That is a very interesting question, and I suspect that a recent client made me think about it more clearly. First of all, the ratios indicate that the current ratio of 58 to 1, will eventually be restored to the historic one of 16 to 1. I see no reason why that should not happen. The ratio has been as high as 77 to 1.This, on the surface, indicates that silver should be a better buy now. Correct? Maybe, but not for certain. Here's why.
When you buy silver, say at $10.00 per ounce, and perhaps 10 oz bars, which are my favorite at $10.50 per ounce, or $105 each. I add a 1.5% commission and shipping on to that of $1.58, making that ten ounce bar in your hot little hands for $106.58, in lots of at least ten. Now here's the catch. The "spread" on silver is much higher than for gold. The spread on silver is about 50 cents per ounce, whereas the spread on Krugerrands or Gold Eagles is about $7 per ounce. Let's analyze those figures, but first let's define "spread."
SPREAD
The "spread" is the difference between what you buy it for, and what you can sell if for, just like the stock market. Call your stock broker and ask about GM, and he might say "GM is $19 at $21." This means that if you want o buy GM, it will cost you $21 a share, plus the broker's commission. If you are selling GM, you will get $19, less broker's commission. The spread varies, depending on the stock. I don't charge a commission if you bought the silver or gold from me, but the shipping is on you. With silver, the shipping costs may be a dime an ounce and gold a dollar an ounce. Why is there a spread anyway? It is to protect the buyer. Suppose you bought GM at $19, and the market went down. The spread protects the buyer from market losses. It's just that simple. Why does silver have such a high spread? I do not know, but it might be because it requires so much storage space and shipping costs at all levels of the transaction. The mine has heavy shipping costs, as does the mill, smelter, wholesaler and broker. The storage costs are equally high for all. I think this is the reason, but it has always been that way, and I can't change it.
So the investor buys gold Krugerrands, at say $7 over spot, which we will say is $575, plus 1.5% commission and shipping. Got it so far? This means he has a Krugerrand in his hands for $582, plus 1.5% of $8.73, or $590.73. Counting the shipping if he sells, it is $591.73, total. In other words, spot gold has to go up $16.73 in order to break even. 10 oz silver bars from a total base of $106.58, or $9.75 per ounce, have to go up to a spot price of $10.70 to break even, including shipping at the sell time. Percentage wise, silver's spot price has to go up 9.75% in order to break even and show a legitimate profit. Gold has to go up only 2.9% to break even and begin going into the profit position. This is if the investor deals with me. 2.9% vs 9.75%, to break even. I know damned well that other brokers charge a fee for selling as well as buying, so the above only applies to me, and I am certain higher with others, but maybe not, I don't know. I don't deal with others! Suit yourself, but by all means check the figures, because it may change with different dealerships, just like car dealerships offer the same car for different prices. This is not meant to be a sales pitch! Just do the figures, which most people don't do, so I have done them for you. Fair?
For silver to go up 9.75% from $9.75, it would have to go to $10.70, and for gold to go up 2.9% from $575, it would have to be $591.68. This is the break even figures for the spot prices of $575 and $9.75. They are $10.70, and $591.68 respectively. Does this discourage you? It shouldn't, because with stocks there are brokerage fees in and out, and it is rare for a stock to go up as fast and far as have gold and silver so far, and I believe will in the future. The actual break-even figures for gold and silver have been reached in a couple of days of late. You just need to know, that's all. In the last few years, silver has gone from $4.20 to its present price, and gold from $252 to its present price. They may be different when this is put up than when I am writing this, so you look at the web sites to determine spot prices. Silver has gone up 130% and gold about 125% over the last few years. This makes either one a fine investment…so far.
Which will go up fastest? Which is the best buy for long term? I say silver. For a year or less? I say gold. Why? Because a client of mine, with an obvious excellent credit rating, has $48,000 in interest free money for a period of from 9 to 12 months, and he wanted to know what to do with it. I don't recommend borrowing to buy metals, but in this case, it is for many months, and at no interest and no transfer fees. Free dollars! Whoopee! I thought about it, and decided that he should go with Krugerrands, which are the cheapest way to get into gold, and the Krug has a low spread, as opposed, as an example to the Canadian Maple Leaf, whose spread is a minimum of $5 more than the Krugerrand. With a Maple Leaf, the spot price would have to go $5 more to break even. He bought Krugs at $571.96 delivered to him, and in 6 days he is already at a profit position. He can sell them, as I write this for $573.30, so he has already, after all costs, made himself about $300, and has invested nothing. Had I suggested silver, he wouldn't have been near break-even yet. Do I recommend this? No, but he was going to do it anyway, and I think I advised him correctly. By the time his free dollars run out, and he has to repay…with no interest, he will probably have made himself several thousand dollars…with no investment. With silver, probably less.
There are risks in everything! Marriage, business dealings, investments, and used cars. There are thousands of previously submerged New Orleans cars out there for sale and have been disguised pretty nicely. Beware! There are huge risks in futures contracts, because a drop can cause huge margin calls. Risks in everything, but of all the risks I can think of, I think gold and silver are the least risky. Do I know what prices will be tomorrow? Nope, and please don't ask. No one knows! But months from now? I think it is a small risk. Anything can go wrong, and this is why I refuse to give advice as a rule, because I don't know tomorrow's prices any more than do the 'experts' who say they do. It's all guess-work, near time. Long term, it's hardly guess-work. Long term, and I mean years, you can hedge yourself very nicely with either gold or silver. Would I do it? I do it all the time!
Beware of doctors who don't follow their own directions, fat ladies selling reducing plans, bleached blonde real estate sales gals, and used car salesmen. One of a used car salesman's neatest tricks is to take your paid for junker in as a trade and offer you a newer junker, with a low interest rate. You drive it out, and guess what? "Oh, we couldn't get that interest rate through, so now it's 15%." You want your old car back. "Sorry, we sold it." Sue them? Forget it, as they will always win. You are stuck. I mention this because I know of it happening a couple of times. Always beware of used car salesmen and something for nothing gimmicks. I know of several who have fallen for those too, and they have lost big time. "Invest $10,000 with me, and I'll guarantee you a 10% interest per month." Horse puckey! "I can get you out of all your credit card debts and mortgage debt…for a fee." Don't be stupid! Just protect yourself.
February 4, 2006
Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
COT Gold Report – Gold Fails to Answer Massive Capital Inflows
By Gene Arensberg 05 Feb 2006 at 02:46 PM EST
HOUSTON (ResourceInvestor.com) -- This powerful bull market rally for gold has gone farther and lasted longer than any other since the Great Gold Bull began in 2001. However, just lately while new wealth measured in billions gushed into physical gold and the gold exchange traded funds added a figurative mountain of new gold bars, the gold price barely noticed.
Outlook Snapshot: February 4, 2006 (Caution Flags Flying)
It is certainly possible that gold may continue its determined and exciting thrust higher, but both the metal and mining shares are short-term overextended and both could use a breather. The failure of gold to answer substantial inflows of wealth is particularly noteworthy.
Given global geopolitical tensions of late it wouldn’t take all that much more political gasoline to fuel another conflagration. However, based on the indicators this report follows closely, an “at resistance” trailing stop strategy seems appropriate to protect significant profits from potentially sudden corrections while allowing for the possibility of a continuation of the dominant trend.
This Week’s Observations: Friday, February 3, 2006
Following on the heels of the over $1 billion inflow into gold ETFs the prior week, Gold began this week with a steady, grinding rise of $8.39 in New York, high-closing at $567.95 and stopping just short of the then most recent intra-day high of $568.10. Later Asian trade early Tuesday marked $570 spot and that momentum carried into the U.S. session with a few trades topping $572.
Last week’s observations included the dueling banjos nature of upgrades and downgrades which continued this week. Note also that even the most conservative of metals pricing forecasts have been climbing. One example of both a general metals sector upgrade and an increase in pricing forecasts surfaced Tuesday from UBS. On Wednesday none other than JP Morgan Chase called for prices to rise toward $800 gold in the next two years.
Profit taking on Wednesday failed to gain momentum once again. After a quick dip to $563.50 bidders resurfaced just before the lunch hour and by the New York close spot gold had rallied back to yet another bull-to-date high close of $570.15. The now dominant April contract on the COMEX reached a level not seen since the same month that Ronald Reagan took the oval office from Jimmy Carter.
Not incidentally, that was also the month that the 52 American hostages were released by Iranian Islamic fundamentalist “students” after being held for 444 days. A quarter-century later that country’s nuclear ambitions are a global destabilizing influence affecting the amount of wealth seeking safe haven.
Incidentally, $570 in 1981 is equivalent to about $1,224 in 2005 dollars. Put another way, gold would have to rise about 114% to reach the same purchasing power as when Ronald Reagan took office as president.
Thursday’s short-lived intra-day peak topping $575 was the highpoint for the week prior to spirited Friday profit taking. Spot gold showed a last trade of $568.86, $9.30 higher than the previous Friday’s close and 62 cents less than the Tuesday COT cutoff day.
As expected, the potent flow of funds into gold metal and gold ETFs continued during the week, albeit at a slower pace than the previous week. As noted below, however, the mediocre reaction of gold to the mammoth inflow of wealth over the last two weeks may be cause for short-term concern. See “Gold ETF” below for more on the subject. Bull market cycles, surge, consolidate, retrace, surge again.
The long-term, repeat long-term, fundamental forces which are driving this bull market for gold are very unlikely to change anytime soon. If anything, the global demand for the unquestioned standard of wealth for four millennia will be increasing as, among other factors, competition to devalue paper fiat currencies escalates and physical stocks of available metal are removed from play in long-term investments.
This report is directed mainly to short-term traders, swing traders and speculators who want to trade the surges and inevitable pullbacks and corrections of one of the most interesting bull market opportunities of the present generation. It is therefore not really intended for longer-term investors content to ride the interim volatility for the very long haul.
As surely as these words are being written the Great Gold Bull will experience periodically sharp, high-percentage pullbacks and corrections following periods of euphoric steep gains. All secular bull markets experience these cycles, so it is not a question of if there will eventually be a pullback or correction, but when.
Along those lines, the best time to put capital to work is during those periods after the hot money has once again exited and the charts have returned closer to their long-term moving averages. When the dominant emotion of euphoria has been replaced by fear which will almost certainly occur sooner or later. Having said that, well established momentum can carry the metal, a stock or an index to even greater heights quickly near peaks, most especially during definition moves. (When upper resistance is being redefined).
Until sustained resistance is defined and confirmed pullbacks tend to be brief and met with vigorous dip buying. It is when sustained resistance has asserted itself following major up legs that deeper and longer lasting corrections usually surface. That is within the context of an overriding bull market and it is those deeper corrections that offer traders more attractive opportunities for entry or reentry.
For those focused on the short term, once a particular market has become strongly extended, in order to protect sizable gains during the euphoric last stages of a particular up leg, an “at resistance” or “near resistance” trailing stop strategy is often used by experienced traders. That simply means that those traders employ tighter trailing sell stops when the indications are that sustained resistance is near.
Those higher stops are not universally applied. That is, not every trader uses the same formula or strategy. (A good thing, because if they did there would be far less opportunity in the markets). As momentum begins to slow, pullbacks probe into those rising sell stops at the same time that strong dip buying is going on. The first attempts at a pullback can be thwarted before they really ever begin that way.
Eventually, however, momentum wanes and the profit taking probes into the sell stops overwhelm dip buying. Resistance is then defined and a new pullback or correction and the opportunity it represents is born.
Definition moves for commodities do not occur without reason. They are by definition powerful. They usually don’t die easily and can continue much longer and test much higher than expected. That is why experienced traders use trailing stops instead of just taking profit at a predetermined or arbitrary target. By carefully managing stops a trader can stay comfortably in the game, catching most of the move until the long-awaited pullback shows itself to be on. That is a time for the patient investor to wait for when the odds strongly favor reentry and that is also a good subject for a future comment in this section.
COT Changes. As of the Tuesday 01/31 cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) had once again decreased their combined net short positions (LCNS) for the week by a another 7,723 contracts to total 167,282 contracts net short while gold metal gained $10.43 Tuesday to Tuesday ($569.48). A significant decrease to the LCNS on an increase for the metal is usually, repeat usually, a bullish signal and consistent with a continuation of the dominant trend short term.
It is unusual to show LCNS decreases into gold gains consistently, but that has been the condition observed for four of the last five reporting periods.
As of the Tuesday cutoff, total COMEX gold open interest dropped another 16,435 lots from 356,080 to 339,645 open contracts. Probably a combination of speculative longs taking profit, some short covering and book squaring as the COT cutoff coincided with the end of the month.
The daily chart reflects gold’s relentless march higher, but with moderating momentum. To give some context to how far this particular move has come, gold is about $104 or 22% above its 200-day moving average. That means that gold could retrace a heart-stopping 18% and not even challenge its technical up trend!
The good news on the weekly chart is that the metal registered both a higher low and high for the week. As of now sustained resistance remains undefined, but the chart remains strongly overbought.
Gold ETF. Since the last report, streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], added 14.15 tonnes of new metal, from 328.84 to 342.99 tonnes of gold bars now held by the trust.
Over the last two weeks (since the close on January 20) GLD has added over 53 tonnes of the historic standard of wealth. Each of those tonnes contains 32,150.75 ounces troy, making the 10-trading day increase worth $983.4 million, a staggering increase of 18.65% in the fund’s value in such a short period.
On January 20 the London PM Fix for gold was $567.25. Friday’s price was pegged at $569.00. With the unprecedented inflows into physical metal via ETFs over the last two weeks it is disconcerting that the metal has not advanced more than just a buck and six bits.
Is this a sign of a mature leg up, or should we be expecting a delayed reaction of gold moving higher? We haven’t had the gold ETFs around long enough to know, but intuitively this market watcher thinks we ought to pay attention. This may possibly prove to be a reliable indicator in the making.
There is nothing we know of that would prevent an equally large or even larger inflow into the metal over the next two weeks, but for now the fact that funds flooded into the gold ETFs but the gold price went nowhere is cause for caution. It may be analogous to when very high volume fails to translate into gains in other securities, a signal that distribution is high. See streetTRACKS Gold Trust for financial data updated daily. http://www.streettracksgoldshares.com/us/value/gb_value_usa.php
Euro Gold. Since the last report, the dollar firmed up and Euro gold jumped €10.11 closing at €471.60 (2/3) on the cash market. Please see the dollar, euro and gold performance comparison chart for a good look at the amazing thrust higher in gold purchasing power relative to the two largest fiat paper currencies since last October. http://stockcharts.com/webcgi/perf.html?$GOLD,$USD,$xeu
U.S. Dollar. As of the Tuesday, 1/31 COT cutoff, and since the last report, the combined net short positions of the large commercial traders on the NYBOT for the dollar index increased by a small 805 contracts from 1,661 to 2,466 contracts net short. This, while the index jumped 88 basis points from 88.06 to 88.95 Tuesday to Tuesday as expected. By Friday the index had added another 94 ticks to close at 89.89. The smallish increase in the dollar index LCNS suggests that the LCs are not positioned for dollar weakness. Last week’s commentary remains on the US dollar index graph.
Gold Indexes. The fifteen companies in the AMEX Gold Bugs index reflect the very sharp short-covering thrust higher from earlier in the week followed by Friday’s vigorous profit taking.
Usually the steep rate of climb shown on the graph is rarely sustainable for long periods without at least a consolidation or a pullback. At now over 46% above the 200-day moving average, the HUI is overdue for a healthy breath-catching pullback. It remains to be seen if it “knows” that yet.
The HUI remains in overbought territory on long-term charts after reaching a momentum level that has rarely been exceeded historically. Last week’s commentary remains on the graph.
HUI:Gold Ratio:
The HUI:Gold Ratio, which measures the relative performance of the HUI index and spot gold, jumped higher again, but energetic Friday profit taking wiped out most of the week’s gain. Try the one-year version of the ratio for a closer look.
[j65702648,y]&r=8106>
The spot gold/HUI spread indicator (spot gold minus the HUI index) edged higher by 1.33 points from 235.24 to 236.57 as of Friday’s close. On Tuesday, 1/31, the HUI peaked at 349.48 as gold touched $572.72 for a intra-day spread of 223.24.
Entries in the weekly books.
On the bullish side of the indicator ledger the large commercials remain unwilling to add to their collective net short positions, there was no telltale spike up in the LCNS and once again it declined against a gold advance. Most short positions in gold metal and mining shares are underwater and further advances, if any, will likely trigger additional defensive short covering. Momentum developed over a long period can be surprisingly tenacious.
On the bearish side the LCs remain strongly net short the metal and the potential for a sudden long liquidation selloff will remain in place until the LCNS is substantially reduced. Both the metal and the mining shares remain in overbought status in weekly charts after steep advances. The LCs have not positioned for weakness in the U.S. dollar. While new wealth has been flooding into physical gold via the ETFs, that has not translated into significantly higher gold prices.
Commentary and Outlook: (Caution Flags Flying)
It is certainly possible that gold may continue its determined and exciting thrust higher, but both the metal and mining shares are short-term overextended and both could use a breather. The failure of gold to answer substantial inflows of wealth is particularly noteworthy.
Given global geopolitical tensions of late it wouldn’t take all that much more political gasoline to fuel another conflagration. However, based on the indicators this report follows closely, an “at resistance” trailing stop strategy seems appropriate to protect significant profits from potentially sudden corrections while allowing for the possibility of a continuation of the dominant trend.
High volatility and wide-ranging days (as we have recently witnessed) remain very possible. Careful stop management remains a must. With that said, as always, MIND YOUR STOPS.
Market Data 
Markets 
AI
