Hi Donger, Fwiw, the COMEX Gold (futures only) open interest gained 26K (25,974) in the first two days of the 'new' reporting period, leaving it 20K under the 371K all time high set on 10-17-05.
HOUSTON (ResourceInvestor.com) -- Increasing global investment demand for gold was evident in a strong way this past week. A little more of the world’s wealth found its way into the relatively small market for gold as the Great Gold Bull roared forward. “Big Wednesday” confirmed the bulls and slapped the bears in what might be just a sample of what might lie ahead.
Outlook Snapshot: November 19, 2005 (Neutral, positive technical bias but near resistance)
The very high LCNS would preclude any outright bullish forecast and while the technical picture is long term bullish with short term strong momentum, the surge forward was steep and some backing and filling would not be at all surprising. It is not unusual for breakouts to soon retest the breakpoint from above. If gold does pause to catch its breath, the indicators this report follows suggest that dip buying demand would likely keep a floor under the market not all that far below. As of 11/19 it would take a move below roughly $469 to change that view.
Please see largely expanded commentary and outlook below.
This Week’s Observations: Friday, 11-18-05
COT Changes. As of the Tuesday 11/15 cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) had increased their combined net short positions (LCNS) for the week by an insignificant 3,863 contracts to total 154,279 contracts net short while gold metal gained $6.87 Tuesday to Tuesday ($468.37). However, this data is from one day before what I am calling “Big Wednesday,” the beginning of a dual breakout move for the metal. Total COMEX gold open interest checked it’s four-week decline, adding 7,643 lots to 324,719 open contracts.
The LCNS peaked October 11 at a record 212,714 contracts net short and probably last week’s 150,416 marked a short-term turning low for this indicator. Since Tuesday, gold powered much higher which virtually assures that the next COT will contain a significant rise in LCNS and open interest.
Should gold hold onto this week’s gains until the Tuesday COT cutoff we will get a better idea of how the largest traders in Gold were positioning as the metal bolted higher. Too bad we are still, in 2005, unable to view the commitments of traders data in real time.
Gold Charts. Last week’s report written Monday, 11/14, said: “The daily chart shows a bullish aborted break of the $460 support, possibly negating what looked to be a bearish shallow head and shoulders pattern developing. Spot gold reclaimed chart real estate above the upper line of the previous uptrend channel and the 50-day moving average after briefly testing the 2004 high of $456.87 from above. That’s bullish action and likely confounding to gold bears that may have relied a bit too heavily on the U.S. dollar’s strength. The gold market isn’t just about currency moves any longer.”
Two days later, Wednesday, gold caught a major league bid as a number of gold-positive events and news items surfaced.
“Big Wednesday”
Reports Wednesday that Russia may double their 500 tonnes of gold reserves added gasoline to the fire. South Africa was mentioned in the same light elsewhere. Those announcements offset news that the Bank of France plans to sell gold. Rising oil prices and new bird flu cases were also cited in a Bloomberg report and in other reports. Several reports cited technical reasons and “aggressive short covering” once the spot gold price moved above a down-trend line that was attempting to form on the daily charts. Alison Guerriere Ciaccio, of Dow Jones Newswires credited a report by metal refiner Johnson Matthey on the 2005 platinum and palladium markets as a catalyst. A report released by Gold Fields Mineral Services and the World Gold Council noted, among other things, a large rise in gold consumption and investment demand.
What those and many other reports reveal is a global increase in liquidity flowing into gold metal, no matter the currency. Liquidity is simply the amount of global wealth chasing a relatively finite amount of gold at a particular time. I believe gold is giving us just a sample of what could lie ahead. While still tiny, the percentage of the world’s wealth held in the various fiat currencies migrating to the only real money on the planet, gold, is growing. The second phase of the Great Gold Bull, the phase dominated by increasing demand as opposed to currency moves is taking another stride.
Last week’s report also said: “Technically minded bears will note that a down-trending channel will have formed if gold fails to take out about $472 in the coming days. Should gold manage to thrust above that mark and stick it, some buy stops likely already reside just above.”
Sure enough, early Wednesday morning heavy gold buying in Asia pushed the metal sharply higher and that momentum carried into the European and U.S. markets. Gold powered through the roughly $472 area which marked the top of the down-trending channel that was trying to form. Buy stops and momentum plays turned the day into a bear shoot.
Shares of mining companies, many of whom had accumulated larger than normal short interests, (largely following the strength of the U.S. dollar?), shot higher. The AMEX Gold Bugs index rocketed over 15 short-covering fueled points in just one session, but then paused at the obvious implied 248-250 resistance zone. More about the HUI below.
So, spot gold cleared the potential down-trending channel and got into buy stops on Big Wednesday. Momentum on Thursday carried the metal above the October high of $480.42 and for the week gained an impressive $17.05 or 3.6% closing Friday at $485.80.
On the weekly chart, spot gold is within a frog’s hair of testing an implied linear resistance line formed by the December 2003 and November 2004 peaks. Due to the big jump, gold is once again approaching a short-term overbought condition as it heads into that resistance.
Volumes on the COMEX for the near-active December gold contract Wednesday and Thursday were quite high. Traders have already begun rolling into the February contract and volume for the combined issues topped 100,000 lots both days.
Gold ETF. Since last Friday (11/11) streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD] adding a whopping 9.91 tonnes of new metal, a one-week increase of 4.7%, and a brand new high for the fund of 221.23 tonnes. As gold broke out, demand for GLD increased strongly. (3.72 tonnes of the increase was reported in the last report. See streetTRACKS Gold Trust).
Euro Gold. Euro gold leapt higher closing up another €13.01 for the week at €412.18 (11/18) on the cash market. The important psychological €400 level gave way after a “warning shot” last week. While the euro and the U.S. dollar more or less played to a draw for the week, they both once again lost ground to gold.
The signs of increasing global investment demand for gold continue to show, as expected. (See the dollar, euro and gold performance comparison chart).
U.S. Dollar. As of the Tuesday COT cutoff, the LCs added another 968 contracts to their combined net short position to a staggering 30,712 contracts net short while the index itself gained 57 basis points from 91.44 to 92.01. (See US dollar index graph). Another record net short position for the large commercial traders. As of last Tuesday the LCs were still very strongly positioning for a weaker U.S. dollar.
Looking a more long-term chart for the greenback, an obvious minor congestion area resides in the 92-93 range, and sure enough the index is attempting a pause, but should the dollar index regain the area just above 93 it could be a quick trip to the 97 region. Rumblings and rumors Thursday among NYBOT members which hinted that an EU interest rate hike is being seriously discussed may have encouraged dollar bears to accept even more contracts on the short side Friday. We’ll see in the next COT report which cuts off Tuesday and will be released next Monday following the U.S. Thanksgiving holiday.
With the LCs holding a record net short position, which is the same as saying they hold the other side of record speculative long positions, this particular market is set up for fireworks one way or the other.
Gold Indexes. The AMEX Gold Bugs index, which many use as a proxy for un-hedged gold mining shares, answered the gold advance Wednesday-Thursday in a big way. But as gold metal hit new highs the HUI balked at challenging the 248-250 resistance zone. In other words, as gold zoomed up to new highs the shares of the fifteen companies listed in this index just made it to collective resistance.
Despite the big jump for the HUI index this week, overall the HUI has not really confirmed the latest move in the metal when compared to the two previous major peaks. Now seemed to be a good time to look into why.
At Friday’s close of 245.01 the HUI is just below the November, 2004 high of 248.18 when gold peaked at $456.87, nearly $29 the ounce lower. Then, the U.S. dollar index was nearing the end of a 3-year decline. The overheated December 2003 high for the HUI of 258.06 came when gold peaked at $431.50 ($54 lower) while the dollar was in a steep decline, but well above where it is today.
The Gold/HUI Spread (spot gold minus the HUI index) registered 208.69 at the 2004 peaks and an overly excited 173.44 at the 2003 highs. Friday, the spread came in at 240.79 suggesting that gold mining company share investors remain skeptical or cautious in this rally for gold. Another way to put it is the spread indicates that the metal is overpriced or the shares under-priced in a (probably temporary) disconnect.
The U.S. dollar has been trending up since the first of the year and that probably accounts for some of the divide between the shares represented in the HUI and the gold price. Perhaps the strength in the dollar and the long-time habit of traders to expect weakness from gold on dollar advances has weighed on the indexes up to now.
Gold mining shares have built up large short positions lately as the metal looked to be starting a down-trending channel. In 2005 just about all costs for miners have escalated harshly and U.S. dollar has been strong. Since the Great Gold Bull began in 2001, the largest traders habitually sold gold and gold shares on dollar strength, especially on dollar breakouts and until recently that was an effective strategy. However, this gold rally is not as much a function of currency moves as before. It is much more about global demand and liquidity now.
Other gold indexes, such as the XAU and the GOX, ARE attempting breakouts along with gold, but they have also lagged the metal in 2005 relatively speaking.
Perhaps the only reason that the HUI is not also attempting a breakout is because of the poor performance of two companies on that index. Golden Star Resources and Hecla Mining, both of which have been under pressure in 2005 and both are not in the other two indexes. Both companies are likely to regain their footing at some point, possibly soon, and that might reduce the disparity between the indexes.
Gold may have to hold its gains just a bit longer or advance for the HUI and the other gold indexes to get the “gold religion” again. If gold does hold/advance, and the gold share indexes advance above resistance convincingly, gold mining shares could pop much higher as large short positions are unwound.
HUI:Gold Ratio: The HUI:Gold Ratio edged slightly higher for the week, but not much. What that signals is that gold shares on the HUI did keep pace with the quick jump in gold, but didn’t get ahead of it.
Entries in the Weekly Books
On the bullish side of the ledger, as of last Tuesday the LCNS for gold rose, but not all that much on a moderate increase for the metal. GLD reported purchasing a whopping 9.91 tonnes of gold, a demand spike. Euro gold smashed the €400 level with gusto. A dual technical breakout for gold metal is underway with a corresponding check up in momentum. Gold shares once again tracked the increase in gold more or less (as opposed to selling the rally). Gold continues to advance in all important fiat currencies. A number of gold-positive reports were released this week from respected sources. Some central banks announced they will likely be adding to gold reserves.
On the bearish side the large commercials remain very strongly net short the metal and the potential for another sudden long liquidation selloff will remain in place until the LCNS is substantially reduced. The US dollar index has been on a roll and despite a record LCNS may be attempting a breakout above an implied long-term resistance zone of roughly 92-93. Technically speaking, gold is approaching implied resistance on two fronts, the long-term linear up-trend line and historic $490 resistance. It is also once again near to being overbought. For whatever reason, so far in 2005 gold mining shares have not yet confirmed the rally for gold.
Commentary and Outlook: (Neutral, positive technical bias but near resistance)
Increasing global investment demand for gold was evident in a strong way this past week. A little more of the world’s wealth found its way into the relatively small market for gold as the Great Gold Bull roared forward. “Big Wednesday” confirmed the bulls and slapped the bears in what might be just a sample of what might lie ahead.
Last week’s report concluded in part: “The strength of gold is confounding to some traders who have come to rely heavily on currency moves, especially those of the U.S. dollar. While currency still plays a big part in the overall play, it is no longer the sure-bet it once was. Gold demand, for investment, for a safe haven, and as a kind of “anti-fiat-currency” has taken on a more global nature. Gold has broken out in most global fiat currencies.”
For absolute confirmation of the very powerful increase in global investment demand look no further than the euro gold price and the nearly 10 tonnes of gold bars added to streetTRACKS Gold Shares Trust in just one week. This, while the U.S. dollar was bucking resistance.
The very high LCNS would preclude any outright bullish forecast and while the technical picture is long term bullish with short term strong momentum, the surge forward was steep and some backing and filling would not be at all surprising. It is not unusual for breakouts to soon retest the breakpoint from above. If gold does pause to catch its breath, the indicators this report follows suggest that dip buying demand would likely keep a floor under the market not all that far below. As of 11/19 it would take a move below roughly $469 to change that view.
High volatility and wide-ranging days remain very possible short term. Careful stop management remains a must.
Scheduling note: The next COT Gold Report should be the Tuesday after Thanksgiving. May everyone have a safe and happy holiday, with lots of good food and fellowship with the ones they love.
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