Friday, March 6, 2009

Gold and Silver pullback to be short

Pullback underway, but may be brief

HOUSTON -- As expected gold paused just after attempting a second assault at the big round number target with three zeros, US$1,000 this past week.   We could all feel a pullback or correction coming. 

Apparently sensing that the market for gold had moved too far or too fast, the very large commercial futures traders had strongly positioned for a gold correction as readers of this report know. They finally got a correction going this past week.

Gold had advanced a total of $326, or 47%, since its October panic lows near $681 in not all that much time. Indeed, the largest of the largest futures traders were evidently willing to take the short side of gold futures contracts aggressively as gold was crossing the $900 line of the gold futures battlefield as we reported in early February. As the yellow metal neared the $1,000 mark mid-month, the largest COMEX commercial traders, who are dominated by a few very large U.S. banks (and their very large bullion holding customers), seemed willing to take the short side against all long comers.

Naturally this report hauled out the caution flags on that action in the last full report. We really didn’t have to wait all that long to see the pullback arrive, but not before gold made a brief foray above the $1,000 line in the sand and not before huge amounts of new capital flooded into world gold ETFs. 

By February 15, with gold at $970, the net positioning of the COMEX commercial traders was just shy of 200,000 contracts betting that gold would move lower. The last time the commercials were collectively that net short gold was last August, right after the infamous “July Massacre,” as Donald Coxe, former Global Portfolio Strategist for BMO Capital Markets and now head of Chicago based Coxe Advisors, LLC dubbed it. The July Massacre was when Coxe felt the U.S. Treasury Department and the U.S. Federal Reserve decided to interfere in the markets for oil, gas, gold and silver through an avalanche of selling in futures markets coordinated through a few big U.S. banks in order to prop up an ailing U.S. dollar and cut the legs out from under the overheated energy markets.

If Coxe is right, that intervention more than anything else contributed to the collapse of the financial markets as the confusion it caused completely destroyed some of the largest (and most leveraged) commercial and investment bank traders and started a global derivatives domino effect meltdown. Entire books will be written in the near future about all the unintended consequences of that fateful period and the resultant global financial crisis of confidence of the “panic of oh-eight.”

At any rate, the last time the COMEX commercial traders were so strongly net short they had a great deal of assistance; a very large tail wind, so to speak. A tailwind of panic liquidations and enormous hedge fund redemptions. That may not be the case this time around. At least we haven’t gotten “wind” of it so far. 

We’ll have more about the gold and silver futures and commitments of traders reports below for GNL subscribers, but first a look at some of the gold and silver ETFs.  

Gold ETFs - GLD, from big to bigger 

The furious flow of capital into SPDR Gold Shares, [GLD], the largest gold ETF, over the past month has been truly remarkable. For the month of February, GLD added a total of 175.92 tonnes of allocated gold bars to its gold holdings. GLD, through its authorized market participants, only adds metal and increases the trading float in response to stronger buying than selling pressure, so we know that there has been more demand to buy GLD than there has been supply by investors to sell GLD shares for the period.  A lot more buying than selling pressure.  

So far this year GLD has added a stunning 249.06 tonnes of gold to show 1,029.29 tonnes of gold bars held for its investors by a custodian in London. That is a two-month increase in GLD gold holdings of a whopping 31.9% as GLD ended the 2008 year holding 780.23 tonnes. As of the Friday 2/27 close the metal held by the trust was worth $31.5 billion.

In the seven months since August 2008, as the world grew more fearful and uncertain; as we all faced the potential for global systemic economic collapse; as investors lost confidence in markets, political leaders and endured their terrifying rhetoric; as government after government announced injections of new fiat currency in amounts measured in the trillions of dollars; as we watched in disbelief once proud and dominant Big Banks reduced to nearly nationalized penny stock banks effectively on life support, … demand for gold in all forms has understandably been intense. 

In those seven months, buying pressure for GLD so overwhelmed selling pressure the authorized market participants increased the amount of gold held by the trust a huge, gigantic, galactic 377.92 tonnes of gold London Good Delivery Bars of 100 and average 400 ounces each. That’s right, as gold increased from $681.00 in October to as much as $1,007.00 last week, or 48%, GLD gold holdings have increased a mind bending 58% from 651.37 to 1,029.29 tonnes. The flood of investor capital seeking safety in gold has been simply amazing and, of course, totally unprecedented. Below is how it appears graphically over the past year.   

Source for data SPDR Gold Trust

Note, please, that as gold has begun a long-awaited pullback we have yet to see any meaningful reduction in GLD gold holdings, meaning that as gold has corrected back to as low as the $920s buying and selling pressure has been more or less balanced. Clearly the majority of GLD investors are not convinced there is material weakness ahead for gold - at least not yet.    

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.

Barclay’s iShares COMEX Gold Trust [IAU] gold holdings declined 1.49 tonnes to 67.8 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. edged 1.68 tonnes lower over the past week, to show 133.00 tonnes of gold held as of Friday. 

All of the gold ETFs sponsored by the World Gold Council showed a collective reduction of a tiny 1.39 tonnes to their gold holdings to 1,203.36 tonnes worth $36.8 billion USD as of the Friday 2/27 cash market close.

Despite the COMEX commercial trader’s extremely large net short positioning for gold and gold’s sharp pullback to the $920s, there has been astonishingly little in the way of selling pressure for the world’s gold ETFs over the past two weeks. Indeed we have to take note of the opposite.   That suggests that as many investors want to add gold ETFs as those who wish to take profit in them for now.

While gold became short-term overbought, in all probability the surge into gold is still a small fraction of the potential going forward. The vast majority of investors aren’t yet on board the “Gold Express.”

SLV Metal Holdings

Silver turned in a short-term bearish outside week with a slightly higher high ($14.63 Monday), a lower low ($12.85 late Friday) before settling for a near-low Friday last trade of $13.11 on the cash market (see the silver chart linked below).   For the week, metal holdings for Barclay’s iShares Silver Trust [SLV], the U.S. silver ETF, added a net 30.68 tonnes of new silver, to show 8,057.79 tonnes of silver metal held for its investors by custodians in London. 

SLV actually began the week by adding another 153.35 tonnes of silver, up to 8,180.46 tonnes, (almost all of the amount of silver JP Morgan Chase London has contracted to store as Custodian for the trust), but the sell-down in silver produced an increase in selling pressure on the silver ETF long enough and strong enough that the authorized market participants saw fit to reduce the float and the amount of silver holdings by 122.67 tonnes Friday 2/27. 

Source for data Barclay’s iShares Silver Trust.

Despite that last minute sale of silver, we can conclude that for all of 2009 so far, buying pressure has dominated selling pressure as SLV has added a staggering net 1,264.8 tonnes of silver to its allocated silver bar hoard in London.

Indeed, the past two months have seen more buying pressure for SLV than any other two month period since the inception of the trust in 2006. A lot more. 

SLV Custodian Shopping? 

Incidentally, as of February 27, 2009, SLV reported its custodian, JP Morgan Chase London, as holding a total of 259,063,966.9 ounces of allocated silver, which is just 5,486,298.1 ounces (about 171 tonnes) shy of the total amount JPM London has contracted to store for SLV under the current custodian agreement. So far, SLV has not yet announced either an increase in the amount of silver “storage” under the present custodian agreement or announced the name of another custodian to allow for more silver storage.

We’ll be keeping an eye out for filings along those lines daily going forward. There is probably ample silver still available for ETF allocation purposes in London from one or more of the eight or so London Bullion Market Association (LBMA) member dealers and their customers holding large physical hoards in LBMA member metal warehouses, but with over 8,000 tonnes (about 260,000 bars) already put away by SLV alone, it might not be all that long before the heavy, bulky, average 1,000-ounce silver London Good Delivery Bars get more difficult to source by investor ETFs. Depending on which estimates one chooses to use, SLV already controls a significant percentage, perhaps approaching or already in the low double digits percentage wise, of all the investment silver bars available in London.

While no one knows at what point this collective investor and ETF silver hoarding would reach supply chain “critical mass,” we certainly can conclude that as of February, global silver ETFs now hold an amount of silver metal that is larger than some fairly popular analysts (with large subscriber lists) thought possible just a few years ago. So perhaps we have gotten a little closer to the time when actual (as opposed to wished-for) shortages might be felt in the commercial, OTC and silver futures markets. That is unless the price of the metal rises enough to coax more real silver out of private-hands hiding.

In case that wasn’t crystal clear, what we are suggesting is that the acceleration of investor participation in world silver ETFs is gobbling up a bunch of the world’s “static inventory” of investment silver. From the same diminishing source of silver metal that has been satisfying a consistent production-consumption deficit for decades. 

If investor demand continues growing at anywhere near the current pace, or even at half of the current pace for very long, the word could get out in the financial media there is a potential for a true silver shortage. Not just a shortage of bullion coins, 90% junk silver coins, bullion rounds and small bars (which are already in short supply), but a bona fide worldwide shortage of the “heavies,” the big bars used in OTC commercial trade, futures and ETF storage.  

If that kind of news does surface, then we can look for rapid contraction of the gold:silver ratio which remains elevated in the low 70s.

Got Gold Report Charts

2-year weekly gold

2-year weekly silver

3-year weekly HUI

2-year weekly Gold:HUI ratio

End notes 

Some junior miners and explorers have seen substantial recoveries over the past two months. However, that has so far not translated into a meaningful recovery for the much more speculative companies in the Canadian CDNX relative to the HUI. Not yet. (Click here to see the relative performance chart.) This report still believes that is suggesting there are tremendous opportunities for resource-minded investors ahead. The kind of opportunities Gold Newsletter constantly strives to uncover for subscribers.

This week is the prestigious Prospectors and Developers Association Conference in Toronto, the largest conference of its kind. Brien Lundin will be there taking in the action and meeting with management of the companies on the Gold Newsletter radar screen. 

One of the great things about a resource conference is being able to listen and connect with some of the best and brightest in the business today. Over the past weekend the Cambridge House Resource Investment Conference in Phoenix was held in Glendale, Arizona, thanks to the tireless efforts of Cambridge House chairman, Joe Martin. The conference featured a wealth of information for investors and your correspondent was fortunate to be there this year. 

The lineup of speakers included popular newsletter writers, such as Peter Grandich, Thom Calandra, Jason Hommel, David Morgan, Jay Taylor and Michael Berry, all of which delivered interesting and timely advice for conference attendees (Apologies to the ones not mentioned).

Market commentators such as silver analyst Ted Butler, who I am told rarely speaks at conferences, Bill Murphy and Chris Powel of the Gold Anti-Trust Action Committee were there to continue the fight for more honest, more transparent and less manipulated markets for gold and silver. Indeed, in a workshop gathering GATA secretary/treasurer Chris Powell let participants know that something possibly “explosive” GATA is working on may be out soon. Keep a close watch on the GATA website for that.   

As conferences go, this one in Phoenix was a little on the smallish side, but surprisingly well attended and every attendee I asked said they were glad they took the time to attend. 

Conferences are almost always worth the time and resource minded investors would do well to work some into their schedules, especially now that the precious metals are assuming more of the role we all expected them to during a worldwide financial crisis. 

The consensus of the speakers in Phoenix is that a great deal of pain lies ahead for traditional investors everywhere, but the long-term future for precious metals is promising. We are witnessing an explosion of investor demand for gold and silver right now which has the potential to be greater than the world has ever seen.  

We’ll have more about the themes underpinning the worldwide rush into precious gold and silver in future reports, but for now let’s close with just one of them. 

The great flood – of fiat currencies 

We are constantly bombarded with a veritable avalanche of news that is from bad to horrible every single day of this economic tsunami underway. It should be clear to anyone reading these Got Gold Report offerings that I believe that investors will see their physical gold and silver assets very strongly outperforming all global fiat currencies in terms of purchasing power for the foreseeable future. Why? 

All of the world’s governments have to fear deflation much more than they fear inflation. Right now virtually all the world’s governments have decided on the same course of action to fight this financial meltdown. They are all injecting mountains on top of mountains of new fiat dollars, yen, euro, rubles, pounds sterling, yuan, etc. into their respective economies in amounts measured in trillions. Trillions!

Trillions? How much is a trillion?

People have a hard time relating to just how much money a trillion dollars is. To understand it, imagine it this way. A US$1,000 bill is about 6.1 inches long, more or less. One thousand dollar bills are difficult to come by these days. They no longer circulate and one has to pay a premium to a coin dealer in order to buy one.  

One trillion dollars is a billion $1,000 bills. If one could somehow round up a billion $1,000 bills and place them end to end, it would take a very long time to complete the task. That line of fiat $1,000 paper promises would stretch 96,275 miles – enough to circle the globe 3.9 times at the equator.

Want to use $1 bills instead? Forget it. One trillion one dollar bills laid end to end would stretch 96,275,253 miles long. That is far enough to stretch from the earth to the sun, plus a little. Does that bring the notion of a trillion dollars into better perspective?

The amount of global fiscal stimuli now being employed all over the world is so unbelievably massive it is pretty clear governments intend to do anything and everything it takes to prevent the dreaded “D” word for staying for any length of time.

Get ready. Stay ready. Because sooner or later all that economic “jet fuel” being pumped into the global financial system though central bank fire hoses is going to have its intended effects. Probably also a bunch of unintended effects too. 

At the same time we are now learning that some central banks (Russia and probably China as examples) are buyers of gold and China is already out gobbling up energy and mining companies in a big way in anticipation of the coming recovery. As the world starts to regain its financial footing, one way or another, the now probable condition of enormous, artificially stimulated liquidity chasing a lot less “stuff” is looking more likely. 

Mountains, oceans of fiat currencies flooding into the system chasing diminishing amounts of precious metals and energy probably means that investors will be glad they own both, and the companies that produce and explore for them too. Like the companies Brien is meeting with this weekend in Toronto for GNL subscribers. Got gold? 

That’s it for this excerpt of the full Got Gold Report. GoldNewsletter.comsubscribers enjoy access to all the Got Gold Report technical analysis and commentary as well as Brien Lundin’s timely advice and analysis of specific resource companies.

Until next time, 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, net long SPDR Gold Shares and holds various long positions in mining and exploration companies.

Gene Arensberg

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets.  In 2000 Gene started sharing his own market research with fellow traders and fund managers.  Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web.  

Gene’s more in-depth market reports, insights and trading ideas are a new feature for subscribers of the very popular Gold Newsletter (GNL).  GNL is edited and published by Jefferson, Louisiana based Jefferson Direct, Brien Lundin, President. Brien hosts the acclaimed New Orleans Investment Conference each year which has brought investors together with some of the best and most sought after financial experts and investment authorities in the world for over three decades.  For more information or New Orleans Investment Conferences.  

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