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Got Gold Report - Gold, Silver ‘Bubbles’ Pricked? Rubbish
By Gene Arensberg
06 Apr 2008 at 05:42 PM GMT-04:00
http://www.resourceinvestor.com/pebble.asp?relid=41689
ATLANTA (ResourceInvestor.com) -- This offering of the Got Gold Report focuses on the notion that very large institutional interests are now rotating out of precious metals and into other assets once again. The idea that the gold and silver markets have been in a “bubble” and that an exodus of capital away from precious metals will now decimate metals prices.

We’ve seen that same argument become popular several times since the Great Gold Bull began in 2001-2002, haven’t we? Didn’t we hear it when gold first managed to eclipse the $425 level late in 2003? Remember those very same gold-bull-is-over calls when gold touched $730 in May of 2006? Then again at $750, at $800, at $900 and now this one with gold having just tested $1,000 for the first time.




Quite a few analysts, commentators and market watchers are, once again, of the opinion that a bubble of sorts has just been pricked in precious metals and it sometimes seems all of these metals-bearish experts somehow find their way onto televised financial media. To hear them tell it, actions by the FED and the U.S. congress have been the pin that just got stuck into the over-inflated balloon of precious metals and commodities. Really?

Experts “Schmecksperts”

I believe it was Mark Twain who said, “Few things are more irritating than when someone who is wrong is also very effective in making his point.” What if these expert analysts are invited on the business TV programs not because they are good at what they do, but instead are very good at how they say it? (Or worse, because they are good looking.)

Citing evidence such as high volume in mining stocks without meaningful advance of mining stock indexes (distribution by “smart money” to “dumb money” said one such commentator), rapidly falling prices for gold and silver, now rising Big Market indexes and other, similar indications, these otherwise respected and closely followed pundits are heralding a coming “crash” in metals prices as they presume that vast amounts of wealth which “chased the metals craze” is about to be “crushed” in a “flood of liquidity back out of commodities and into equities.”

Metals craze? Rubbish!

Let’s skip straight to the conclusion which is that the indicators this report follows closely just can’t confirm that bubble-pricked theory. Not yet anyway. Besides, if gold and silver were in a true bubble just about everyone would own some or have exposure to the sector in their 401Ks and IRAs. That is certainly not the case today. If we were in a true bubble for precious metals there would be a great deal more popular excitement about them than there is today and it’s pretty safe to say that if we were in a true bubble many of those same analysts, the “schmecksperts” that are now confidently and self-assuredly calling a top in gold would be advising people to buy, buy, buy!

COMEX Commercials Reduce Net Short Position

Resource investors who are diligent readers will learn in this report that over the past six reporting weeks the largest of the largest traders of gold futures have reduced their net short positioning by 23.61%, enough contracts to cover about 186 tonnes of gold metal. Clearly those bullion bank and hedge-trading veterans aren’t aggressively positioning for strongly lower gold prices. To the contrary. Yes, they remain considerably net short gold, but a lot less net short than they were just after Valentine’s Day. They may not have reduced their net short positions as much as we might have expected over the past week, but there are probably good reasons for that. Read more about that in the COT Changes section just below.

Demand for Silver Robust

Despite the current sharp sell-down for silver prices in the paper silver markets underway since the last Got Gold Report, we still see significant positive money flow (more wealth entering than exiting) in the U.S. silver ETF. Persistent reports of a widespread and growing shortage of physical silver continue to surface indicating very strong and growing popular on-the-street demand for the white metal in the U.S.

If institutional investors are “exiting the metals in droves” as some analysts would have us believe, then why isn’t there negative money flow in the silver ETF and why are there actual physical shortages of silver metal out there right now? Read more about that in the Silver ETF section below.

Mining Shares Argument

Finally, regarding the most compelling argument the gold-bubble-is-popped market watchers point to, which is that volume has been extra high for gold mining companies but without meaningful advances in the mining shares indexes as gold tested the $1,000 level and silver tested $21. That’s actually an accurate assessment relative to gold metal compared to past leverage and the miner’s inability to leverage gold gains would ordinarily be worrisome all else being “normal.”

However, the markets since last July have been anything but “normal.” One only has to look at the relationship between mining shares and the Big Markets to quickly understand why volumes have been so high relatively speaking for mining shares. Compared to the Big Markets the miners have been a great place to be. (See performance comparison chart.)

When investors go looking for liquidity, when they have to have cash aren’t they more likely to go looking for it where they have a profit? Can’t we argue that since the big miners did so well compared to the rest of the Big Markets that’s a sign that Big Money has stayed with them?

Bottom Line

The bottom line for this report is that despite the popular calls for a wholesale and massive exodus of capital from precious metals, the indicators this report follows closely for both gold and silver just do not support those ideas very well. Although it is entirely possible that our read is dead wrong, this report continues to believe that the current pullback in precious metals is just that, a good pullback. To know more as to why we take that position, please read on.

Significant to strong dips in both gold and silver bullion are for buying now and for the foreseeable future in this report’s opinion. (Especially silver, and please see expanded commentary about silver below in the Silver ETF and Silver COT sections.) As always that is provided short-term traders using indexes and ETFs for trading vehicles instead of taking delivery of actual metal are disciplined in the use and management of reasonable trailing stops for protection.

COT Changes. In the Tuesday 4/1 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) fell a smaller than expected 13,057 contracts or -6.33% from 206,125 to 193,068 contracts net short Tuesday to Tuesday as gold plummeted $56.24 or 5.99% from $938.74 to $882.50. ($34.45 of the drop occurred on COT reporting Tuesday itself, so once again we are probably not seeing the whole story on LCNS reduction.) Since Tuesday gold managed to claw its way back on up above the $900 level for a Friday last trade of $913.78 on the cash market.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest fell by a huge 52,800, to 399,393 contracts open. That’s the lowest total open interest on the COMEX since September of 2007 when gold was just gaining its legs above the $730 previous resistance.

Long-term April 2009 and beyond COMEX forwards added a large 4,614 contracts, but still only show 54,731 lots open, or a still low 13.7% of total open contracts. If we don’t include April 2009 (which drops off as the back month in the next report) then long forwards would only be 46,381 lots open or a very low 11.6%. Given the harsh pullback for gold the increase in long-term forwards is actually not as large as we would expect. Those looking for a telltale bearish big jump higher in long-term forwards are still looking for it in other words.

More to Come?

Although the reduction of the collective commercial net short positioning (LCNS) is quite a bit less than one would expect where the gold price on COT reporting Tuesday was fully $56 less than the prior Tuesday, it is really not uncommon for that to occur when the largest move lower of the reporting week occurs on COT reporting cutoff day. In fact, $34.45 of the $56 move lower occurred on COT reporting Tuesday and there were really no obvious or determined attempts at rallies that Tuesday and thus not really all that much incentive for short interests to close their positions or for newly minted “short-term-momentum-shorts” to cash in.

If true, then we should be able to see a considerable amount of commercial repositioning in the next COT report even if gold remains flat or increases in price, similar to what occurred in mid-November of last year when gold fell $22.48 in the COT reporting week ending November 13 with gold then $802.52, but the LCNS (only) declined 13,592 contracts that week. The following two reporting weeks saw the LCNS decline another 21,000 contracts as gold actually INCREASED about ten bucks.

COMEX Commercials Reducing Net Short Positions

Interestingly, (and some would say bullishly) the LCNS peaked February 19 at a record 252,740 COMEX 100-ounce contracts net short with gold then at $927.92. As of Tuesday, 4/1 (six reporting weeks later) gold had declined a net $45.42 or 4.89% to $882.50 while the collective combined commercial net short positioning (LCNS) had declined a whopping 59,672 or 23.61%. Clearly there has been a significant reduction in short positioning by the very large, well funded traders classed by the Commodities Futures Trading Commission as “commercial” on what amounts to a fairly small net move lower for gold metal.

If we ignore for the moment that gold zoomed up to test over $1,000 the ounce on a multitude of frightening financial concerns (an unsustainable event-driven move higher) and if we strip out that added upside pressure at some point we end up with where demand for gold metal is consistent with all the other strongly bullish fundamentals driving this Great Gold Bull. The market is currently in the process of discovery on just that in this report’s opinion. Notice, however, that while that discovery process is underway we are witnessing a big move lower (repeat lower) in COMEX commercial net short positioning.

For some color on just how much of a move we are talking about, as of Tuesday, 4/1, the LCs were about 186 tonnes of gold less net short (in paper gold contracts) than they were on February 19. They went from being net short 786.11 to 600.51 tonnes of paper gold futures. As measured in notional value, as of Tuesday they were about $5 billion dollars less net short than in February.

Rhetorical question: If a gold bubble has just been popped, why are the largest gold futures short sellers in such a hurry to “get small.” (Translation: Why, when gold has only sold off 4.89% since the LCNS peaked February 19 have the commercials dumped 23.61% of their collective net short positioning?) Rhetorical question answer: Is it because they got so upside down by taking the short side they are getting out (covering) now, while gold is in a pullback, while the getting is good?

And, what is it they see on the horizon that has them so scared? (They were reducing their net short positioning even when gold was going higher!)

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



Source for data CFTC for COT, cash market for gold.

As the total open interest dropped so fast, how did the LC’s net short position change compared to the total open interest? The answer is that for the past week the LCNS percentage to total open actually increased a little. That’s likely a combination of large long liquidation and profit taking which resulted in the big drop in total COMEX open interest. This report suspects that we will see a significant reduction in the commercial net short percentage to open in the next COT report.



Source for data CFTC for COT, cash market for gold.

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], remained unchanged at 642.04 tonnes. As of Friday’s figures that’s equal to $18.7 billion U.S. dollars worth of gold bars held by a custodian in London for the trust. That follows an addition of 4.91 tonnes the week prior.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, rose by a tiny 0.16 to 115.87 tonnes of gold held (as of Friday). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings showed a maintenance reduction of 0.02 to 64.04 tonnes of gold held for its investors.

For the week ending Friday, 4/4, all of the gold ETFs sponsored by the World Gold Council showed a collective increase of 0.23 tonnes to their gold holdings to 807.49 tonnes worth $23.5 billion.

We should note that as gold metal sold down over $100 the ounce there really hasn’t been all that much in the way of negative money flow (more wealth leaving an issue or a sector than entering) for the world’s gold metal ETFs. Take GLD for example. If there had been a major exodus of capital from GLD without corresponding and offsetting dip-buying we should have seen a much larger reduction in GLD gold holdings than has surfaced thus far. (See the graph below.)

Where’s the Exodus in ETFs?

If overwhelming selling pressure, such as one would expect if very large, institutional and pension funds all hit the exits on gold via the gold ETFs at once had occurred, then the authorized market participants for GLD would have no choice but to reduce the trading float of GLD (and redeem a corresponding amount of gold) in a much bigger way than just happened. Otherwise the sales price of each share of the trading vehicle would drop much faster than its net asset (gold bullion) value per share.

While there has been some negative money flow over the past few weeks, it is this report’s read that the relatively small quantities involved (just a reduction of 21.79 tonnes since March 18 or 3.3% versus a peak to trough drop of $157 or 15.2% for gold metal) are much more consistent with a hot-money fund get-out than a bona fide wholesale shift away from gold by large institutions. For now this action suggests that the very largest investors in gold metal ETFs are not heading for the exits as some commentators in the financial media suspected and reported.

How about another comparison? As the COMEX commercials reduced their collective net short gold futures positions by 23.61% since February 19 when gold was in the $920s the amount of gold metal held by the custodian for GLD has shown a net increase from 631.15 to 642.04 tonnes over the same period. So the biggest hedgers and short sellers have been reducing their exposure while demand for GLD increased. Does that sound consistent with an exodus of capital from precious metals? Nope.

That doesn’t mean that there couldn’t be just such a major exodus of capital out of gold ETFs tomorrow, next week or next month, it just means that so far it isn’t showing. It also means that significant numbers of investors are buying the dips so far.



Source for data streetTRACKS Gold Trust.

Silver ETF: In contrast to gold ETFs, metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, showed a significant increase of 151.35 to 5,730.30 tonnes of silver metal held for its investors over the past week.

On a calendar week basis, silver booked a net $0.14 fall on the cash market with a Friday last trade of $17.75.

Isn’t it fascinating that as silver reached its most recent apex above $21 and then sold down to as low as the $16.60s that we have yet to see ANY negative money flow from the largest silver ETF? Friends, we’re seeing the opposite.

Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and market commentary on the graphs themselves.



Source for data Barclay’s iShares Silver Trust. As of Thursday, 4/3.

Regional Shortage of Small Silver Continues, Goes National

There is a good reason we have not seen negative money flow from the silver ETF and that is because, as any coin and bullion shop dealer can tell you, popular interest in owing silver has been strongly rising and very large interests probably sense that we are nearing the point where that popular interest could have an exponential affect on silver prices.

Indeed, reports of a physical silver shortage in the U.S., especially for small denomination rounds (such as prospectors and U.S. silver eagles), 10-ounce and 100-ounce bars as well as other silver products have become widespread over the past two months leading to the popular notion that demand for physical silver is nearing first stage critical mass.

“About $19 is where we start to see more silver product coming in the door right now,” said a very busy Sonny Toupard, who runs Royal Coin, a 35-year rare coin and bullion firm in Houston. By that he means that when silver is under $19 the supply from customers selling their silver to Royal slows to a trickle.

“Deliverables are hard to find at these prices. We’re paying over spot to get product, if we can get it,” Toupard said Wednesday 4/2 with silver then in the $17.30s. “The current lack of supply is not reflected by the spot price,” he added.

The silver shortage situation has been enhanced because so many dealers, both online and large regional’s, had been in the habit of making their own market spreads and booking sales with the idea of filling those orders with OPP (other people’s product). It is a very common industry practice in the small, but highly efficient silver dealer network. Apparently so-called “drop-ship-selling” was not much of a problem with silver in the $20 range, but once the price fell sharply to $16 and change supplies literally disappeared forcing otherwise well connected dealers to scramble to find the metal they had already sold.

Now that prices have fallen, which has usually been answered by a rush of private sellers in the past (but not this time), dealers are being overrun with new orders by bargain hunters. Orders the dealers simply cannot fill without charging extremely high premiums, if they can get silver at all to fill them.

Toupard works closely with large regional bullion dealers that are so keen to find silver eagles to fill orders they are becoming desperate. He reports that one such large dealer is so short of already sold U.S. silver eagles that dealer is begging him to cold call old customers in order to get them to come in to sell product, even if it means having to pay large premiums for large quantities. (For example, a large premium would be something like $2.00 over spot for each 1-ounce silver eagle.)

The silver market is vastly different than the gold market. Because so much of available silver is held in private hoards there is likely plenty of physical silver out there to answer the current demand for it, just not at the current, recently reduced price levels. The recent spike in demand has depleted the chronically under-capitalized silver market dealer’s limited inventory stocks for many silver products and the lower prices just won’t liberate enough silver from enough private hands to satisfy the strongly increasing demand.

A Warning Shot

Some of the demand is laid off in the silver ETF and in other physical silver products, such as old 90% silver U.S. coins in cloth bags (which still appear relatively plentiful, but have higher premiums now), some foreign silver coins (such as Mexican Libertads and Canadian Maples), and even in sterling scrap and silverware items. But, if the current surge in demand were to continue or even accelerate (very possible), then the still very tiny silver market could explode higher and silver prices could undergo legendary advances not seen since 1979-1980.

Private sellers (the largest source of small size silver inventory after the U.S. mint) would be less inclined to sell the more popular the idea becomes that there is a silver shortage and buyers would become more aggressive if they thought that a modern popular run on silver has begun. This report believes the current silver shortage is a warning shot that a popular run on silver is probably not that far off now. Any really strong dips should be eagerly bought by the growing silver faithful and that should keep a rising floor under silver for some time to come.

Like other actively traded commodities, the paper silver futures markets can and often do operate in their own price world for limited periods of time as the heat of battle rages on high. Profit taking, leading to larger scale selling, leading to panic selling opens up opportunities for bargain hunting, leading to position taking, leading to panic buying and so on. While the very volatile paper markets are getting out of kilter both ways physical metal dealers watch premiums for physical silver making instant adjustments (from higher premiums to discounts) which also offer opportunity for the nimble. Sooner or later, however, the prices for silver on the street migrate their way up the very efficient market chain and end up being reflected across all markets as the global silver supply/demand/liquidity equilibrium constantly asserts itself over and over again.

Unlike gold, there are few very large concentrated pools of silver metal to borrow from in times of strongly increasing demand. Make no mistake, there are large quantities of silver metal out there (in private hands). Much larger quantities than many analysts factored in their calculations just a few years ago, but about the only thing that will bring that silver out of hiding and into available inventory is higher prices. Especially now, when there is a legitimate whiff of a popular silver run in the air for the first time since 1980.

Silver COT: As silver plunged $1.17 or -6.5% COT reporting Tuesday to Tuesday (from $17.96 to $16.79 on the cash market) the large commercial COMEX silver traders (LCs) reduced their collective net short positioning (LCNS) by a miniscule 829 (-1.4%) to 58,292 contracts of net short exposure. That was as the total open interest on the COMEX fell 3,560 (-2.4%) to 145,358 COMEX 5,000-ounce contracts.

While surprising that the LCNS didn’t drop even more than it did, we have to remember that the cutoff for the COT report occurs on Tuesday and on Tuesday, 4/1, the paper silver market was in the third consecutive trading day of full plunge mode. On the cash market silver traded as low as $16.34 the ounce on COT reporting Tuesday having traded as high as $18.19 just the day before on Monday, and having traded as high as $18.54 on Friday, 3/28. That Tuesday was also the fourth consecutive day of lower lows for the white metal.

Until Wednesday, 4/2, there really wasn’t much rally action (no higher highs) and so there was little incentive for short sellers to close their positions. If that read is correct, then we ought to see the LCNS drop by a considerable amount in the next COT report provided cash market silver stays somewhere near its Friday close of $17.75 or drifts lower. (Which it probably won’t.)



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 4-1-2008.

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.

Closing comments. Repeating from the last report: “For those who have the long-term resources to deploy in their favorite promising junior miners and explorers, just about any strong pullback in the metals ought to present outstanding long-term opportunity for well placed stink bids near-term.” Adding to that, any further significant dips in silver should be bought also if one can actually find and take delivery of the metal.

That’s it for this offering of the Got Gold Report. Until next time, scheduled for two weeks hence, as always, MIND YOUR STOPS.

The Great Gold Bull has a long way to go. It just won’t go straight up. Got gold? Got silver? Got spec mining shares?