HOUSTON -- Gold bulls are probably disappointed in the amount of upside follow through following the March 18 U.S. Federal Open Market Committee (FOMC) announcement of up to $300 billion in quantitative easing (QE) via planned direct purchases of U.S. treasury notes. That “dollar printing” or “dollar dilution” is on top of planned purchases by the government of up to $1.25 trillion in mortgage-backed securities aimed at restoring confidence in the badly-shaken banking sector.
Since March 18, gold popped higher, testing the $960s Friday, March 20, but as Brien Lundin mentioned in his recent alert to Gold Newsletter subscribers, “Gold had been driven down $25 before the Fed announcement, apparently in an attempt to quell the metal’s positive reaction to the news.”
The initial reaction in Forex markets was dramatic, sending the U.S. dollar index down, violently. As the buck index (dead cat?) bounced up nearly 280 “bips” off its 500-basis point reaction spike lower (see the U.S. dollar charts below), sellers still more or less controlled the gold dance floor on the COMEX, division of NYMEX, in New York City, … at least for now.
Gold began the week in the $950s, but with the Big Markets still surging in their three-week rally, the dollar buoyed up off it’s QE reaction spike lower, less than bullish demand news out of Pakistan and India, probable quick profit taking after the $50 spike higher and weakness in the energy pits, gold moved lower more easily than higher over the past five trading days.
The one true “currency” and always trusted store of value, gold tested as low as the $917s before some probable last minute short covering and pre-weekend buying made for a Friday last trade of $924.04 on the cash market. So, despite some of the most bullish news a gold bull could wish for; despite the (now) certainty of raging global competitive devaluation of fiat currencies in a coordinated effort by multiple governments to stave off deflation literally at all costs; … despite all that, the futures dominated spot price for gold moved $28.30, or 3% lower for the week.
Interesting silver news
Meanwhile an interesting development is underway now in the silver ETF arena. Barclay’s (sponsored) iShares Silver Trust (SLV) has completely filled up all the storage space foreseen in its custodian agreement with JP Morgan Chase, London. In fact, as of this past week SLV reported its silver holdings exceeded the amount of silver JP Morgan is obligated to store for SLV. For more on that please see the Silver ETF section of the report below.
Gold ETFs
SPDR Gold Shares, [GLD], the largest gold ETF, added another 12.84 tonnes of allocated gold bars to its gold holdings over the past week to show 1,127.44 tonnes of gold bars held for its investors by a custodian in London. As of the Friday 3/27 close the metal held by the trust was worth $33.5 billion.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.
Barclay’s iShares COMEX Gold Trust [IAU] gold holdings added a small 0.92 tonnes to 67.78 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added a large 4.14 tonnes over the past week, to show 137.16 tonnes of gold held as of Friday.
All of the gold ETFs sponsored by the World Gold Council (WGC) showed a collective increase of 16.98 tonnes to their gold holdings to 1,306.43 tonnes worth $33.8 billion USD as of the Friday 3/27 cash market close.
GLD sixth in gold holdings
Please note that the largest of the gold ETFs, GLD, now holds more bullion than all but a handful of countries in the world. According to the World Gold Council, GLD’s metal holdings now rank sixth in global gold holdings having just gone past Switzerland’s 1,040 tonnes of gold reserves (as of December 2008). Some pundits and televised media commentators have recently suggested that gold ETFs have become “crowded trades” or that they are now close to the point where investors are “all in” with gold.
Well, GLD certainly does hold a lot of gold. In anyone’s book 1,127.44 tonnes or 36,248,334 ounces of fine gold really is a great deal of gold. But in terms of the amount of investing horsepower globally is it really all that much?
Remember that as of Friday GLD’s gold holdings were worth $33.5 billion. Sure, that is certainly a large number of dollars no matter who is doing the counting or comparing, but let’s compare it to something else for a little context. Consider that all the net asset value (NAV) of GLD allocated gold, all $33.5 billion of it, represents less (repeat less) than one-fifth of the amount of taxpayer money used by the U.S. government to prop up just one large insurance and finance company, AIG.
Let that sentence, uh, sink in for a moment before going on, if you will.
The gold holdings of the largest gold ETF are dwarfed by the amount of capital it is taking to keep just one financial institution afloat in this crisis. To say it another way, it would take five times the GLD gold holdings just to equal the amount the government has plowed into AIG in order to keep its big trading creditors (like Goldman Sachs) from going down with AIG. Does the idea that the U.S. taxpayer has already expended five times more capital bailing out bad credit default swaps and overly-leveraged derivative blowups principally from just one division of AIG begin to put the amount of capital in GLD gold holdings into better perspective? How about another comparison?
All of the gold ETFs sponsored by the World Gold Council represent a high percentage of all the collective global gold ETF holdings. All five of the WGC sponsored ETFs now hold some $38.8 billion worth of gold as measured by the Friday 3/27 close. Some analysts think that investors are “all in” on WGC ETF gold at just under $40 billion invested? Is that possible? Yes. It is likely?
Well, consider that $40 billion is less than 20% of the current market cap of Wal-Mart, a company many people own shares of through direct and mutual fund investments, but just one of thousands of publicly traded companies. For another example, it would take about 10 or 11 times the amount of net asset value currently held by all five of the WGC ETFs in order to buy one very large, widely-owned, oil and gas company, Exxon-Mobil.
The combined NAV of all the WGC ETFs is big all right. But compared to companies that truly are widely-owned and perhaps over-owned it sure seems like the gold ETFs have a long way to go before they become “crowded.”
For now gold and silver ETFs are interesting, quickly evolving barometers, gauging whether there is more buying or selling pressure for the metals. For quite some time now there has been consistently more buying pressure than selling pressure for gold ETFs as evidenced by the amount of metal which has been added to them. And, the really quite rapid pace of metals holding ascension recently probably reflects a shift in investor thinking toward gold as an important part of a well-diversified portfolio.
Small wonder considering that gold has held up better than just about all the other portfolio denizens over the past year.
SLV Metal Holdings
Believe it or not, even though it lost ground for the week, silver actually turned in a slightly higher high ($13.91) and a considerably higher low ($12.97) as it held onto chart real estate just above the popular 50-day moving average. Speaking of the 50-dma, it is currently crossing back above the 200-dma for the first time since last August, an event known in technical circles as a “golden cross.” Silver closed the week on a less than enthusiastic dip with a last Friday 3/27 trade of $13.33 on the cash market. (See the silver chart linked below).
Investors apparently chose to buy the dip in silver more than not. For the week metal holdings for Barclay’s iShares Silver Trust [SLV], the U.S. silver ETF, rose another 116.49 tonnes to show a new record 8,296.93 tonnes of silver metal held for its investors by custodians in London. SLV reported adding 282.07 tonnes the prior week.
Source for data Barclay’s iShares Silver Trust.
Like GLD, the authorized market participants (AMPs) for SLV add shares to the float and increase the amount of silver held (in minimum basket amounts of 50,000 shares) to answer imbalances of buying pressure over selling pressure. So, we know that when the amount of silver being held increases, buying pressure is prevailing. The opposite is true when selling pressure overwhelms buying pressure.
Clearly there continues to be net positive money flow into the silver ETF, which now holds silver worth a little over $3.5 billion, roughly 10.5% of GLD gold holdings. Although perhaps a little choppy from time to time, it really isn’t hard to discern the trend for SLV metal holdings over the past year in the chart above. Even if the trend for the metal itself is more opaque. Investors want more silver.
Still no new custodian for SLV
As of Friday, March 27, SLV still had not filed an amendment with the SEC either naming an additional custodian or increasing the amount of silver storage available under the current custodian agreement with JP Morgan Chase London.
Repeating from the last Got Gold Report: “We remain vigilant, because there is very little “room” under the current custodian agreement for SLV to add additional silver as we reported in the last Got Gold Report. There is no doubt ample silver available in London (for now) from one of the other London Bullion Market Association (LBMA) members with large metal holdings in London warehouses, but so far we don’t know whom SLV will name as the additional custodian or sub-custodian and we don’t know how much silver “storage” that new custodian will be able to provide.”
As of this past week, the amount of silver being held by the SLV custodian actually exceeded the amount of silver foreseen in the current custodian agreement, yet the sponsor of SLV, Barclays, has yet to announce any additional storage capacity to the existing agreement or a new custodian.
The details are in previous Got Gold Reports, but briefly, SLV reported holding 266,752,671.5 ounces of silver as of March 27. The current custodian agreement was for up to 264,550,265 ounces. So SLV now holds 2,202,405.5 ounces, or about 68.5 tonnes more silver than the current custodian agreement covered.
News reports surfaced again this past week that Barclays might be in the final stages of a sale of its iShares division to, among others, Goldman Sachs. While we will await further developments before commenting on that potential change, we sincerely doubt that a pending sale of iShares by Barclays is the holdup for SLV to announce additional silver storage capacity.
In order for SLV to continue to accurately mirror the spot market for silver, its AMPs simply must have the flexibility and opportunity to take advantage of the NAV-SLV share price spread arbitrage, which makes the ETF work. SLV has tracked in lock step with the spot price of silver flawlessly so far, but without the ability to add more silver, and if buying pressure for SLV continues to prevail over selling pressure, the large U.S. silver ETF could face a condition where the shares would trade at a premium to spot silver. Therefore, an expansion of the current silver storage arrangement or another custodian or sub-custodian is almost certainly to be announced by SLV imminently.
Bid under the CDNX?
On the small resource company battlefield, the 2008 killing fields of the CDNX, which tracks a fair number of smaller, more risky and more thinly traded resource companies based primarily in Canada managed, finally, to print a higher high than its February apex this past week. That is encouraging, but still, the CDNX – expressed in gold, monthly, in the chart below - would have to do a whole lot better just to be “lousy.”
For comparison, “lousy” was in 2003 with the ratio below 3.00. That was as gold had begun moving higher following a grueling, horrible, protracted 20-year bear market for precious metals, but the shares of mining companies lagged. Lousy was bad in 2003. Today the CDNX is about three orders of magnitude worse. It is difficult to find words to describe just how ridiculously cheap, how unloved and unwanted small resource companies, like the companies on the CDNX have become since last July, but the graph below is the proverbial picture worth a thousand words.
Click here to see the relative performance graph courtesy of Stockcharts.com.
This report continues to believe that now, when just about no one wants them and prices are a quarter or a fifth or even a tenth of what they were just a year ago; now when meaningfully large positions in promising miners and explorers with good management and real prospects can be had with relatively tiny capital (the kind of companies Gold Newsletter is focused on for subscribers); now when there are oceans of blood in the proverbial streets; right now is a small resource company speculator’s opportunity of a generation.
Got Gold Report Charts
2-year weekly gold
2-year weekly silver
3-year weekly HUI
2-year weekly Gold:HUI ratio
That’s it for this excerpt of the full Got Gold Report. GoldNewsletter.com subscribers enjoy access to all the Got Gold Report technical analysis and commentary as well as Brien Lundin’s timely advice and analysis of specific resource companies.
Until next time, as always, MIND YOUR STOPS.
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 currently holds a long position in iShares Silver Trust, net long SPDR Gold Shares and holds various long positions in mining and exploration companies.
