About Gold: COT Report
Got Gold Report - Small Gold, Silver and Uranium Miners Advance
By Gene Arensberg
25 May 2008 at 01:15 PM GMT-04:00
ATLANTA (ResourceInvestor.com) -- It’s been a satisfying three weeks since the last Got Gold Report suggested backing up the truck to add badly beaten up small gold, silver and uranium mining and exploration companies. For those who missed that report, the nutshell version was that when the financial genius stock-picking gurus were abandoning their former “best buys” at what are ridiculously low prices; when these popular stock salesmen were in essence finally turning fearful and about as bearish as they ever do, it was time for all of us very patient, vulture-like, longer-term oriented and contrarian-minded traders to back up the truck for our highly liquidity-dependent and very harshly mistreated inexpensive mining favorites.
Since that May 5 report, of the 82 small mining and exploration companies this report follows daily on charts, 53 or 65% advanced (some strongly), 23 or 28% declined and 6 or 7% remained unchanged over the 3-week period. That means that advancers outnumbered decliners by more than a 2:1 ratio for the period.
That’s an impressive showing made all the more interesting by a notable increase in volume on many of the individual issues as well as a dramatic increase in the number of small resource companies reporting buys of their own stock by company insiders. (Companies followed closely by this report, not necessarily the entire sector.)
The slightly more bullish action of the small miners over the past three weeks shows up in this chart of the Canadian CDNX (the S&P TSX Canadian Venture Exchange). Of course it didn’t hurt that both gold and silver rose modestly over the period, but if that was the only factor at play then so many of these small resource companies would not be at such drastically low price levels to begin with. See additional commentary about that on the chart itself and a bit more below in the Bottom Line section.
COMEX Commercials’ Net Short Positions Spike Higher for Gold but Not Silver
As chronicled below in the Gold COT Changes and Silver COT sections over the past week the largest of the largest futures traders took on new gold short positions aggressively as gold popped a little over $52 the ounce, but they really didn’t do so for silver.
Speaking of silver, longtime readers and new friends alike might find this week’s Silver Market Commentary interesting. It’s just below the Silver COT section this time and looks at the continued positive money flow into the U.S. silver exchange traded fund. Among other things mentioned, SLV has added about 1,299 tonnes of new silver to its silver holdings this year and has yet to show ANY significant negative money flow in 2008.
Bottom Line
When real interest rates remain negative, real inflation is escalating and the very inflationary effects of much higher oil prices have yet to really be felt; when gold production for the major producers is falling (that’s right, falling), central bankers are selling less than they are allowed to under the Washington Agreement II; when investors world-wide are trying to preserve their purchasing power in an era of continued reckless, competitive government fiat currency debasement; when investment demand for both gold and silver are strongly on the rise, it is a time for buying gold and silver, not for selling it. This is a gold and silver bull market and it won’t end abruptly anytime soon in this report’s opinion.
As of today nothing trumps gold and silver for places to store wealth (especially silver during its usual harsh corrections). This report continues to recommend buying/adding on significant to strong dips if possible, but add a reasonable percentage of gold and silver soon to one’s investment portfolio if you haven’t already done so (preferably into significant to strong pullbacks).
Additionally, with oil having eclipsed the $130 mark, and perversely, many of the small speculative but promising uranium miners and explorers having been taken out behind the barn and shot over the past nine months, that is another contrarian stock vulture opportunity well underway to be exploited by the more nimble resource investors.
Although certainly not robust yet, interest in our favourite junior and micro-cap resource companies does finally appear to be on the rise, as expected, following a brutally harsh vacuum of liquidity away from the sector since last July. If that action continues and if some of the more strongly mistreated, but still promising issues catch a bit more of a bid over the next few weeks, we’ll be able to say that a little more liquidity and confidence is finally returning to the small miners and explorers.
If the indications this report follows closely are correct, the exodus of liquidity away from the small miners and explorers peaked sometime between January and early May, also as expected.
While it is probably much too soon to expect a dramatic flood of liquidity back into the small guys right away, it is certainly not too soon to expect them to continue firming through the “normally lacklustre summer months.” By this time next year it would not be surprising at all to see that they had strongly outperformed both the two most popular precious metals and their larger, major exchange traded gold and silver producing cousins.
Over the next few weeks the author plans to continue to add favourite small miners and explorers into obvious lack-of-liquidity-driven downside overreactions opportunistically for longer-term speculation.
On to some of the indicators.
Gold COT Changes. In the Tuesday 5/20 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) mushroomed a whopping 37,584 contracts or 21.16% from 177,597 to 215,181 contracts net short Tuesday to Tuesday as gold jumped $52.27 or 6.03% from $867.00 to $919.27.
Since Tuesday gold tested as high as $935.80 Thursday, before pre-Memorial Day (in the U.S.) profit taking set in knocking just the tip top off back to a Friday last trade of $924.86 on the cash market. For the calendar week gold turned in a net $22.77 gain or about 3.4% on the cash market.
As of Tuesday’s COT reporting cutoff, COMEX gold open interest rose a moderate 13,448 to 453,084 contracts open, each covering the future delivery of 100 ounces of gold metal.
Long-term June 2009 and beyond COMEX forwards surprisingly FELL 4,718 to 47,642 lots open, or a very low 10.52% of total open contracts.
Gold bears, having just gotten gut punched with a $52 jump higher for the metal will probably take some comfort that the largest of the largest futures traders INCREASED their collective net short positioning by 2.79 times the number of overall new contracts on the largest, most liquid gold futures bourse in the world, the COMEX. Indeed, as the number of total open contracts increased a one-week total of 13,448 the collective combined net short positions of traders classed by the CFTC as commercial increased by 37,584 lots.
For each $1.00 of gold price increase, the commercials added 719 contracts to their net short positioning. As gold metal increased about 6.03% the commercials were willing to increase their net short positioning by 21.16%, enough contracts to cover just under 117 metric tonnes of gold metal. That means that the COMEX commercials had to be aggressively willing to accept the short side of new trades.
We have to conclude that right or wrong the commercials clearly felt that this latest surge higher for gold is not going much higher, was unjustified and will soon be reversed if their net short positioning is any guide. Are they right?
Not incidentally, the last time that the commercials increased their collective net short positioning by more than 20% in a single COT reporting week was the reporting week of September 11, 2007 when the LCNS jumped 29.41%, having increased 25.78% the week prior. Gold metal had just cleared the $700 mark at the time and was inching very close to its May 2006 previous peak near $730. Clearly the commercials believed strongly then, in September, that gold would soon reverse course and head back on down. It didn’t. By March of this year gold had eclipsed the $1,000 level before it finally ran out of steam.
Although such a large increase in the net short positioning of commercial traders is ominous and disquieting for those long the metal, the above is just one example of several over the past five years where an overly large increase in the net short positioning of COMEX commercials produced the opposite of what one might expect.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart below compares the COMEX commercial net short position with the total open interest. As of Tuesday, 5/20, the LCNS percent to total open interest spiked higher to 47.49% of all open contracts. Just one week ago the LCNS represented 40.40%, a difference of 7.09 percentage points.
It has been quite a while since we have seen such a large (some would say “determined”) stand taken by the commercials on the short side over just one COT reporting week. In the reporting week of July 24, 2007, the LCNS percentage to total open increased from 29.18% to 40.24%, a difference of 11.06 percentage points in one week with gold then at $683.20. Gold did indeed pull back, a little, to the $650s in August, but by September it had crossed $700 on its way to $1,000 the following March.
In other words, the last time the LCs took such a large one-week jump up in the LCNS percent to open they were very short-term “right” (a little bit), but long-term they were very “wrong.”
Source for data CFTC for COT, cash market for gold.
Gold ETFs. On May 21 streetTRACKS Gold Trust became SPDR Gold Trust, but the trading symbol remained the same. Over the past week gold holdings at SPDR Gold Shares, the largest gold exchange traded fund [NYSE:GLD], increased 7.67 to 591.60 tonnes, having declined 6.44 tonnes the week prior. As of Friday’s figures that’s equal to $17.6 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, also added 1.39 tonnes to 113.24 tonnes of gold held (as of Friday). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings remained steady at 61.25 tonnes of gold held for its investors.
For the week ending Friday, 5/23, all of the gold ETFs sponsored by the World Gold Council showed a collective increase of 9.67 tonnes to their gold holdings to 753.35 tonnes worth $22.4 billion.
Since the last Got Gold Report three weeks ago, as gold tested as low as the $850s and as high as the $930s gold holdings at GLD have more or less leveled out following the largest exodus of capital from the fund since its November, 2004 inception. Negative money flow (more wealth exiting than entering) apparently stopped in late April as gold challenged the key $850s support level.
Source for data SPDR Gold Trust.
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 5,989.57 tonnes of silver metal held for its investors over the past week. SLV added another 61.58 tonnes of silver the week prior when the metal was trading under $17.00.
Silver metal answered the recent persistent positive money flow into SLV over the past week, turning in a short-seller-teeth-gnashing $1.22 bump higher, or 7.2% on the cash market with a Friday last trade of $18.186.
Repeating from the last Got Gold Report, written when silver closed at $16.41: “Not only are we NOT seeing negative money flow from the silver ETF as the cash market price has fallen, we are seeing quite the opposite. That’s probably a sign of aggressive dip buying for the silver ETF and it reflects the growing understanding of the market that physical silver, the real, precious shiny stuff, (as opposed to paper futures contracts which promise to deliver some of it in the future) … real physical silver in many forms is getting even more scarce as the price declines and demand for it increases.”
Dog Days of Summer?
A recurring theme keeps surfacing in analysts’ comments regarding both gold and silver around this time of year and that is that the summer months tend to be weaker for gold and silver. That is more or less historically accurate and all over the world some investors and futures traders are currently positioning for expected summer weakness. However, it is arrogant and foolish to presume that this year will follow some predetermined seasonal path. Seasonality is just one of many factors at play and it is certainly not the strongest factor.
Silver very well may pull back harshly over the summer months and if (repeat IF) it does it will have followed the more expected path, but the trading graveyard is filled to the brim with the bodies of those who placed oversized bets based on seasonal expectations. Silver also very well may not follow those expectations. Neither scenario should surprise us.
It’s much more important to keep focused on the longer-term fundamentals for the white metal, nearly all of which remain extraordinarily bullish and nearly all of which continue to improve with time.
Every now and then we have a year which bucks the seasonal trend. This one, 2008, is a good candidate to do just that too if the consistent positive money flow into SLV, shown in the graph below, is any guide. It should be obvious from looking at the graph that there has been more buying pressure for the largest silver ETF than selling pressure as silver metal pulled back harshly from over $21.00 to around $16.00 and has now crawled back up to challenge $18.00. Indeed, we have yet to see ANY significant negative money flow from the silver ETF in 2008.
Part of the reason for that is that silver is still so darn cheap compared to its more popular yellow cousin. But that’s not the only reason.
Source for data Barclay’s iShares Silver Trust.
Repeating from the last Got Gold Report, written when silver was challenging $16.00: “While we have seen considerable negative money flow from the largest gold ETF as gold prices fell, we see the opposite in the U.S. silver ETF. That means that people are buying this dip in silver. At least so far. It also probably means that the continued existence of the current paper-silver-market-influenced pullback for the white metal may already be in jeopardy. We’ll see.”
Sure enough, silver has since rallied nicely.
Silver COT: As silver jumped $0.96 or 5.75% COT reporting Tuesday to Tuesday (from $16.71 to $17.67 on the cash market) the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by 3,187 (5.40%) to 62,240 contracts of net short exposure, as the total open interest on the COMEX edged 3,036 contracts higher (2.47%) to 125,838 COMEX 5,000-ounce contracts.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market. As of COT cutoff Tuesday 5-20-2008.
It is a little surprising that the silver LCNS only increased by about 5% while the gold LCNS increased about 21% over the past week. One take-away from that is that apparently COMEX commercial traders were less confident that silver will move lower than they were gold.
With that in mind, when we compare the collective combined net short positioning of the COMEX commercials to the total number of COMEX open silver contracts, the commercials net short position amounted to 49.46% of all open contracts, which is a high level relatively speaking.
Part of the reason for the high percentage is that the total open interest on the COMEX for silver remains near its lowest level of the year. As of May 20 there were “just” 125,838 contracts open on the COMEX. As recently as February 19 there were over 189,000 silver contracts open on that bourse.
To give a sense of just how small that total open interest is, (and how small the silver market is comparatively speaking) all of the silver contracts open on the COMEX on May 20 covered paper commitments for 629,190,000 ounces. Does that sound like a lot? It isn’t really. If we add up the notional value of every one of those 5,000-ounce contracts, it only amounts to about $11.1 billion U.S. dollars worth (as of May 20 with silver then trading at $17.67).
It would take 18 times the entire COMEX silver ballgame, 18 times the notional value of all the open contracts for all delivery months, in order to get close to the market cap of Proctor and Gamble, just one U.S. corporation.
About 154.7 million ounces of silver changed hands daily at the London Bullion Market Association (LBMA) in March. So, the entire open interest for silver on the COMEX in New York represents about 4 days of LBMA action.
Doesn’t that suggest a relative dearth of speculative froth for silver currently? It does to yours truly. At least so far. It also suggests there is a good deal more room for new trades to be opened up near-term. A lot more room.
Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.
Persistent, continued scarcity of some physical silver metal products such as small silver rounds, U.S. silver eagles, and 10 and 100-ounce silver bars continues to result in very high premiums for those products at prevailing spot prices, especially when silver has been falling in price. That has probably resulted in some of that physical silver demand finding a home in the silver ETF, but it underscores that there really isn’t all that much silver metal available in dealer’s inventories at any given time or at any given silver price point.
Because the popular physical silver market is so comparatively small, has not really rebounded all that much since the brutal 21-year bear market ended just six years ago, and because so many of its dealers are chronically undercapitalized and can’t afford to keep large inventories on hand, it really doesn’t take all that much of an increase in demand today to translate into a temporary shortage for some physical silver products.
The vast majority of the overall inventory of small sized silver products is held in private hands and now that silver has enjoyed a taste of what gold has done price wise, holders of that silver are much less inclined to sell at current price levels than they were just a year ago when today’s prices would have seemed very high. So, about the only thing that will coax more of the popular physical metal out of hiding and into the market is considerably higher silver prices.
The high premiums we have just witnessed for some silver products are probably just a very small hint of what is coming in the silver market. Yes, there has been an increase in popular demand for small sized silver products. Yes, high premiums, delivery delays and wide-spread scarcity for some products at lower silver prices has proven it. But so far that was really just a smallish increase in the popular demand. We are a very long way from the kind of mania-driven silver-buying panic last seen in 1979-1980 when popular demand for silver mushroomed very briefly out of control.
How do we know? Because during this recent scarce-silver-event only some silver products were actually affected for any length of time. (Particularly when silver traded below $17.50 basis spot.) Other popular silver products have remained relatively plentiful (except when silver traded below $16.50) and have continued to trade at reasonable premiums or even at discounts at times. Products such as 1,000-ounce bars and $1,000 face value bags of pre-1965 U.S. 90% silver coins were and are still widely available at reasonable premiums in the U.S.
The fact that a bona fide shortage of ANY silver products occurred has probably interested other new investors to investigate the market a bit more in depth and to start moving some portion of their investment ammunition into the market one way or another. Either by buying some physical silver at the local coin and bullion dealer, or buy taking a new position in SLV with their brokerage account, as examples.
Because of the action, we can certainly say there are more new faces in the silver market than there were this time last year. The odds favor that trend to continue over the next year.
Silver Demand Finds a Home
Over time the demand for silver finds a home one way or another in the small, but pretty efficient global silver market. Over time the supply/demand/liquidity equilibrium will assert itself across all markets that trade the white metal.
Presently there is probably enough silver metal to answer current demand, just not in the form some of the public wants it in. When even dealers are having to pay $0.80 the ounce over spot in order to secure 100-ounce name brand bars for their customers in quantity (as of Saturday, May 24 with spot silver at $18.18) and small rounds and 10-ounce bars are routinely selling for more than $1.00 over, it is just a question of time before some of that high demand for those products ends up being reflected in the paper silver markets.
Here’s why. The paper silver futures markets, such as on the COMEX in New York, trade contracts for the future delivery of much larger average 1,000-ounce bars. Each COMEX contract is a promise to deliver five such bars at a date in the future. Currently, with silver trading at $18.18 on the cash market anyone can buy very similar average 1,000 ounce bars at regional and national bullion dealers at around $0.25 the ounce over the cash market price. Volume buyers can do even better by entering their order for immediate delivery on major trading bourses in the world assuming they have the connections to do so and the facilities to accept and store the bulky metal.
When there are very high premiums on some smaller products but not on the larger ones, isn’t it just a question of time before some enterprising firm buys one and converts it into the other to capitalize on the difference in spread? In other words, isn’t it just a question of time before someone starts taking the large 1,000-ounce bars which are still relatively plentiful and turns them into more profitable 10-ounce and 100-ounce bars which are in hot demand?
At premiums of $1.00 the ounce and higher, that could be a fairly profitable proposition provided the “manufacturer” has the means and the gravitas to gain acceptance in the global market, already has a consistent source or network of buyers and can move relatively quickly. At premiums of “only” $0.50 the ounce it would only be half as interesting, but probably still quite profitable for a while.
Whomever it is that does choose to answer the demand/supply imbalance currently in play for small sized silver, we can just about bet that someone will or is doing so and that represents additional buying pressure for the most abundant and available silver feedstock which is those 1,000-ounce so-called good delivery bars that trade on the major bullion bourses in the world.
Add that new buying pressure to the 1,299 tonnes of 1,000-ounce bars that SLV has pulled out of the global silver market for its investors this year alone (to hold nearly 6,000 tonnes) and we begin to understand that in time the availability of even the most plentiful large hunks of the shiny metal just might get tight if prices don’t increase considerably and soon.
Ed Steer, Chris Powell and the good folks over at GATA harvested an interesting Wall Street Journal piece by Ianthe Jeanne Dugan which talks about the shortage of U.S. silver eagles currently underway. Readers can access the article, entitled “Losing a Mint: Curb on Coin Sales Angers Collectors” on the GATA website here.
If the increased demand continues or accelerates and when those 1,000-ounce heavies begin disappearing at a faster clip they will also enjoy higher on-the-street premiums as will all the other silver investment vehicles until the price rises enough to liberate more of it out of the private-hands inventory stockpile.
Silver remains the cheapest of the precious metals for now, but probably not forever. Got Silver?
Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.
Gold Indexes. Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.
HUI:Gold Ratio. Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.
U.S. Dollar. Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.
That’s it for this offering of the Got Gold Report. Enjoy the Memorial Day holiday. Until next time, scheduled two weeks from now, 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 and holds various long positions in mining and exploration companies.
Resource Investor Article Link
By Gene Arensberg
25 May 2008 at 01:15 PM GMT-04:00
ATLANTA (ResourceInvestor.com) -- It’s been a satisfying three weeks since the last Got Gold Report suggested backing up the truck to add badly beaten up small gold, silver and uranium mining and exploration companies. For those who missed that report, the nutshell version was that when the financial genius stock-picking gurus were abandoning their former “best buys” at what are ridiculously low prices; when these popular stock salesmen were in essence finally turning fearful and about as bearish as they ever do, it was time for all of us very patient, vulture-like, longer-term oriented and contrarian-minded traders to back up the truck for our highly liquidity-dependent and very harshly mistreated inexpensive mining favorites.
Since that May 5 report, of the 82 small mining and exploration companies this report follows daily on charts, 53 or 65% advanced (some strongly), 23 or 28% declined and 6 or 7% remained unchanged over the 3-week period. That means that advancers outnumbered decliners by more than a 2:1 ratio for the period.
That’s an impressive showing made all the more interesting by a notable increase in volume on many of the individual issues as well as a dramatic increase in the number of small resource companies reporting buys of their own stock by company insiders. (Companies followed closely by this report, not necessarily the entire sector.)
The slightly more bullish action of the small miners over the past three weeks shows up in this chart of the Canadian CDNX (the S&P TSX Canadian Venture Exchange). Of course it didn’t hurt that both gold and silver rose modestly over the period, but if that was the only factor at play then so many of these small resource companies would not be at such drastically low price levels to begin with. See additional commentary about that on the chart itself and a bit more below in the Bottom Line section.
COMEX Commercials’ Net Short Positions Spike Higher for Gold but Not Silver
As chronicled below in the Gold COT Changes and Silver COT sections over the past week the largest of the largest futures traders took on new gold short positions aggressively as gold popped a little over $52 the ounce, but they really didn’t do so for silver.
Speaking of silver, longtime readers and new friends alike might find this week’s Silver Market Commentary interesting. It’s just below the Silver COT section this time and looks at the continued positive money flow into the U.S. silver exchange traded fund. Among other things mentioned, SLV has added about 1,299 tonnes of new silver to its silver holdings this year and has yet to show ANY significant negative money flow in 2008.
Bottom Line
When real interest rates remain negative, real inflation is escalating and the very inflationary effects of much higher oil prices have yet to really be felt; when gold production for the major producers is falling (that’s right, falling), central bankers are selling less than they are allowed to under the Washington Agreement II; when investors world-wide are trying to preserve their purchasing power in an era of continued reckless, competitive government fiat currency debasement; when investment demand for both gold and silver are strongly on the rise, it is a time for buying gold and silver, not for selling it. This is a gold and silver bull market and it won’t end abruptly anytime soon in this report’s opinion.
As of today nothing trumps gold and silver for places to store wealth (especially silver during its usual harsh corrections). This report continues to recommend buying/adding on significant to strong dips if possible, but add a reasonable percentage of gold and silver soon to one’s investment portfolio if you haven’t already done so (preferably into significant to strong pullbacks).
Additionally, with oil having eclipsed the $130 mark, and perversely, many of the small speculative but promising uranium miners and explorers having been taken out behind the barn and shot over the past nine months, that is another contrarian stock vulture opportunity well underway to be exploited by the more nimble resource investors.
Although certainly not robust yet, interest in our favourite junior and micro-cap resource companies does finally appear to be on the rise, as expected, following a brutally harsh vacuum of liquidity away from the sector since last July. If that action continues and if some of the more strongly mistreated, but still promising issues catch a bit more of a bid over the next few weeks, we’ll be able to say that a little more liquidity and confidence is finally returning to the small miners and explorers.
If the indications this report follows closely are correct, the exodus of liquidity away from the small miners and explorers peaked sometime between January and early May, also as expected.
While it is probably much too soon to expect a dramatic flood of liquidity back into the small guys right away, it is certainly not too soon to expect them to continue firming through the “normally lacklustre summer months.” By this time next year it would not be surprising at all to see that they had strongly outperformed both the two most popular precious metals and their larger, major exchange traded gold and silver producing cousins.
Over the next few weeks the author plans to continue to add favourite small miners and explorers into obvious lack-of-liquidity-driven downside overreactions opportunistically for longer-term speculation.
On to some of the indicators.
Gold COT Changes. In the Tuesday 5/20 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) mushroomed a whopping 37,584 contracts or 21.16% from 177,597 to 215,181 contracts net short Tuesday to Tuesday as gold jumped $52.27 or 6.03% from $867.00 to $919.27.
Since Tuesday gold tested as high as $935.80 Thursday, before pre-Memorial Day (in the U.S.) profit taking set in knocking just the tip top off back to a Friday last trade of $924.86 on the cash market. For the calendar week gold turned in a net $22.77 gain or about 3.4% on the cash market.
As of Tuesday’s COT reporting cutoff, COMEX gold open interest rose a moderate 13,448 to 453,084 contracts open, each covering the future delivery of 100 ounces of gold metal.
Long-term June 2009 and beyond COMEX forwards surprisingly FELL 4,718 to 47,642 lots open, or a very low 10.52% of total open contracts.
Gold bears, having just gotten gut punched with a $52 jump higher for the metal will probably take some comfort that the largest of the largest futures traders INCREASED their collective net short positioning by 2.79 times the number of overall new contracts on the largest, most liquid gold futures bourse in the world, the COMEX. Indeed, as the number of total open contracts increased a one-week total of 13,448 the collective combined net short positions of traders classed by the CFTC as commercial increased by 37,584 lots.
For each $1.00 of gold price increase, the commercials added 719 contracts to their net short positioning. As gold metal increased about 6.03% the commercials were willing to increase their net short positioning by 21.16%, enough contracts to cover just under 117 metric tonnes of gold metal. That means that the COMEX commercials had to be aggressively willing to accept the short side of new trades.
We have to conclude that right or wrong the commercials clearly felt that this latest surge higher for gold is not going much higher, was unjustified and will soon be reversed if their net short positioning is any guide. Are they right?
Not incidentally, the last time that the commercials increased their collective net short positioning by more than 20% in a single COT reporting week was the reporting week of September 11, 2007 when the LCNS jumped 29.41%, having increased 25.78% the week prior. Gold metal had just cleared the $700 mark at the time and was inching very close to its May 2006 previous peak near $730. Clearly the commercials believed strongly then, in September, that gold would soon reverse course and head back on down. It didn’t. By March of this year gold had eclipsed the $1,000 level before it finally ran out of steam.
Although such a large increase in the net short positioning of commercial traders is ominous and disquieting for those long the metal, the above is just one example of several over the past five years where an overly large increase in the net short positioning of COMEX commercials produced the opposite of what one might expect.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart below compares the COMEX commercial net short position with the total open interest. As of Tuesday, 5/20, the LCNS percent to total open interest spiked higher to 47.49% of all open contracts. Just one week ago the LCNS represented 40.40%, a difference of 7.09 percentage points.
It has been quite a while since we have seen such a large (some would say “determined”) stand taken by the commercials on the short side over just one COT reporting week. In the reporting week of July 24, 2007, the LCNS percentage to total open increased from 29.18% to 40.24%, a difference of 11.06 percentage points in one week with gold then at $683.20. Gold did indeed pull back, a little, to the $650s in August, but by September it had crossed $700 on its way to $1,000 the following March.
In other words, the last time the LCs took such a large one-week jump up in the LCNS percent to open they were very short-term “right” (a little bit), but long-term they were very “wrong.”
Source for data CFTC for COT, cash market for gold.
Gold ETFs. On May 21 streetTRACKS Gold Trust became SPDR Gold Trust, but the trading symbol remained the same. Over the past week gold holdings at SPDR Gold Shares, the largest gold exchange traded fund [NYSE:GLD], increased 7.67 to 591.60 tonnes, having declined 6.44 tonnes the week prior. As of Friday’s figures that’s equal to $17.6 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.
Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, also added 1.39 tonnes to 113.24 tonnes of gold held (as of Friday). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings remained steady at 61.25 tonnes of gold held for its investors.
For the week ending Friday, 5/23, all of the gold ETFs sponsored by the World Gold Council showed a collective increase of 9.67 tonnes to their gold holdings to 753.35 tonnes worth $22.4 billion.
Since the last Got Gold Report three weeks ago, as gold tested as low as the $850s and as high as the $930s gold holdings at GLD have more or less leveled out following the largest exodus of capital from the fund since its November, 2004 inception. Negative money flow (more wealth exiting than entering) apparently stopped in late April as gold challenged the key $850s support level.
Source for data SPDR Gold Trust.
Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 5,989.57 tonnes of silver metal held for its investors over the past week. SLV added another 61.58 tonnes of silver the week prior when the metal was trading under $17.00.
Silver metal answered the recent persistent positive money flow into SLV over the past week, turning in a short-seller-teeth-gnashing $1.22 bump higher, or 7.2% on the cash market with a Friday last trade of $18.186.
Repeating from the last Got Gold Report, written when silver closed at $16.41: “Not only are we NOT seeing negative money flow from the silver ETF as the cash market price has fallen, we are seeing quite the opposite. That’s probably a sign of aggressive dip buying for the silver ETF and it reflects the growing understanding of the market that physical silver, the real, precious shiny stuff, (as opposed to paper futures contracts which promise to deliver some of it in the future) … real physical silver in many forms is getting even more scarce as the price declines and demand for it increases.”
Dog Days of Summer?
A recurring theme keeps surfacing in analysts’ comments regarding both gold and silver around this time of year and that is that the summer months tend to be weaker for gold and silver. That is more or less historically accurate and all over the world some investors and futures traders are currently positioning for expected summer weakness. However, it is arrogant and foolish to presume that this year will follow some predetermined seasonal path. Seasonality is just one of many factors at play and it is certainly not the strongest factor.
Silver very well may pull back harshly over the summer months and if (repeat IF) it does it will have followed the more expected path, but the trading graveyard is filled to the brim with the bodies of those who placed oversized bets based on seasonal expectations. Silver also very well may not follow those expectations. Neither scenario should surprise us.
It’s much more important to keep focused on the longer-term fundamentals for the white metal, nearly all of which remain extraordinarily bullish and nearly all of which continue to improve with time.
Every now and then we have a year which bucks the seasonal trend. This one, 2008, is a good candidate to do just that too if the consistent positive money flow into SLV, shown in the graph below, is any guide. It should be obvious from looking at the graph that there has been more buying pressure for the largest silver ETF than selling pressure as silver metal pulled back harshly from over $21.00 to around $16.00 and has now crawled back up to challenge $18.00. Indeed, we have yet to see ANY significant negative money flow from the silver ETF in 2008.
Part of the reason for that is that silver is still so darn cheap compared to its more popular yellow cousin. But that’s not the only reason.
Source for data Barclay’s iShares Silver Trust.
Repeating from the last Got Gold Report, written when silver was challenging $16.00: “While we have seen considerable negative money flow from the largest gold ETF as gold prices fell, we see the opposite in the U.S. silver ETF. That means that people are buying this dip in silver. At least so far. It also probably means that the continued existence of the current paper-silver-market-influenced pullback for the white metal may already be in jeopardy. We’ll see.”
Sure enough, silver has since rallied nicely.
Silver COT: As silver jumped $0.96 or 5.75% COT reporting Tuesday to Tuesday (from $16.71 to $17.67 on the cash market) the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by 3,187 (5.40%) to 62,240 contracts of net short exposure, as the total open interest on the COMEX edged 3,036 contracts higher (2.47%) to 125,838 COMEX 5,000-ounce contracts.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market. As of COT cutoff Tuesday 5-20-2008.
It is a little surprising that the silver LCNS only increased by about 5% while the gold LCNS increased about 21% over the past week. One take-away from that is that apparently COMEX commercial traders were less confident that silver will move lower than they were gold.
With that in mind, when we compare the collective combined net short positioning of the COMEX commercials to the total number of COMEX open silver contracts, the commercials net short position amounted to 49.46% of all open contracts, which is a high level relatively speaking.
Part of the reason for the high percentage is that the total open interest on the COMEX for silver remains near its lowest level of the year. As of May 20 there were “just” 125,838 contracts open on the COMEX. As recently as February 19 there were over 189,000 silver contracts open on that bourse.
To give a sense of just how small that total open interest is, (and how small the silver market is comparatively speaking) all of the silver contracts open on the COMEX on May 20 covered paper commitments for 629,190,000 ounces. Does that sound like a lot? It isn’t really. If we add up the notional value of every one of those 5,000-ounce contracts, it only amounts to about $11.1 billion U.S. dollars worth (as of May 20 with silver then trading at $17.67).
It would take 18 times the entire COMEX silver ballgame, 18 times the notional value of all the open contracts for all delivery months, in order to get close to the market cap of Proctor and Gamble, just one U.S. corporation.
About 154.7 million ounces of silver changed hands daily at the London Bullion Market Association (LBMA) in March. So, the entire open interest for silver on the COMEX in New York represents about 4 days of LBMA action.
Doesn’t that suggest a relative dearth of speculative froth for silver currently? It does to yours truly. At least so far. It also suggests there is a good deal more room for new trades to be opened up near-term. A lot more room.
Silver Market Commentary
Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.
Persistent, continued scarcity of some physical silver metal products such as small silver rounds, U.S. silver eagles, and 10 and 100-ounce silver bars continues to result in very high premiums for those products at prevailing spot prices, especially when silver has been falling in price. That has probably resulted in some of that physical silver demand finding a home in the silver ETF, but it underscores that there really isn’t all that much silver metal available in dealer’s inventories at any given time or at any given silver price point.
Because the popular physical silver market is so comparatively small, has not really rebounded all that much since the brutal 21-year bear market ended just six years ago, and because so many of its dealers are chronically undercapitalized and can’t afford to keep large inventories on hand, it really doesn’t take all that much of an increase in demand today to translate into a temporary shortage for some physical silver products.
The vast majority of the overall inventory of small sized silver products is held in private hands and now that silver has enjoyed a taste of what gold has done price wise, holders of that silver are much less inclined to sell at current price levels than they were just a year ago when today’s prices would have seemed very high. So, about the only thing that will coax more of the popular physical metal out of hiding and into the market is considerably higher silver prices.
The high premiums we have just witnessed for some silver products are probably just a very small hint of what is coming in the silver market. Yes, there has been an increase in popular demand for small sized silver products. Yes, high premiums, delivery delays and wide-spread scarcity for some products at lower silver prices has proven it. But so far that was really just a smallish increase in the popular demand. We are a very long way from the kind of mania-driven silver-buying panic last seen in 1979-1980 when popular demand for silver mushroomed very briefly out of control.
How do we know? Because during this recent scarce-silver-event only some silver products were actually affected for any length of time. (Particularly when silver traded below $17.50 basis spot.) Other popular silver products have remained relatively plentiful (except when silver traded below $16.50) and have continued to trade at reasonable premiums or even at discounts at times. Products such as 1,000-ounce bars and $1,000 face value bags of pre-1965 U.S. 90% silver coins were and are still widely available at reasonable premiums in the U.S.
The fact that a bona fide shortage of ANY silver products occurred has probably interested other new investors to investigate the market a bit more in depth and to start moving some portion of their investment ammunition into the market one way or another. Either by buying some physical silver at the local coin and bullion dealer, or buy taking a new position in SLV with their brokerage account, as examples.
Because of the action, we can certainly say there are more new faces in the silver market than there were this time last year. The odds favor that trend to continue over the next year.
Silver Demand Finds a Home
Over time the demand for silver finds a home one way or another in the small, but pretty efficient global silver market. Over time the supply/demand/liquidity equilibrium will assert itself across all markets that trade the white metal.
Presently there is probably enough silver metal to answer current demand, just not in the form some of the public wants it in. When even dealers are having to pay $0.80 the ounce over spot in order to secure 100-ounce name brand bars for their customers in quantity (as of Saturday, May 24 with spot silver at $18.18) and small rounds and 10-ounce bars are routinely selling for more than $1.00 over, it is just a question of time before some of that high demand for those products ends up being reflected in the paper silver markets.
Here’s why. The paper silver futures markets, such as on the COMEX in New York, trade contracts for the future delivery of much larger average 1,000-ounce bars. Each COMEX contract is a promise to deliver five such bars at a date in the future. Currently, with silver trading at $18.18 on the cash market anyone can buy very similar average 1,000 ounce bars at regional and national bullion dealers at around $0.25 the ounce over the cash market price. Volume buyers can do even better by entering their order for immediate delivery on major trading bourses in the world assuming they have the connections to do so and the facilities to accept and store the bulky metal.
When there are very high premiums on some smaller products but not on the larger ones, isn’t it just a question of time before some enterprising firm buys one and converts it into the other to capitalize on the difference in spread? In other words, isn’t it just a question of time before someone starts taking the large 1,000-ounce bars which are still relatively plentiful and turns them into more profitable 10-ounce and 100-ounce bars which are in hot demand?
At premiums of $1.00 the ounce and higher, that could be a fairly profitable proposition provided the “manufacturer” has the means and the gravitas to gain acceptance in the global market, already has a consistent source or network of buyers and can move relatively quickly. At premiums of “only” $0.50 the ounce it would only be half as interesting, but probably still quite profitable for a while.
Whomever it is that does choose to answer the demand/supply imbalance currently in play for small sized silver, we can just about bet that someone will or is doing so and that represents additional buying pressure for the most abundant and available silver feedstock which is those 1,000-ounce so-called good delivery bars that trade on the major bullion bourses in the world.
Add that new buying pressure to the 1,299 tonnes of 1,000-ounce bars that SLV has pulled out of the global silver market for its investors this year alone (to hold nearly 6,000 tonnes) and we begin to understand that in time the availability of even the most plentiful large hunks of the shiny metal just might get tight if prices don’t increase considerably and soon.
Ed Steer, Chris Powell and the good folks over at GATA harvested an interesting Wall Street Journal piece by Ianthe Jeanne Dugan which talks about the shortage of U.S. silver eagles currently underway. Readers can access the article, entitled “Losing a Mint: Curb on Coin Sales Angers Collectors” on the GATA website here.
If the increased demand continues or accelerates and when those 1,000-ounce heavies begin disappearing at a faster clip they will also enjoy higher on-the-street premiums as will all the other silver investment vehicles until the price rises enough to liberate more of it out of the private-hands inventory stockpile.
Silver remains the cheapest of the precious metals for now, but probably not forever. Got Silver?
Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.
Gold Indexes. Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.
HUI:Gold Ratio. Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.
U.S. Dollar. Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.
That’s it for this offering of the Got Gold Report. Enjoy the Memorial Day holiday. Until next time, scheduled two weeks from now, 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 and holds various long positions in mining and exploration companies.
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