Largest futures traders poised for PM smack-down with record net short gold futures
HOUSTON – The largest of the largest gold and silver futures traders in New York significantly increased their collective net short positioning going into the U.S. Thanksgiving week, a week of lighter than usual liquidity.
COMEX commercial traders boosted their net short positioning for gold by a large 24,558 contracts as of Tuesday, November 24, according to data released by the Commodities Futures Trading Commission (CFTC) Monday, November 30.
At 306,104 contracts net short, the net short position held by traders the CFTC classes as “commercial” for gold is at a new nominal record.
On the surface that suggests that the largest gold hedgers and short sellers are once again taking a “goal line stand,” or at least employing a “prevent defense” as gold approached the $1,170 level. Indeed we have to note material and determined “opposition” to $1,200 gold and $19 silver.
Interestingly, as the COMEX commercials were stepping up their gold short positions, their colleagues, commercial traders on the Intercontinental Exchange or ICE, were apparently heading in the opposite direction with their U.S. dollar positioning. Despite additional weakness in the greenback, the “ICECOMS” ended the reporting week net short the buck for the first time in months.
We’ll have more about all that below, but first here’s this week’s closing table:
This Week’s Bottom Line Summary (in bold)
Base on preponderance of all the indicators in our gold and silver universe, we have adopted a cautious, neutral bias for the first time this year, for gold and for mining shares in general. Our bias remains cautiously bullish for silver, mainly because it remains strongly undervalued relative to gold.
We have moved our short-term trading stops to their highest, most cautious settings as of Friday, November 27. We have also employed partial hedging via inverse gold ETFs, albeit with extremely tight, micro-loss stops in place.
Out of an abundance of caution we have also “harvested” some investing/trading “ammunition” from ultra high-flyers and offsetting laggards in an effort to build up the “opportunity arsenal.”
With gold having just traded as much as 23% above its popular 200-day moving average (Wednesday November 25), and with the large, well-funded mining shares refusing to “answer” the last moves higher; with silver also having refused to echo gold’s remarkable move into nominal record territory, our antennae are up and so then are our defenses.
This week we noted continued positive money flow in many gold ETFs. Once again we see significant positive money flow into the leading U.S. silver ETF, which has added over 660 tonnes of new silver in November and over 2,600 tonnes this year (details below).
Gold ended the holiday week in backwardation on the COMEX futures markets, with the cash price actually higher than the front active contracts. Not so for silver.
Arguing in the opposite direction, as the buck fell again, ICE commercials actually went from net long to net short the greenback! (See the details below).
Well financed mining shares were flat for the holiday-influenced week. No help there.
In short, we urge caution for short-term traders. Caution flags are flying. Please do not confuse that with an outright sell signal. If our short-term caution proves unwarranted, we want the opportunity to stay in the game (in the trade), thus, instead of just hitting the red (sell) button we move stops up to our tightest of tight settings. If a material precious metal smack-down is indeed in the making, we’ll be watching it from the relative safety of the sidelines pronto.
We’re cautious, but we will let the Trading Gods decide whether this is where we heave ho or get to stay game on with our short-term gold and silver ETF and futures trades.
Subscribers please note: The COT report was delayed to Monday this week because of the Thanksgiving holiday in the U.S., hence the reason the Got Gold Report is being issued on a Tuesday instead of Sunday/Monday. Most of this report was actually written Saturday, November 28 as we were traveling Sunday and Monday. The COT report more or less confirms our impressions on a short-term basis. For all the details don’t miss the Gold and Silver COT sections below.
With our short-term caution firmly in mind 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, coupled with incessant official meddling and interference. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead.
We see nothing which promises to reverse the current flight of wealth out of paper and into real money.
Now, a closer look at a few of this week’s indicators:
Gold ETFs: SPDR Gold Shares (NYSE: GLD, Stock Forum), by far the largest gold exchange traded fund, reported a net increase of 10.367 tonnes for the week. GLD reports that it held 1,127.86 tonnes of gold bars held by a custodian in London. That’s just a gnat’s hair less than the all-time high water mark of 1,134.03 tonnes set on June 2, 2009. (Late update.) GLD reported another small addition of 2.13 tonnes to show 1,129.99 tonnes on Monday, November 30.
Source for data SPDR Gold Shares.
Barclay’s (soon it will become BlackRock’s) iShares COMEX Gold Trust (NYSE: IAU, Stock Forum), reported no change to its metal holdings this week, showing 80.72 tonnes of gold held in COMEX warehouses.
All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively recorded an increase of 9.85 tonnes of gold metal, to a combined 1,325.88 tonnes (42,628,220 ounces) worth about US$49.8 billion as of Friday’s close. There was briefly over $50 billion in the WGC gold ETFs Wednesday, November 25.
We note, then, slightly more buying pressure than selling pressure once again in the world’s gold ETFs over the past multi-holiday week.
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: Barclay’s (also soon to be BlackRock’s) sponsored iShares Silver Trust (NYSE: SLV, Stock Forum), reportedly added another 135.98 tonnes Thanksgiving week, to show a new record 9,252.02 tonnes of average 1,000-ounce allocated silver bar inventory for the week. (Late update.) The last trading day of the month, Monday, November 30, SLV reported adding yet another 152.77 tonnes to show a new record 9,404.79 tonnes of bar silver in London.
Source for data, iShares Silver Trust.
Silver may not be answering gold like it should, and that is certainly a reason to be short-term cautious, however it is clear that money flow continues to be positive for the second most popular precious metal. We continue to note much tighter spreads between the SLV share price and the implied NAV per share during pullbacks for silver. Collectively investors are apparently still waiting for dips to buy more than not.
Arguing with what some analysts have suggested, SLV seems to have no trouble adding silver metal when the spreads tighten (when we would reasonably expect there to be additions to the metal holdings). Indeed, for the month of November, SLV added a little over 660 tonnes of silver to its holdings.
For all of 2009 thus far SLV has added a net 2,611.80 tonnes of silver to its holdings, an increase of 38%.
As long-time readers know, SLV now holds a goodly amount of silver more than the amount called for in its custodian agreement with JP Morgan Chase, London. Although the managers for SLV have yet to file documents with the SEC amending the current custodian agreement or announcing a new custodian or sub-custodian (and the amount of silver which the new agreement might indicate is available to SLV when it needs more), the current custodian is apparently able to supply enough metal for SLV’s current needs.
We expect that soon after the BlackRock purchase of the iShares product line closes and funds, we will likely see such an amendment to the SLV custodian agreement. We will comment on it then. Meanwhile, we are advised by people who absolutely know the status of silver availability in London that there is not currently any “shortage” of good-delivery bar silver. Most any London-based silver ETF should have no difficulty finding the silver it needs very near term.
Having said that, at now just over 302 million ounces held by SLV alone, some significant fraction of the available bar silver in London has been removed from the total amount available for all trading purposes. In other words, when we do finally see the surge in silver demand we have been expecting, there is a good deal less of it to satisfy that new demand. Each thousand tonnes put away globally by all the silver ETFs, pools, funds and trusts reduces the available-for-trading bullion amount, hastening the time when we might see a sure-enough demand-critical-mass-event for silver similar to the one we witnessed in 1979.
We don’t know precisely when, but we continue to believe that it is merely a question of time before we see a silver supply squeeze of equal or perhaps even superior amplitude to then. (If the world manages to hold things more or less together.) In our opinion, harsh dips for silver are to be bought rather than rallies sold into for our longer-term minded traders.
If our view is correct, then it would not be at all surprising to see silver trading well above its 1980 nominal highs near $50 the ounce in the not-too-distant future. It is difficult for people to grasp just how much less actual silver bullion metal exists compared to what was available during the last physical silver squeeze 29 years ago.
Sooner or later that will change.
Gold once again advanced to print a new all-time nominal cash market high ($1,195.23 Thursday) and a higher weekly low ($1,138.42 Friday, see the closing table for comparison to last week). High-low spreads widened as shown in the closing table above, suggesting a bit of chaos returning. The last trade on Friday printed $1,177.79 on the cash market, an advance of $27.31 or 2.4% for the week. Despite the initial selloff on Friday (to the $1,130s on the news out of Dubai), we noted more strength on the bid side than on the offer side nearly all day. We noted very determined selling pressure in the $1,190s just ahead of the Friday break attempt. Please see the gold charts linked below for more technical commentary.
Silver seemed tired and weary the week of Thanksgiving. Silver did manage to print a slightly higher high ($18.92 Monday) and managed to make a modestly higher low ($17.67 Friday). However, each time cash silver approached $18.90 we noted material and determined firepower in opposition to it. At least for now it is obvious that some very large sellers are defending against anything with a $19 handle. Not quite enough bull horsepower to overcome the entrenched bears? A pity, because it is almost a certainty that large numbers of buy stops and short trailing stops reside just above the $19 silver Maginot line. Despite silver’s underperformance to gold, we noted that bidding for SLV increased in intensity somewhat on the least dip in silver price and was nothing short of robust in the Dubai-inspired Friday harsh dip to the $17.60s in early N.Y. trading. The last trade Friday printed $18.29 on the cash market, down 21 cents or 1.1% versus gold’s 2.4% addition. Right or wrong, when silver is weaker than gold we become instinctively more cautious. Please see the silver charts linked below for more technical commentary.
Backwardation in Gold, Contango Razor Thin for Silver
As it has for weeks, gold futures ended the week in backwardation, where the cash or spot price was higher than the front active contracts. Cash gold closed the holiday week at $1,177.79, which is $3.59 above the December contract and $2.29 over February as shown in the table below courtesy of Barcharts.com. The spread between cash gold and the December contract actually widened since our last full report two weeks ago when it was then $2.50.
Barcharts.com
Backwardation is rare and unusual in the metals futures markets. Backwardation suggests that demand for physical metal is immediate and material.
Cash silver finished the week almost flat with the expiring December contract, not technically in backwardation, but with the contango on up the futures “strip” continuing to be as thin as the business end of a razor.
Barcharts.com
As we have said previously, while backwardation by itself does not guarantee that the metals will advance in price, most analysts and traders view backwardation as a much more bullish than bearish condition.
The U.S. dollar index (DXY) ended the week at 74.97. Yep, a “74-handle.” That’s another one-week drop of 64 basis points lower than the prior week’s Friday close as shown in the U.S. dollar index graph below in the charts section.
In dollar index COT action, as the DXY fell another 30 basis points COT reporting Tuesday to Tuesday, to 74.99, instead of fading the greenback fall, ICE commercial traders dumped all of their collective net long positioning. The “ICECOMs” reported a net short position of 1,587 DXY contracts out of a total open interest of 39,858 contracts (LCNS:TO = 4%) as of November 24. Gold bears will find it disconcerting that the ICE commercials went net short the buck as it fell. The U.S. dollar index chart, with commentary, is below in the charts section.
The Gold/Silver Ratio (GSR) continued to warn this holiday week. As of Friday, November 27 the GSR stood at 64.39 ounces to buy one ounce of gold metal. A rising GSR is a bearish omen and vice versa. As we said two weeks ago in the last full report: … we are forced to pay attention to this signal now, since the GSR has not corrected back lower. A rising gold/silver ratio is not just a metals market signal. Many traders use it as a canary-in-coal-mine gauge of overall market confidence. As of this week confidence is weakening if the GSR is any guide. Therefore we have taken more aggressive defensive action and suggest everyone keep an eye on this important indicator.
Nothing says that the GSR cannot correct back lower right away and by doing so allay our concerns about it, but until the GSR is heading south again our antennae are up and our defenses are raised. Perhaps stating the obvious, as of today we see silver as very strongly undervalued relative to gold. See the short-term GSR chart below in the charts section.
The large, well-financed mining shares have once again stalled when compared to the performance of gold metal. With gold printing yet another new nominal all-time high some $160 higher than the May 2008 $1,033 interim pinnacle, we have to note that the HUI is balking just under the 500 level. With gold 16% above its May 2008 turning high, the HUI would sill have to advance more than 9% higher just to equal its May top in the 519 arena.
Repeating from the previous full report two weeks ago: Perhaps it is asking too much for mining shares to be as robust now as they were then, in early 2008 before the collapse of Lehman, Bear, AIG and the near total collapse of the global financial system? Perhaps, but we also have to note that we viewed the action then as a warning because mining shares did not seem to be fully “responding” to gold that May. In other words, while we probably should not expect the equities of mining companies to be as strong following the worst stock market panic since the Great Depression, we sure shouldn’t start the very bad habit of making excuses for the indicators we rely on for guidance. Of course the massive new sales of equity by the miners (think Barrick) contribute to the underperformance, but probably not enough to cancel the overall effect.
Therefore, until the mining share indexes reflect more confidence; until they “answer” the movement in gold or even better, outperform it boldly, caution is warranted. Please see more in the HUI index and HUI/Gold ratio charts 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 (see the charts linked below in the charts section), edged slightly lower for the week. The CDNX closed Friday at 1,405.60, down a little less than three points. Considering that gold increased 2.4% the CDNX performance is somewhat disappointing. The CDNX continues to lag both gold and the HUI, which suggests that confidence in the more speculative issues, although improving, is less than enthusiastic. Until it improves we have to view this indicator as a non-confirmation in progress.
Gold COT Changes: In the Tuesday 11/24 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) jumped a large 24,558 contracts, or 8.7%, from 281,546 to a new record 306,104 contracts net short Tuesday to Tuesday as U.S. dollar spot gold rose $27.17, or 2.4%, from $1,141.80 to $1,168.97 - while the total open interest actually DECLINED 11,866 to 521,253 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.
For some perspective, COMEX commercial traders are now net short contracts representing 30.6 million ounces of gold metal – about 952 tonnes of paper gold bets that would improve if gold falls in price. That gives new meaning to the phrase “motivated seller” doesn’t it?
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 snapped back up from 52.8% to 58.7% of all contracts open on the COMEX, division of NYMEX in New York. That’s a large enough jump to be considered a warning-shot and we are back to an extremely high level, suggesting that commercial traders are once again confident or “determined” that gold will move lower near term.
As high and extreme as that sounds, the LCNS:TO is below its all-time high set September 22 at 61.6% of all contracts open.
Source for data CFTC for COT, cash market for gold.
While we consider such a large bump higher in the LCNS:TO a short-term warning, we hasten to add that the commercial traders are not always “right.” The most recent example came on September 22 (a little over a month ago) as the LCNS:TO reached an all-time record 61.8% of all the contracts open on the COMEX bourse. That was with gold at $1,014.96. Gold has since come within 10 dollars of $1,200 the ounce several times.
Silver COT: As silver rose 10 cents or 0.5% COT reporting Tuesday to Tuesday (to $18.51 on the cash market), the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by a large 6,064 contracts or 10.4% from 58,381 to 64,445 contracts of net short exposure. The total open interest FELL 6,038 contracts to 136,162 COMEX 5,000-ounce contracts open, after adding 406 contracts the week prior.
Similar to gold, we view the large increase in the LCNS as a bit of a warning shot. It suggests that the commercial traders have suddenly become much more willing to take the short side as silver was traveling with an $18 handle. Like gold, that doesn’t necessarily mean the commercials are “right,” just determined. Like gold, the last time that the commercials took a really large one-week jump higher in LCNS (September 8, +8,345 contracts net short) silver showed a COT cutoff price of $16.41. It has since tested as high as $18.92, or 15.3%, higher.
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, division of NYMEX (LCNS:TO). That gives us a better idea of how the commercials are positioned relative to all the COMEX traders. As the commercial traders increased their net short positioning while the open interest fell, the relative commercial net short positioning in silver futures jumped sharply from 41.1% to 47.3% of all COMEX contracts open.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
The jump higher in LCNS:TO shouts to us that the commercials have suddenly become more confident that prices are set to move lower over the short term. As confident as they may be, they better not allow trading much over $19. If that were to occur and remain there for more than an hour or so, an old fashioned short strangling, buy-stop-triggering, bull rush is certainly possible.
Just about everything else we study suggests that harsh dips, if any, should, repeat should, be well bid though. And, we will likely be one of the bidders once convinced a reaction, if any, is done. We’ll see.
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 mentioned in the most recent 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.
Please note: Gold Newsletter (GNL) subscribers received this issue of the Got Gold Report Monday morning, December 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.
That’s it from Houston 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 net long position in iShares Silver Trust, long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last six months: 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), Esperanza Silver (EPZ.V), Gold Port Resources (GPO.V), Victoria Gold (VIT.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V), long DZZ as a gold hedge (with a razor-thin stop) and currently holds various (approximately 15) 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).
