Traders Cooperative

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Got Gold Report - Gold, Silver Bears Nervous

By Gene Arensberg
28 Oct 2007 at 03:00 PM

HOUSTON (ResourceInvestor.com) -- A short covering surge took gold on a $16 Friday (10/26) hop to the $780s confounding bloodied and increasingly nervous underwater gold bears who were no doubt expecting help in the form of either official intervention in the foreign exchange markets or in the gold market itself, or both. Evidently they got neither, because if there was official intervention or attempted manipulation it just plain wasn’t enough to overcome escalating demand for both of the most popular precious metals, gold and silver.

Gold and silver bears usually have help sooner or later when the price of the metals looks like it might run a bit too far too fast. This report chooses to view government intervention as one more source of supply, one more market force, albeit a diminishing one as more and more global investors join the ranks of the unofficial gold ownership alliance. Whether or not one believes in government sponsored manipulation of the gold market, Chris Powell’s remarks at the New Orleans Investment Conference on Sunday, October 21, are certainly worth a look. Powell is the Secretary/Treasurer of the Gold Anti-Trust Action Committee Inc. (GATA).

“Gold has been manipulated by central banks because it is a currency that competes with their currencies, a currency whose price helps set the price of government currencies and helps determine interest rates,” Powel said after listing compelling supporting evidence.

Powell went on to say why GATA believes that governments and central banks seek to suppress or control the price of the metal.

“More than that, gold is the ticket out of the central bank system, the escape from coercive central bank and government power. As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply.”

In a sense central bankers have to view gold as the proverbial canary in the mineshaft. When gold gets too high too fast their currency confidence canary is getting sick and listless and they know they need to pump oxygen in for the current fiat currency system to keep breathing. (So as not to undermine confidence in the world’s under-backed paper currencies).

Because of the continued dilution of paper currencies worldwide and growing concern that governments will continue to competitively weaken their own mediums of exchange, over time it takes more and more “oxygen” (more and more intervention) in order to achieve results so they have to now be content with attempting to control the pace of gold revaluation. It’s obvious that gold is undervalued as measured in today’s paper, the central bankers just don’t want the price of gold to move so fast that it gets noticed in the mainstream press. They would much prefer to see the revaluation proceed in an orderly fashion.

We should expect that “official sector action” will continue to show up from time to time in the gold market. We just can’t know in advance when. But if current, escalating trends continue along the same path they are on today (increasing global investment/safe haven interest in gold versus decreasing official sector ability to maintain stable gold price escalation) we are nearing the point where the global currency confidence mine managers just won’t have enough “oxygen” to keep everyone in the currency mineshaft from noticing that the canary is lying prone, feet upward and not breathing.

In this report, we note that COMEX commercial traders remain net short in near record proportions, but actually reduced their net short positioning as of Tuesday 10/23 when gold was trading near $760. Gold is $25 higher now, and it’s looking more and more like November of 2005, isn’t it? (Details below in the COT Changes section).

Despite reportedly robust physical metal demand for both gold and silver locally and regionally only modest positive money flow showed up for gold ETFs and liquidity-driven money flow has been flat for the silver ETF all month. Yet silver prices attempted a hint of a secondary breakout toward the end of the week. (Read more in the Gold ETF and Silver ETF sections below).

Mining shares continue to struggle to keep pace with gold relatively speaking which is worrisome very short term, but they haven’t shown a telltale big-money exodus spike lower either. So if they are not exactly signaling supreme confidence they also aren’t signaling the opposite, at least not yet. All that within the context of new all time lows for the U.S. dollar index diligent readers will find more about below.

Bottom line for this report is that we have to keep short term caution flags flying because of the near all-time record net short position held today by the largest and most influential futures traders on the planet and by the increasing risk of official sector intervention most any time. However, just as we noted in the last report two weeks ago: “… momentum has shifted in favor of the gold and silver bulls short term as breakouts for both the metals and mining shares are trying to confirm and if those betting on the short side don’t get a break soon, they’ll be adding to the fuel to power both gold and silver much higher in the coming weeks as they are forced to cover those downside bets.

Should the dollar rally strongly (it might) and should gold and silver stage a more meaningful pullback it is this report’s intention to continue to add into significant to strong dips, but always with reasonable new-trade trailing stops for protection. As each week passes we get closer to the inevitable groundswell flood of global investor wealth into precious metals as more and more of the world’s major players tire of consistently devalued paper currencies, opting instead for the only real money there is. Got gold?”

On to some of the indicators.

COT Changes. In the Tuesday 10/23 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) DECREASED 16,327 contracts or 7% from a record 239,096 TO 222,769 contracts net short Tuesday to Tuesday while gold metal was NEAR FLAT, just $1.28 or 0.2% lower from $760.64 to $759.36 on the cash market.

Still no telltale very large jump higher in LCNS. To the contrary. However, since Tuesday gold popped $26.04 higher for a near high-close last trade Friday 10/26 of $785.40 on the cash market. For the week gold turned in a net $20.07 gain as measured in still weakening U.S. dollars. For comparison, the yellow metal also turned in a weekly up tick of €10.38 as measured in euro, but it took a Friday €11.45 move up to get there.

Over the past week total COMEX gold open interest added 5,599 to 489,471 total open contracts, which is yet another record total open interest on a COT reporting Tuesday, having added nearly 25,000 contracts the week prior.

One interesting aspect is that as the total number of open contracts increased by over 30,000 contracts over the past two reporting weeks the number of reported net short positions held by traders classed by the CFTC as commercial actually declined by 16,327 or a little more than half. So as Gold was still around $760 the commercials were lightening their short positioning a little.

Long term December 2008 and beyond COMEX forwards added a noteworthy 10,812 contracts to 74,713 lots open, but with the increase in the total open interest, that is still only about 15.26% of open contracts. Nothing exceptional about that and still no telltale large spike higher in long forwards. (Note the change to December for the back month.)

Because of the still extremely high LCNS, this indicator has to stay on the bearish side of the gold market indicator ledger short term. It is interesting to note, however, that at least as of Tuesday’s COT cutoff COMEX commercials were not yet willing to pile on the gold short side with gold near $760 (about $25 lower than Friday’s close).

]i\Gold versus the commercial net short positions as of the Tuesday COT cutoff:


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