Sunday, November 23, 2008

Got Gold Report – COMEX Commercial Short Positions Still Low For Gold, Silver

By Gene Arensberg

23 Nov 2008 at 09:00 AM GMT-05:00

While equity markets were once again bludgeoned unmercifully this week, gold and silver fared relatively better. Perhaps that is in part because the largest of the largest futures traders continued to have the lowest COMEX futures net short positioning in years.


ATLANTA (ResourceInvestor.com) -- As the world once again fell into an abyss of fear over the past week, the reasons for which are well documented elsewhere, investors are coming to the realization that a violent new bubble has been forming since July.  The new bubble is the global rush into U.S. treasuries and into the U.S. dollar.  However, the largest of the largest traders of gold and silver futures continued to report very low net short positions, right near the lowest net short positions they have had in years.

A net short position means that the trader profits if prices fall.      

Used to be strong dollar means weak gold, but now?  

From July up to now, in November, a combination of the rapidly rising U.S. dollar index, vicious forced and panic selling of all asset classes and massive deleveraging have helped to put downward price pressure on both gold and silver along with all other commodities. Very large funds and investors that were faced with the need to raise cash have been forced to sell anything liquid, even that which they wished they could hold, in order to meet redemptions, margin requirements or what have you.

Carry trade unwinding has forced offshore investors to buy U.S. dollars as a function of selling off dollar denominated assets.  Perversely, the U.S. dollar has gotten the mother of all forex bids during this horrible financial bedlam.  Not because the dollar is inherently strong, mind us all, but mostly because it happens to be what things are traded in the most and, thanks to the U.S. Federal Reserve, it is also the most liquid of liquid currencies.    

When people are suddenly and violently frightened financially they just want cash and treasuries.  Without getting too much more into exactly why, (which could take up all the space allotted to this report by itself), suddenly the dollar has merely become one of the strongest and healthiest lookingmembers of the global fiat currency leper colony.  All fiat currencies are sick, but apparently not equally sick. 

The dollar is rising and rising fast.  Too fast.  The spike in the dollar is a signal flare.  It is a warning klaxon sounding.  This is a flame out just before the inevitable stall. 

The net short-term effect has been to see gold (and silver) unnaturally hammered as measured in those rapidly-rising-in-relative-value paper U.S. dollars and a few other currencies, such as Japanese yen.  At the same time gold has appeared stable to strong in others such as in  euroAustralian dollarsCanadian dollars and pounds sterling as examples.     

Just when gold metal should have been screaming higher (with silver tagging along), as measured in U.S. dollars it plunged on futures markets all the way down from the $900s to the high $600s before the opposing forces of deleveraging/fear versus safe haven demand/wealth protection set up a tighter trading range in the low USD $700s.  

Demand is there all right 

Meanwhile, as covered in the last Got Gold Report, premiums for actual gold and silver metal on the street skyrocketed because people wanted more of the precious metals than was actually available.  The very high premiums continue, by the way, and availability of real physical gold and silver remains tighter than a cheap rubber band.

Premiums are the amount paid and charged by dealers over the spot price for metals.     

This week we learn from the World Gold Council that, as we suspected it would from those very high physical metal premiums, all over the world demand for gold has been tremendous, especially in the Middle East, India, Indonesia, Asia and in Europe. 

On Friday, November 21, we may have seen a taste of what gold is supposed to do in times of real economic crisis.  Why?      

As financial terror once again escalated through the week, with equity markets plumbing new depths, fear of systemic financial collapse escalated on the price cave in of Citigroup to just over $3.00.  Attempts to explain and to reassure by public officials, including Treasury Secretary Henry Paulson, failed to slow the carnage. While that financial nightmare was unfolding we observed gold holding steady in a tight consolidation range.  That was even as the U.S. dollar remained quite strong relative to a basket of other fiat currencies.

Then, on Friday, the heretofore dominant sellers of gold futures across the globe saw their $750 Maginot Line give way as gold powered higher $43.00 or 5.8% in one day.  Technicians love consolidation breakouts and tend to gain confidence from them provided they show staying power and follow through right afterwards.      

Time will tell whether or not what we saw on Friday is a portent of more to come or a one-off news-driven event, but some of the most astute observers out there today are suggesting that at some point the current “bubble” in the U.S. dollar will reach a crescendo, followed by a hard and fast plunge in the purchasing power of the greenback.  These analysts, the same ones that correctly predicted the current set of dire circumstances, continue to encourage people to find safety in gold.

Once the unnatural deleveraging and panic selling pressure becomes exhausted, as  analysts say it has to eventually, gold looks set to explode much higher.  It is merely a question of when.  With that in mind, let’s look at the gold and silver ETFs and the Commitments of Traders reports from the CFTC.

First a scheduling note.  Due to travel conflicts the next Got Gold Report will likely be in three weeks instead of two. 

Gold ETFs    

SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported adding 6.12 to 755.06 tonnes of gold bars held for its investors by a custodian in London.

Source for data SPDR Gold Trust

So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, dipped 0.63 tonnes for the week, to 119.18 tonnes of gold held.  Barclay’s iShares COMEX Gold Trust [IAU] gold holdings remained flat at 63.88 tonnes of gold held for its investors. 

For the week ending Friday, 11/21, all of the gold ETFs sponsored by the World Gold Council showed a collective addition of 5.76 tonnes to their gold holdings to 912.66 tonnes worth $22.8 billion.

From the additions to the world’s gold ETF holdings it is clear that there was more buying pressure than selling pressure for gold ETFs over the past week. 

SLV Metal Holdings

Metal holdings for Barclay’s iShares Silver Trust [SLV], fell by 61.41 tonnes this week, to 6,686.75 tonnes of silver metal held for its investors by custodians in London.  

This, while the major equities markets were getting yet another brutal pasting Monday-Thursday.  With so much fear and forced selling out there, a small reduction of 61.41 tonnes is actually less than we would have expected, especially given the sometimes wider than normal spread between the share price of SLV and its per-share NAV Monday and Tuesday. 

Source for data Barclay’s iShares Silver Trust.

Gold COT Changes  

In the Tuesday 11/18 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) inched 1,620 contracts or 2.33% higher from a very low 69,496 to a still very low 71,116 contracts net short Tuesday to Tuesday as spot (paper contract) gold rose $6.31 or 0.86% from $731.89 to $738.20.

Gold established the same trading floor on three consecutive days to begin the week, failing to dip below $731 each day. Until breakout day Friday, it actually traded in a tighter range than it has for weeks, between the $730s and $760s.  Then Friday gold surged decisively higher, breaking through implied resistance of around $756 for a last trade of $800.52 on the cash market.   

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 (LCNS:TO). 

Source for data CFTC for COT, cash market for gold

Repeating from the last full Got Gold Report two weeks ago:  “Under more normal market conditions such a very low LCNS would be extraordinarily bullish, especially the low percentage of LCNS to the total open which, up to now at least, has been a fairly reliable bullish indicator below 27%.  Now that we have transitioned into a market that is abnormal in the extreme, it will definitely be interesting to see if this indicator remains reliable.

Should gold catch a bid in the coming few weeks, then this indicator is (excuse me) ‘as good as gold.’”    

Well, so far it looks like the LCNS:TO indicator came through again, but it surprisingly took two weeks for the move higher to show. 

Silver COT

As silver fell $0.39 or 3.89% COT reporting Tuesday to Tuesday (from $10.03 to $9.64 on the cash market), the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a miniscule 506 or 1.81% to 27,458 contracts of net short exposure, while the total open interest on the COMEX fell yet another 2,641 contracts to a very low 91,853 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

What is kind of interesting about the little change in LCNS is that silver actually tested the $8.80s on Thursday, November 13 before popping back up to close that day at $9.42 on the cash market.  The trading that day was suggestive of at least some short covering, but we find in this latest CFTC report that there was little in the way of commercial short covering. 

Silver repeated the feat again this week, testing $8.83 on Thursday, but this time closing closer to the low at $8.96 that day.  Then on Friday, as gold powered higher, silver reacted too, but in a more muted fashion for a last trade of $9.65.  Although that was a 7.7% one-day move higher, the action in silver seemed tame in comparison to gold.  

It will be doubly interesting to see if Friday's move higher was the result of significant commercial short covering, but we will have to wait until the next COT report to know.

For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX.  When compared to all the contracts open, the commercial net short positioning in silver futures amounts to a still low 29.89%. 

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

The very low silver LCNS is supportive of higher prices historically. 

Odds and Ends

The gold:silver ratio (GSR), which reached a 16-year high in October of 88 ounces of silver to one ounce of gold, has once again spiked back up to the level that should attract robust conversion of gold to silver.  As of the Friday close the GSR was back up to 82.95 ounces of silver to one ounce of gold using cash market closing figures. 

While the very high GSR is an ominous sign for global equity markets generally, it may also accelerate the exodus of silver metal from the COMEX member warehouses as investors take advantage of the rare opportunity to convert gold into silver at such historically high conversion rates.     

Speaking of the COMEX silver inventories, just since October 17, the inventory of silver metal of COMEX depositories has dropped by an eye opening 4,932,992 ounces. That’s metal leaving the COMEX for the physical market or for industry. 

Source for data NYMEX.com

So long as the futures markets continue to grossly under price silver relative to the popular physical markets, we can expect the trend of silver metal exiting the COMEX for the real physical markets to continue and probably to accelerate into December. 

End Notes

There is plenty of very scary news out there this week for people to consume, so I won’t add any at this time.  Instead, here’s a repeat of the close in the last full report.    

At the same time the newswires are flooded with reports of mining companies having to close existing mines due to low prices of metals.  New mines that were due to come on line are also being shelved.  So, at the same time that we have the highest premiums since 1980 for physical gold and silver – when one cannot actually find gold and silver bullion at anything even close to the futures-dominated spot price - we learn that there is a huge increase in the number of “currencies” out there about to be chasing a vastly reduced amount of physical production.  

Short term virtually anything is possible in this crazy futures-dominated market, but shouldn’t that be a potent recipe for an explosion in precious metals prices over the longer term?  Got gold?  Got Silver?  Got mining shares?    

Got Gold Report Charts

That’s it for this offering of the Got Gold Report. Until next time, hopefully in about three weeks, 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, SPDR Gold Shares and holds various long positions in mining and exploration companies.   

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