HOUSTON – The largest of the largest traders of gold futures on the COMEX in New York continued to drastically reduce their net short exposure to both gold and silver futures according to data in the latest Commodities Futures Trading Commission (CFTC) commitments of traders (COT) reports released Friday, February 12.
A net short futures position increases in value if prices of the commodity decline and vice versa. Some veteran investors track the positioning of these very large actors as a predictive gauge of future buying and selling pressure. Others believe they have no predictive value. We believe that commercial COT positioning is one of many important gold and silver indicators – one that is moving into a more bullish than bearish structure.
In gold futures, the commercial net short positioning (LCNS) has not been this “small” since September of last year with gold then trading in the $950s. For silver futures in New York, the always-short commercials haven’t held fewer net short silver positions since July of 2009 with silver then in the $13.70s. All the details are below in the Gold and Silver COT sections, but that is only part of the story as we return to a bullish bias for gold, up from neutral. Check this week’s Bottom Line Summary for additional indications.
We’ll have much more below, but first, here’s this week’s closing table:
This Week’s Bottom Line Summary (in bold)
Those who have learned to click on the technical chart links in “off weeks” for the Got Gold Report (GGR) and did so last weekend know that GGR turned from neutral on gold to “cautiously bullish” February 5 with gold in the $1,050s, immediately after gold futures traded harshly down to where India bought 200 tonnes of gold from the IMF near $1,045/oz. Here at GGR, we often, but not always, update the charts on off weeks between our bi-weekly reports. Unless we completely re-do the charts, our links to them survive for multiple reports.
As everyone knows, we had been neutral on gold since our December 2, 2009 report as gold flirted with $1,200 the ounce. We moved safely to the sidelines with the majority of our short-term gold ammunition in very late November.
In our last full report two weeks ago we said, “that may change very shortly, depending on how the gold market behaves over the next few trading days to two weeks.” We saw the gold market as once again very close to implied technical support then, as shown in the miniature chart just below, which we have updated for this report.
Well, so far so good, as gold has indeed bounced up off the implied support range indicated, slightly insulating our new positioning. We note several corroborating signs in a number of the indicators we rely on as detailed below. Unfortunately, as is nearly always the case at turning points and also at false turning points, all of our indicators are not unanimous as readers will see below.
Right or wrong, timely or early, we chose to reenter with about half of a normal position in gold ETFs with gold in the $1,050s and GLD in the $103s. We have already raised our trading stops up to no-loss levels, but we are not yet willing to either raise them again or to add to the trade, preferring to see how the indicators fill in over the next little while.
We still note only minimal reductions of metal holdings in gold ETFs, but we call attention to significant buying pressure for silver ETFs over the past week below in the Silver ETF section.
Large mining shares are no longer underperforming gold and that is encouraging. The big miners held their ground despite gold and silver weakness over the past two weeks, but they do not seem robust enough for comfort. That is probably due to the very nervous and fearful tenor of most equity markets presently. Persistent mining share weakness was one of the main reasons we were reluctant to return to a bullish bias for gold.
Regular readers know we have been impressed with the relative outperformance of the smaller, less liquid issues on down the mining share food chain during this corrective phase for gold and silver. We believe that when the “little guys” outperform the big miners it is usually a more bullish than bearish signal.
We must watch the CDNX-HUI-Gold relationship closely now for telltale signs of confirming strength or damning weakness. So long as the CDNX continues to show relative outperformance to the HUI – relative to gold – we’ll take some comfort there.
Despite even more troubling revelations and fearful news out of the Eurozone and Greece (perhaps even the expulsion of Greece from the E.U.), the U.S. dollar index could not close higher on the week. Now commercial traders on the ICE exchange are record net short the U.S. dollar index as a percentage of the open interest as discussed below in a special section we call “ICE Commercials “Kamikaze-Short” the Greenback.”
Meanwhile, COMEX traders classed by the CFTC as commercial are dumping their collective net short bets for gold and silver futures in a really big way. The very large reductions in commercial net short positioning has to be the big news of this week’s report and that’s why it takes the lead on page 1. Of all the indicators we follow closely, large or abrupt changes in the net short positioning by the largest gold futures traders in New York command our attention like no other.
This week we witnessed very large reductions in the net short positioning of COMEX commercial traders for both gold and silver. Indeed, since gold challenged the $1,200 level in early December COMEX commercial traders have now reduced their net short positioning by 31% as gold corrected a net 10%. The story is similar for silver. For more on this very interesting development don’t miss the Gold and Silver COT sections below.
So, at the same time we see COMEX commercial traders getting the heck out of their gold and silver short positions ICE commercial traders have dug in on the net short side for the U.S. dollar big time. This while gold has just attempted a bounce off of an important implied support zone and while mining shares have finally quit over-selling the metals. Although all of the indicators we follow closely do not agree and some are still flashing bright caution flags (such as the very high gold/silver ratio discussed below and the fact that silver has broken implied support before bouncing), we see both gold and silver as over-sold with a strongly improving COT structure. We see no material negative money flow out of gold ETFs and significantly positive money flow for silver ETFs. That is, of course, inconsistent with the bearish thesis that wealth has begun to move out of precious metals.
Once again 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.”
Therefore, based on a preponderance of all the indicators we follow closely, we believe we have seen enough to return to a cautiously bullish bias for gold and we maintain our cautiously bullish bias for silver. With the gold/silver ratio near 70 we believe silver is very strongly undervalued relative to gold.
We will trade accordingly, in measured increments unless we see deterioration of the important indicators we follow closely, but only (and always) with 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.
As we are wont to say, trading without good stops is like skydiving without a parachute. Neither is a very good idea for most humans and both have the potential to end badly.
Could we be wrong or early? Could we see further material declines in gold, silver and mining shares? Yep. We are uncomfortable on the sidelines now, but no human can see the future and we certainly could be proven wrong, early or both. The best we have to work with are probabilities and our experience. Our trading stops take care of the rest.
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Please note: This offering of the Got Gold Report was originally filed Sunday, February 14, and delivered to Gold Newsletter (GNL) subscribers shortly afterwards. 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 (NYSE: GLD), by far the largest gold exchange traded fund, reported no change to its 1,106.38 tonnes of gold bars held by a custodian in London. GLD reported a reduction of 5.54 tonnes the prior week when gold was under material liquidation selling pressure. As of the Friday, February 12 close, GLD’s metal holdings were worth USD $38.5 billion.
Source for data SPDR Gold Shares.
iShares COMEX Gold Trust (NYSE: IAU), reported a reduction of 1.83 tonnes to show 77.44 tonnes of gold held in COMEX warehouses.
All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively recorded a small decline of 2.03 tonnes of gold metal, to a combined 1,294.27 tonnes (41,612,101 ounces) worth about US$45.1 billion as of Friday’s close.
Once again we ask: If substantial amounts of wealth were indeed exiting precious metals, as some noted short sellers have suggested in recent weeks (George Soros, among others), shouldn’t we be seeing more selling pressure in the world’s gold ETFs?
What we see instead is more or less equal buying and selling pressure for gold ETFs and this week we see a return to positive money flow into the largest silver ETF as covered just below.
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 (NYSE: SLV) increased by 94.63 tonnes to a reported 9,446.40 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 $4.7 billion or about 12.1% 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.
We note that investors seem to be doing materially more buying than selling following the harsh dip for silver via SLV.
SLV files new custodian agreement with J.P. Morgan Chase
On February 8, BlackRock filed documents with the S.E.C. announcing that iShares Silver Trust had entered into an amended custodian agreement with J.P. Morgan Chase, London to increase the amount of silver available under the custodian agreement to 400 million ounces (about 12,441 tonnes).
The new custodian agreement provides investors with a measure of how much physical silver bullion custodian J.P. Morgan Chase is able to provide for BlackRock and SLV.
As we began reporting in the spring of 2009, SLV had exceeded the amount of silver foreseen in its prior first-amended custodian agreement, which called for up to 270,484,574.5 ounces (8,413 tonnes). SLV’s metal holdings first reached the “storage limit” April 3, 2009. On June 1, 2009 SLV’s silver holdings exceeded the prior custodian agreement limits for the first time as SLV then reported holding 8,608.54 tonnes.
Although SLV had exceeded the amount of storage capacity, in June of 2009, the custodian agreed to continue to provide additional silver as needed from time to time as the sale of iShares, the trust’s sponsor, from Barclays’ to Blackrock, was pending. That sale closed in early December.
We find it interesting that the new custodian agreement only expands the silver availability for SLV by 129,515,425.5 ounces, or 48%, some of which had already been stored by the custodian for SLV in excess of the prior custodian agreement. Indeed, as of Friday, February 12, the custodian for SLV was holding 303,708,675.7 ounces of silver for the popular silver trust. Meaning that the new amended custodian agreement only allows room to add 96,291,324.3 additional ounces (just under 3,000 tonnes) before SLV will need additional sources of silver bullion – before either another amendment with J.P Morgan or another custodian or sub-custodian source for silver bullion will be necessary if the trust needs more silver.
Quite frankly, here at Got Gold Report we are surprised that the new custodian agreement was not for considerably more storage space and more available silver metal given the very large increases in metal SLV has added over the past two years. Because of steady positive money flow into SLV, the trust found it necessary to add 2,102.55 tonnes of new silver in 2008 and 2,699.88 tonnes in 2009. If that two-year trend were to continue, the new custodian agreement provides less than one year of increased silver availability for SLV.
Below is a graph showing the additions of metal held for SLV since its 2006 inception.
Notice, please, that even during the height of the silver price collapse in 2008 there really wasn’t any meaningful reduction in silver metal holdings in SLV. To the contrary, the period actually witnessed an increase in metal holdings, which equals more buying than selling pressure for shares of the ETF. If there were a popular rush into silver later in 2010, it would not take very long at all before SLV would need to amend the custodian agreement again or find another silver source.
Traders we correspond with, who are familiar with the London bullion market, strongly suspect that SLV may have reached the limit of silver availability at 400 million ounces with their current custodian in London. Other traders suggest this new agreement is merely a bridge to allow SLV more time to negotiate with other sources for more silver availability.
Although there is apparently ample bar silver in London to serve ETF demand for now, some sources are suggesting that demand for allocated silver has increased to the point where bullion storage and companies involved in bullion management feel justified in raising their storage and custodian fees. If true, then that could put additional upward pressure on physical silver for immediate and near-month delivery.
Moving on, gold in U.S. dollar terms closed the week $27.60 (2.6%) higher than the previous Friday close, showing a last Friday print of $1,093.30 on the cash market. The weekly high ($1,097.80 Thursday) was lower week/week, but the low ($1,062.04 Monday) was higher in fairly choppy, news rattled trading. Gold closed nearly at its high for the week as late short covering seemed the rule on Friday. High-low spreads narrowed to less than $40 for the week, which could point to a much wider spread just ahead as stops are once again closing in from both sides of the trading battlefield.
Readers who visited our linked charts last weekend will have noted that our bias for gold turned from neutral to cautiously bullish as of February 5 with gold in the $1,050s. We have already raised trading stops up to no-loss levels since then, but we are not yet willing to raise them any higher than that just yet. We want to allow for more than normal new-trade volatility with this entry for now. Please see the gold charts linked below for more technical commentary.
Silver, which had been strongly under-performing gold, crashed through implied support near $16 since our last full report two weeks ago, tripping a bevy of trailing stops (including ours) and then careened through the popular 200-day moving average for the first time since April of 2009. This past week, over-sold silver posted a much lower high ($15.73 Friday) but the weekly low ($14.93 Monday) was more than 2% higher as shown in the closing table above. Silver closed the week nearly at its weekly high with a last trade Friday of $15.51 on the cash market, up 34 cents or 2.2% from the prior Friday close. On Friday, traders seemed more afraid to go into the long weekend short than long as the steady, but minor price rise shows in the chart just below courtesy of Kitco.com. Please see the silver charts linked below for more technical commentary.
![Live New York Silver Chart [ Kitco Inc. ]](http://www.stockhouse.com/Columnists/2010/Feb/17/images/clip_image010)
ICE Commercials “Kamikaze-Short” the Greenback
For all the heat and fury in the news over the last week (Europe, Greece, Iran et al), and for all the talk on televised media about capital rushing in to the “safety” of U.S. dollars, it may surprise some readers to learn that the U.S. dollar index finished the trading week almost exactly flat. For 10 weeks the buck benefited, surging higher against a basket of other fiat currencies (Ed note: The dollar index basket is made up of euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss francs) on all kinds of fear-related issues.
Despite all the dire and gloomy news the dollar index was unable to close higher, although it did manage a six-bps higher weekly high on Friday, before a late sell-down. As the U.S. dollar index rose 81 “pips” from 79.00 to 79.81 (on COT cutoff Tuesdays) ICE commercial traders reduced – that’s reduced - their collective net short positioning by 1,577 contracts to show a still extreme 44,673 contracts net short the DX. However, the open interest plunged over 8,000 contracts at the same time, so the “ICECOMS” actually INCREASED their relative net short positioning to a stunning 75.8% of all the open contracts on the ICE exchange.
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.
We’ve no idea why the ICE commercials are so determined in their net short positioning in the dollar index, but we are pretty sure of what it means. The ICE commercials have apparently decided that the euro is not going into the fiat currency scrap heap just yet, and they seem just as convinced that the U.S. dollar’s rapid rise is objectionable. The U.S. dollar index chart, with additional commentary, is below in the charts section.
The Gold/Silver Ratio (GSR) is still signaling fear. As of Friday, February 12, the GSR showed 70.47 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. At a GSR of 70:1 or higher we believe that excess gold can be sold to buy silver provided one can affect the trade without injurious premium slippage. At a GSR over 80:1 we will sell some gold and buy silver aggressively, as we believe that to be a rare opportunity.
Of all the indicators we watch closely, the gold/silver ratio is the one that worries us the most right now. We want to see this ratio falling and falling sharply as soon as the crisis in Europe quiets down some. If we do not see the GSR falling shortly it is not a good sign and we will be forced once again to take more defensive action. See the short-term GSR chart below in the charts section.
Larger, more liquid and well-financed mining shares have very modestly outperformed gold metal over the past week. As gold rose by 2.6% the HUI managed a 3.2% bump. That follows the prior week when the miners did much better than the metal. It may be difficult for HUI resident mining shares to show outperformance until negative news flow simmers down a little and worry meters come out of the red. However, we still view this indicator as useful for the time being. If nothing else for comparison purposes to the next indicator, which comparison we find interesting and much more useful in today’s nervous environment. 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 also edged higher over the past week. The CDNX closed Friday at 1,498,75, up 43.34 points (3%). That is roughly in line with the HUI and is also a teeny bit stronger than gold, but we should remember that the CDNX hasn’t corrected as much on a percentage basis as the companies in the HUI have – a fact that gives us some comfort. We like to think that when the “little guys” are stronger than the big companies 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. So far, even in this most recent metals pullback, we have yet to see any meaningful over-selling by the CDNX relative to gold metal or the HUI. If we do see the CDNX over-selling the other indexes and indicators, we’ll be taking evasive and defensive action accordingly. Please see the CDNX and CDNX/HUI ratio graphs below in the charts section.
Now for this week’s most interesting developments, which have to be the positioning of the largest gold and silver futures traders on the planet.
Gold COT Changes: In the Tuesday 2/10 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 an extremely large 31,152 contracts, or 12.7%, from 244,579 to 213,427 contracts net short Tuesday to Tuesday as U.S. dollar spot gold fell $36.51, or 3.6%, from $1,114.14 to $1,077.63. (Remember that gold tested as low as the $1,040s Friday, February 5, during this reporting period, so this number includes the recent most lows for gold and the appurtenant long liquidation with them.) This was while the total open interest declined a much smaller 13,955 contracts to 466,905 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.
In the 11 weeks since December 1, 2009, as gold fell a net $118.73, or 10%, to $1,077.63 (as measured on COT reporting Tuesdays) commercial traders on the COMEX have covered or offset 94,804 contracts (31%) of their collective net short positioning. That means that the commercials are less net short gold contracts representing about 295 tonnes of gold metal for the period. That was while the open interest declined a much lesser 54,528 contracts (10.4%).
So, on what is not really all that large a drop for the price of gold we have to note a fast pace of commercial net short reduction for the period. For each net $1.00 lower in the gold price we have seen a reduction in the LCNS of just under 800 contracts averaged over the 11-week period. However, as one might imagine, the pace of commercial net short reduction has accelerated over the past three reporting weeks, which account for 60,220 contracts of the reduction or about 64% of it.
Now that gold has given back as much as $175 off its December $1,220s pinnacle, we have to note that the large, well funded and presumably well-informed COMEX commercial traders ARE IN A HURRY TO REDUCE THEIR NET SHORT POSITIONING on 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 and fell a lot this past week. The LCNS:TO dropped from 50.1% to 45.7% of all contracts open on the COMEX.
Source for data CFTC for COT, cash market for gold.
The last time that the LCNS:TO was less than 45.7% was clear back on April 28, 2009, when gold was trading in the $890s and the LCNS:TO came in then at 44.7%.
Can there be further long liquidation in gold and can the LCNS and LCNS:TO go even lower? Sure, you bet they can, but given the quick pace of commercial net short reduction in the very recent past we have to view the COT action as a more bullish than bearish signal short term. It is one of the reasons we have returned to a cautiously bullish bias for gold, up from neutral as of February 5.
Silver COT: Silver COT is the most favorable since July, 2009. As silver plunged $1.24 or 7.4% COT reporting Tuesday to Tuesday (from $16.69 to $15.45 on the cash market), the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a really large 8,763 contracts, or 18.8%, from 46,563 to 37,800 contracts of net short exposure. The total open interest fell a much smaller 3,668 contracts to 118,593 COMEX 5,000-ounce contracts open, after losing 2,634 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
As anyone with eyes can see, THE COMEX COMMERCIAL TRADERS ARE IN A HURRY TO REDUCE THEIR COLLECTIVE NET SHORT POSITIONING. Just over the past three reporting weeks COMEX commercial traders have reduced their net short positioning by a huge 23,890 contracts, or about 39% as silver swan dived $3.29 or 17.6%. (These are very large, highly unusual moves, friends.) For comparison the total open interest declined a much smaller 12,792 contracts for the period.
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 38.1% to 31.9% in one week.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
Rightly or wrongly we view very large downward moves in the LCNS:TO, like the ones this week and last week, as more bullish than bearish looking ahead – especially when the blue line in the chart above closes in on the bottom of the three-year range.
For the second time in four weeks we were stopped out of our SLV positions, one trade with a minor gain, the other with a minor loss on silver’s harsh spike lower the prior week. Perhaps the third time will be the charm as, once again undaunted, we have re-entered silver ETFs as of February 8 with silver near $15 and SLV trading in the middle $14.70s. Once again, as is our habit, we are only interested in this trade if the Trading Gods prove us correct in the timing. We have already moved our stops up to the no-loss arena, but we are not yet willing to raise our stops even further or to add to the trade.
Given the nervousness that permeates just about all markets at the moment we are content to allow for a bit more volatility than usual with new-trade positioning in an attempt to avoid being stopped out prematurely. But, we are not willing to allow more volatility immediately on entry – only if the position “earns” it.
So, our newest SLV entry is with a reasonably tight, new-trade stop, near $14.80, risking only a gap down and nothing more for now. We’ll let the Trading Gods show us whether or not we should head to the sidelines or add to the trade as the coming week unfolds.
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 chilly 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 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).
