveraged packaging of sub-standard mortgage loans to carry traders, and as the entire world absolutely understands that stuff is costing more than the published inflation figures, no wonder gold and silver have continued to confound the brave (read misguided) souls who have bet against it up to now.

Bottom Line
Let’s see. The COMEX commercial gold traders are record net short gold futures nominally again, and their net short positions are a relatively high percentage of the total open interest. Money flow into gold ETFs has paused (but hasn’t yet turned negative). Mining shares continue to underperform precious metals and although we’ve just recently seen a few tentative signs of life from mining stocks well down the mining share food chain (as expected), miners on the Canadian exchanges and the OTCBB still suffer from chronic illiquidity and a severe buyer’s strike for all higher risk speculative issues (they’re dreadfully anemic).

That sounds pretty bearish, doesn’t it? Maybe it is, but the metals just don’t know it yet. Or, maybe we have an unusual paradox on our hands this time. A paradox where investors worldwide have been selling lots of other stuff in order to buy gold and silver, including, until recently, even selling high-risk, low-priced gold and silver mining stocks to the point where even so called “stink bids” get hit regularly.

Will gold and silver continue on it’s upward elevator ride near-term? No one knows for sure what will happen in the future, especially short-term, and although the indicators are just about all showing some upside fatigue the metals have been poor places to bet on the downside for a good while now. The powerful rallies for both gold and silver could most certainly keep right on confounding the short sellers, but just remember that elevators go both ways, up and down. Placing carefully considered trailing stops in positions that catch your share of the upward movement, allow for reasonable volatility, but get you out if momentum shifts back down is the way the smartest short-term money in the market plays it.

On to some of the indicators.

COT Changes. In the Tuesday 2/19 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) increased 9,140 contracts or 3.75% from 243,600 to a new record 252,740 contracts net short Tuesday to Tuesday as gold added $21.52 or 2.37% from $906.40 to $927.92. Since Tuesday gold tested as high as $953.98 Thursday before modest Friday profit taking and a last trade of $944.60 on the cash market.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest rose for the first time in five reports. The open interest bumped up 14,040 from the previous week’s 475,749 to 489,789 total open contracts. As 14,040 COMEX contracts were added (2.95%) the collective commercial net short positions rose 3.75%.

Long-term February 2009 and beyond COMEX forwards actually FELL 613 contracts to 48,822 lots open, which is now just under 10% of total open contracts. Still no telltale ultra-bearish spike up in long-term forwards in other words.

The large commercial traders on the COMEX are once again record net short in their collective positioning nominally and as of Tuesday their net short positions represented 51.60% of all COMEX open contracts, a relatively high percentage.

Incidentally, the last time the LCs set a new record net short position was just last month on January 15 when they reported being net short 251,114 contracts with gold then at $888.78, but at the time their net short positions were 42.28% of the total open. Gold has since advanced $55.82.

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, remained flat at 631.15 tonnes. As of Friday’s figures that’s equal to $19.2 billion U.S. dollars worth of gold bars held by a custodian in London for the trust. There have been no significant additions or subtractions to the number of shares or gold metal holdings for GLD for the month of February so far.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, also stayed steady at 107.90 tonnes of gold held. Barclay’s iShares COMEX Gold Trust gold holdings once again reported 59.93 tonnes of gold held for its investors, so it was also flat.

There was no significant change in gold holdings over the past week in all of the gold ETFs sponsored by the World Gold Council. Their collective gold holdings edged down a miniscule 0.06 to 784.62 tonnes of the precious metal worth $23.8 billion.

As gold traded above $900 the ounce positive money flow (more wealth entering than leaving) has paused for the world’s gold exchange traded funds, but it is also apparent that it has not turned substantially negative as of yet.

Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, added 77.06 to 5,149.22 tonnes of silver metal held for its investors over the past week. The metal turned in a net $0.93 gain, up 5.44% for the holiday-shortened U.S. week on the cash market with a Friday last trade of a short-strangling $18.02.

Modest positive money flow (more wealth entering than leaving) did continue for the U.S. silver ETF for the week.
Silver COT: As silver added $0.35 (2.0%) from COT reporting Tuesday to Tuesday (from $17.19 to $17.54) the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by 4,516 (6.34%) to 75,790 contracts of net short exposure. That was as the total open interest on the COMEX rose just 1,842 (1%) to 189,151 COMEX 5,000-ounce contracts.

The silver LCNS percentage of total open interest increased a little more, but at just over 40% it’s still quite a bit under where it spent most of 2007 and it’s considerably under the average LCNS percentage seen in 2005-2006. In other words, the current commercial net short positioning is fairly normal or even below average.

Although slightly higher this week, we have yet to see a telltale bearish very large spike up in the number of net short positions reported by the COMEX commercial traders and it is interesting that the total open interest has not really increased all that much since the end of January (just 6,095 contracts from 183,056 to 189,151).

On the other hand, the commercial net short positioning did increase at more than twice the number of overall new contracts for the reporting week, meaning the commercials were being a little more aggressive on the short side. Even if they were short term wrong again.

Why, with silver up a whopping 63% since it’s August turning low, is the silver LCNS is still such a low percentage of the total open interest?

Could it be that the commercials have memories long enough to remember the last time they did take an overly large net short position in 2005 and what happened when they did? (They had their collective heads handed to them on a silver platter.)

One side point for this offering is to note that there have been a few tentative signs of life showing in the small, very speculative, high-risk miners and explorers well down the mining share food chain since the last report, as expected.

The vacuum of liquidity from the speculative mining and exploration stocks has been nothing short of brutally amazing over the past four months, indeed since the middle of last year. It is especially dramatic for thinly traded companies on less liquid markets such as in Canada, relative to the HUI (and the HUI hasn’t been doing all that great either compared to gold). Compared to the HUI the smaller, more speculative mining and exploration stocks have been murdered and that’s hard for some investors to take for very long given that the metals themselves have been on a tear. Compared to the metals, spec miners have been dismembered, ground up and fed to the pigs. It’s much worse than the plunge seen in 2003.

According to old-timers in the resource biz, this could possibly be one of the best buying opportunities of the Great Gold Bull in the making for those with the stomach for it, a longer time horizon and the high-risk capital to put to work ahead of the inevitable flood of liquidity back into the sector sometime in the next year or so.

Investors fled the spec miners in droves but they’ll be back, and back in a big way sooner or later. This report continues to believe that it is not too soon to be adding shares into obvious downside overreactions for the most promising of the juniors and explorers, especially when a large have-to-sell-now seller shows up into little or no buying pressure, setting off pure first stage panic for retail shareholders and driving these otherwise promising lottery tickets down from merely real cheap to ridiculously cheap.

A few very successful and well-funded vulture-like long-time veteran contrarian stock accumulators this report corresponds with regularly are actively setting up their stink bid targets for their favorite small miners right now. They are literally hoping for pullbacks in the metals to allow their “stupidly cheap” buy targets a better chance of being hit. And, they have been panning what they feel is loads of future pay dirt over the past month too.

As one of them put it in response to the question of whether he might be early yet, he replied: “It doesn’t matter if we’re early. We’re (starting) at such a low entry point now, if we are (early) we get to add more (if it gets even cheaper), if not, then we’re happy with our positions. … We just don’t get many opportunities like this one.”

HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performancee 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.

Short-Term Outlook: (Upside breakouts remain underway. Caution flags flying for both short term trading bulls and bears. Trailing stops elevated to “near resistance” strategy.)

Short term traders should have already tightened trailing stops to at least a “near resistance” strategy as discussed in previous reports.

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 still 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.

Until next time, scheduled for two weeks from now, as always MIND YOUR STOPS.
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?