Gold running into a COMEX wall: Got Gold Report

Gene Arensberg
0 Comments|July 27, 2009

Conditions improve for silver

ATLANTA -- Gold ran into a well-defended wall in the $950s this past week ending July 24, but silver seemed to be marching to a different, more bullish drummer.

In the natural gas arena, the largest ETF in the space stands up for itself in an important press release.   

Let’s jump right into some of the indicators. 

Gold ETFs:  As gold metal tacked on another net $14.10 or 2.6% for the week (to $951.52 on the cash market), SPDR Gold Shares (GLD), realized a net weekly reduction of 7.93 tonnes to show 1,086.61 tonnes of gold bars held by a custodian in London. 

The falling metal inventory suggests there has been more selling pressure than buying pressure for the most popular gold ETF.  We believe some investors are worried about the upcoming CFTC and SEC hearings regarding futures position limits “for all commodities of finite supply” which is ironic because most gold ETFs do not use futures.  Some investors are undoubtedly raising cash to chase the Big Market rally now underway.  We also believe both issues are temporary.   
 

Interestingly, at the same time as GLD saw net negative money flow, other gold ETFs saw the opposite.  One example was iShares COMEX Gold Trust (IAU), which reported an addition of 0.93 tonnes, to 72.27 tonnes of gold held in COMEX warehouses. 

In our opinion premiums (the price charged and paid by dealers over spot) for gold products have come in to levels which make it marginally attractive to convert GLD and other gold ETFs to gold coins and investment-sized bars, but choose dealers carefully. 

We have repeatedly held that a good time for conversion would finally arrive and that time starts now, while premiums are relatively low.  This is, of course, for the portion of the gold portfolio which is intended for the long haul.  We believe that premiums will once again increase dramatically in the not-too-distant future, so there is probably not very much time to waste in that effort.           

Silver ETF:  Barclay’s (for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), once again reported no change to their silver holdings for the week.  The trust reported an addition of 42.07 tonnes of average 1,000-ounce allocated silver bar inventory the prior week.
 
The trust continues to hold more silver than the original custodian agreement with J.P. Morgan Chase London provided for, now reporting 8,766.93 tonnes of allocated silver bars held for investors by the custodian.

Apparently buying and selling pressure for the silver ETF have been more or less balanced over the past week, otherwise the prospectus says we would have seen changes to the metal holdings and number of tradable shares.     

Repeating from the last full Got Gold Report two weeks ago“With premiums for physical silver metal products back to normal or near normal and availability seemingly adequate regionally, now might be an excellent time to convert shares of SLV into the real deal physical metal.  Investors might want to check with their local dealer and even “lock-in” such a transaction ahead of the actual “exchange.” Investors will want to make one more phone call before hand, to their accountant, who can advise them on strategies to make the like-for-like item conversion tax friendly.”

Gold recorded a much higher weekly low ($937.38) and a slightly higher high ($957.50), but ran into sustained, determined and repetitive selling resistance in the $955 region. Below we use GLD as a proxy for gold futures to show the action over the past three weeks, chart courtesy of Stockcharts.com:    

Clearly there is material overhead resistance.  Just as clearly, as of July 24, there is seemingly just as determined support.  We are interested and curious to see which side “blinks.”  Please see the gold charts below for more technical commentary.  

After a near rendezvous with its 200-day moving average (200-dma) two weeks ago, Silver has clawed its way steadily higher and is knocking at the door of potential technical resistance marked by the $14 and 50-dma region.  Should that resistance give way, the next defined line of defense for silver bears has a $16 handle. Please see the silver charts below for more technical commentary.  

Larger, better financed and more liquid mining shares more or less tracked with gold as shown in the HUI charts below. We can see how the larger miners performed relative to gold metal in the HUI:Gold Ratio, also in the chart section below. 

Smaller, more speculative and more thinly traded miners and explorers, like those in the Canadian S&P TSX Venture Exchange or CDNX, moved higher on slightly higher, but still unsatisfying summer “dawg daze” volume of 816 million shares for the week. 

Despite the lower than wished for volume, it is good to see the CDNX advancing on higher volume and declining on lower volume as shown in the CDNX charts below.

We cannot help but notice that a number of our more speculative issues saw increasing size on the bid side as the week progressed.  A couple even attempted significant breakouts, but they lacked sustaining volume, such as Timberline Resources (AMEX: TLR, Stock Forum) and Endeavour Financial (TSX: T.EDV, Stock Forum).     

The U.S. dollar continued to bleed red this past week and as measured by the U.S. dollar index it has clearly broken lower out of a congestion area which formed around the historic support level around 80.  The “Dixie” (DX) turned in a last Friday print of 78.75, down 77 “ticks” from the previous Friday close as shown in the U.S. dollar index graph below in the charts section.

As the DX fell 129 basis points, from 80.18 to 78.89 COT reporting Tuesday to Tuesday, ICE commercial traders apparently attempted to catch the dollar falling knife, adding 3,355 contracts to their collective net long positioning.  The “ICECOMs” reported a net long position of 11,883 DX contracts out of a total open interest of 27,107 contracts (LCNL:TO = 44%) as of July 21. As of this week, virtually no U.S. dollar index futures long positions put on this year are currently in the money.  The rather important U.S. dollar chart is below in the charts section.     

After rising briefly above 71 two weeks ago, the Gold:Silver Ratio (GSR) has begun to come in, as expected, finishing the week at 69.20.  We still believe that selling gold to buy silver makes economic sense, but perhaps a little less sense than it did with the GSR over 71 in the last report.  Over time we fully expect the GSR to return to more normal levels near 55 and possibly considerably lower.  See the GSR chart below in the charts section.   

Physical premiums for most gold and silver bullion coins and bars are near normal according to email and Web sources.  This, despite consistent dealer reports of considerable and sustained increases in traffic and “unusual buyers in size.” 

Inventories apparently remain adequate for most products, at least regionally, but some tightness in the most popular items may be surfacing locally according to dealers we correspond with daily.

Call it intuition, or trader’s instinct, or whatever, we believe those planning to convert gold and silver ETFs into physical metal might want to do so with a sense of urgency now, as we doubt that premiums will remain near normal for an extended period.  Regardless if gold and silver move substantially higher or lower we expect to see premiums moving higher toward the end of the year and maybe much sooner. 

For silver we prefer old U.S. 90% silver coins in $1,000 face value bags above all other fabricated silver products.  For gold our preference given an equal price choice is first for U.S. gold eagles, then South African krugerrands, but we are not willing to pay a higher premium for either.  Thus, for now the most likely target is “k-rands,” currently fetching about half the premium as eagles at local dealers.  Both are widely available, popular and instantly liquid.

By the way, a considerable amount of wealth can be sequestered or set aside in a small space with gold.  One million dollars worth of physical gold (currently about 1,050 1-ounce K-rands) easily fits inside a reinforced metal suitcase or large briefcase and weighs less than 100 pounds. Three average 400-ounce investment bars, each weighing about 33.3 Troy pounds (about 12.4 kilos each) easily fits inside the same space and would equal about $1.2 million (with the premium included).         

Please note this is an excerpt of portions of the full Got Gold Report (GGR).  Gold Newsletter subscribers enjoy access to the full GGR as well as Brien Lundin’s timely and actionable analysis of specific resource companies.  For more information visit GoldNewsletter.com or New Orleans Investment Conferences

Natural Gas:  For those interested in natural gas, my good friend and able investor Brien Lundin was interviewed on the subject of energy by The Energy Report, a service of Gold Speculator.  You can review his timely comments at this link.

Of particular interest in that report, Brien said:  “I think the lows (for oil and natural gas) are behind us. Sometime over the next two or three years we're likely to see close to $100 oil or higher. Natural gas should move considerably higher; it has a very good shot of at least doubling at some point over the next two to three years. So this is a time to pick up leveraged companies and perhaps look at some options plays.”
 
Along those same lines we added two royalty trusts to our own accounts this week.  San Juan Basin Royalty Trust (NYSE: SJT, Stock Forum) and Permian Basin Royalty Trust (NYSE: PBT, Stock Forum) as longer-term plays on the price of NatGas.  Each pay a small monthly distribution, so we are “paid” to hold them.  The price of the trusts tend to answer price moves in the commodity, but in a less volatile fashion than the ETFs. 

We also want to call attention to an SEC filing by United States Natural Gas Fund (NYSE: UNG, Stock Forum).  Filed Friday, July 24, the filing refutes the irresponsible contentions by some NatGas bears and some misinformed, power hungry politicos that the energy ETFs contributed to a rise in energy prices last year.  Please read the release for yourself and reach your own conclusions, but we’ll just say that we are glad that UNG management isn’t taking the maligning by power-greedy regulators and irresponsible comments by televised market mavens (Jim Cramer) sitting down.   

We’ll have more about natural gas in future reports, but for now, below is the chart which UNG included in that SEC filing as a “tease.”   

http://content.edgar-online.com/edgar_conv_img/2009/07/24/0001144204-09-038643_CHART.JPG

The usual graph of UNG is in the charts section below. 

Head for the Big Easy

Before moving into the conclusion section just a quick aside to say I’m looking forward to presenting and meeting some of you at the always exciting and stimulating New Orleans Investment Conference to be held this year at the Hilton New Orleans Riverside October 8-11. 

2009 New Orleans Investment Conference

The New Orleans conference has always boasted an impressive speaker lineup, but this year conference organizer Brien Lundin has outdone even himself with a power-packed menu of experts and savvy intellectuals in both business and politics.  Including Dr. Marc Faber...Dennis Gartman...Peter Schiff...Dr. Stephen Leeb...Doug Casey...Rick Rule...Adrian Day...Frank Holmes...Bob Hoye...Bob Prechter...Dr. Mark Skousen...Ian McAvity...Pam and Mary Anne Aden...Brent Cook...David Coffin...Lawrence Roulston…Thom Calandra…Rick Santelli…Carl Rove…Howard Dean and many, many more. 

As of right now there are still spaces available, but as always they are going fast.  For more information or to reserve for the conference please use this special link and send me an email note if you plan to attend so we can connect there.  It should be fun, interesting, entertaining and very worthwhile. 

Summing up:  We have to note some negative money flow from the largest gold ETF, but we believe that is probably caused by temporary considerations. With the Big Markets on a roll and uncertainty surrounding the upcoming CFTC hearings it is surprising there hasn’t been more of it. Still no negative money flow from the U.S. silver ETF. 

While gold has apparently run into significant and determined selling pressure in the $950s, with COMEX commercials aggressively taking the short side in yet another apparent “goal line stand” for the yellow metal, those same traders are aggressively reducing their net short positioning for silver as the U.S. dollar continues to lose buying power and credibility thanks to the actions of the current “captain” and crew Americans voted into power in the last big election, who cannot seem to understand that we cannot borrow our way out of a giant debt hole and the last thing we need now is huge new taxes and government takeover of the healthcare system.  We firmly believe one reason the markets are stronger is because these ill-conceived programs look less likely to pass.      

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 on our Vulture Bargain Hunter list.  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

While we must raise short-term trading stops on gold to a “near resistance level,” we believe that lower silver prices should be bought in a long term accumulation by thick-skinned, risk-be-dammed, forward-looking investors ahead of the world realizing that a bona fide shortage of the metal looms.  We believe that silver should occupy a reasonable percentage of one’s overall investment arsenal.  Despite minor implied increases lately, existing global physical silver stocks have been depleted to their lowest levels in over 100 years.  While that condition is presently not widely known, sooner or later it will be.  While the gold:silver ratio is near 70 it makes sense to us to sell gold in order to buy silver.

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.     

Got Gold Report Charts

That’s it from Atlanta, this week.  Until next time, good luck, good trading and 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 and/or his family currently holds a net long position in SPDR Gold Shares, net long COMEX silver futures, net long iShares Silver Trust, net long natural gas ETF UNG, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), Bravo Venture (BVG.V), long SDS as a Big Market hedge and currently holds various (approximately 25) 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).  


Rate this article
0 stars
v
Usefulness

Clarity

Credibility
Add to favourites icon Add to favourites

Interested in these industries and sectors?

Receive investor kits and email updates from Stockhouse and directly from these companies.

"Industrial Metals & Minerals"
Energy

I consent to receiving investment related electronic messages from Stockhouse and the companies selected.
I may withdraw my consent at any time.

Comments

No comments yet. Be first to comment!

Leave a Message

You must be logged in to access this feature.