Liquidity Floods Into Silver ETF

Got Gold Report - Liquidity Floods Into Silver ETF

By Gene Arensberg
24 Dec 2006 at 09:11 AM EST

HOUSTON (ResourceInvestor.com) -- What is the big news in this issue of the Got Gold Report? It is the stunning 325 tonnes of new silver added to Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF. For details see the Silver ETF section below.

Typically thin holiday trading and a lack of marquee gold-moving news had the ancient standard of wealth moving sideways more or less for most the week. Ho, ho, ho hum.... That is to be expected in the last full trading week before Christmas, especially when the holiday falls on a Monday.

Since gold put in an interim high on December 1 in the $650s it has now retreated to the lower edge of an up-trending channel and tantalizingly close to what bears would view as a chance for gold breakdown pay dirt.

What better a week than this or next to attempt to crash the obvious implied support indicated on this graph. (See the close-together popular moving averages). For more see the Gold Charts section below.

Should we expect a visit from short selling Grinches right out of the gate on Tuesday? Sure, but they are only half the equation. January is practically here, equity options have already expired and how much ammunition is left in the bear’s collective magazine?

Not that it couldn’t change and change quickly, but one problem from the bear’s point of view is that the recent weakness for gold metal is not and has not been well supported by the indicators followed closely by this report. The usual rundown of some of the indicators follows, but before we take a look at them just a quick word of thanks to all our loyal readers and best holiday wishes to all. Got Gold?

Moving right into this report’s indicators:

COT Changes. The Tuesday 12/19 commitments of traders report (COT) shows that the large commercials (LCs) collective combined net short positions (LCNS) fell 14,550 or -13% to 101,732 contracts net short Tuesday to Tuesday having declined 3,886 lots the previous week. Gold metal dipped $7.45 or -1.2% to $622.70 Tuesday to Tuesday. The last trade on the cash market Friday showed $621.21 or pretty much sideways from Tuesday’s last tick. Gold managed a $5.49 gain for the calendar week.

Total COMEX gold open interest added 3,995 lots to 337,096 open contracts having inched 2,571 contracts up the prior week. Long-term December ‘07 and beyond COMEX forwards ended the week 4,760 contracts higher at 68,836 or 20.4% of open contracts.

As of Tuesday, which followed gold’s near-significant dip to the $612 region on the cash market Monday 12/18, (the day before the COT cutoff), the data show the large commercials reducing net short exposure at an accelerated pace. As one measure of that metric, consider that as gold declined 1.2% the LCs reduced net short exposure by 13%, nearly an 11:1 ratio. For another measure, we have to go all the way back to the September 12, 2006 COT report to find a larger reduction in the LCNS percentage wise. In that September 12 report the LCNS declined 20,570 contracts or 16% but was during a week that saw gold metal cliff dive a whopping $47.96 or 7.5% from $637.94 to a bone shattering $589.98. (Roughly only a 2:1 ratio then.)

Gold bulls will be comforted by the faster pace of LCNS reduction which occurred above key support for gold metal. This indicator stays on the bullish side of the gold market ledger.

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

Gold ETFs. This week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], added another 3.09 tonnes to 452.01 tonnes of gold bars held by a custodian in London for the trust. The previous week saw an addition of 7.4 tonnes.

The U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, was near flat for the week at 90.30 tonnes of gold held, while Barclays’ iShares COMEX Gold Trust [NYSE:IAU] jumped 1.23 to 44.46 tonnes of gold metal held for its investors.

After a short pause, positive money flow into gold ETFs is plainly apparent. The last full Got Gold Report two weeks ago mentioned: “Even though positive money flow seems to have paused, we cannot ignore the over 52 tonnes of new gold metal added to GLD alone in the month of November. Intuitively that kind of wealth flowing into gold sure seems like it ought to have long term bullish implications. Something to watch for over the near term now that gold has pulled back some is whether GLD ends up adding or subtracting gold…”

Well, since then GLD alone has added over 10 tonnes of fresh new gold bars to its hoard indicating that more wealth has been entering gold ETFs than leaving it. Investors have indeed been buying the dip. That is good to know, but the positive money flow indicated into gold ETFs pales in comparison to the strongly positive money flow story for silver (explained below). This indicator remains on the bullish side of the gold market ledger.

Financial data for GLD are updated daily at streetTRACKS Gold Trust.

Silver ETF: While silver metal on the cash market was mistreated over the past two weeks and plunged as much as $1.89 the ounce, metal holdings for Barclays’ iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, skyrocketed by a stunning 325.5 tonnes to total 3,768.02 tonnes (121,144,585 ounces) worth $1.51 billion as of Friday’s figures. And get this; 279.02 tonnes of that titanic increase in silver holdings occurred on Thursday, December 21. Talk about positive money flow!

To put this eye-opening liquidity-induced silver positive money flow event into context, consider that the 279 tonnes of silver metal added to SLV’s holdings Thursday 12/21 is higher than each of the previous four monthly additions (November 153.8, October 14.09, September 123.02 and August 247.35 tonnes of silver added to SLV holdings). Not since the week following SLV’s April 28 inception has there been a 200-plus tonne addition in one day and only a few weekly totals top 200 tonnes, the last one way back in June (June 19-23, 264.16 tonnes).

So, positive money flow continued for SLV in a huge way. Does anyone doubt that investors are buying this dip for silver?

Meanwhile silver metal appears to be attempting to mark support with a new pivot near $12.50. Given the extremely large inflow into the metal evidenced by the SLV metal holdings, a pretty good case can be made for sustained support to form somewhere between right here and the 38.2% Fibonacci retrace level. (“Here” is the cash market intra-day low Monday 12/18 at $12.29. The 38.2% Fib basis is shown on the 1-year graph below and comes in at around $11.94.)

Please also see the 1-year silver graph for additional commentary. Each tick lower will very likely see buying pressure for physical metal in most popular forms increasing logarithmically as the trading approaches both the 200-dma and the 38.2% Fib and just below that, in the roughly $11.70 region as of Friday, is the lower edge of a medium-period up-trending channel now well defined. In other words, all things else being equal, silver bears face a rather daunting challenge over the near term if this report’s read is close.

Having said that, when downward momentum is ruling, new silver purchases made in this region should be made only with fairly tight new-trade trailing stops, but can be attempted here in incremental scale-in amounts in this report’s opinion. That is, of course, provided traders are disciplined in the use of appropriate stop management. As always, each trader should study the issues carefully and make their own trading decisions.

SLV metal holdings graph as of Friday, 12/22:

Gold Charts. The daily chart shows gold metal roughly hugging the 50-dma having briefly touched the 200-dma and modestly bouncing off of it. Both popular moving averages are above the bottom feature breakout level of $607-$610 which happens to coincide and frame the 38.2% Fibonacci retrace level. (Please see the 2-year chart for Fibonacci basis.) Gold has traversed what could be a developing uptrend channel and if so currently resides near an implied uptrend support lower channel line. Bad news for bears, definition of the uptrend channel is yet to be confirmed and if that tentative level is defeated there should be strongly increasing support not very far underneath. Bears beware of a potential light liquidity trap door reversal which very well could follow a 200-dma breach. Many hot-money short stops will likely be very tight, “at support” levels by now, meaning any convincing thrust would gain some additional fuel.

On the other hand, mentioned out of an abundance of caution, a very large number of sell stops and long trailing stops will have no doubt accumulated by now in the $5 to $8 region below the November breakout ($607-$610). It would not be all that surprising to see a determined attempt by energized fund traders to crash that important technical level during the thin-market conditions extant in the week between Christmas and New Years Day. It is this report’s opinion that should that significant technical event occur it would be an opportune time to begin scaling into new long positions for gold metal. More likely than not, such a breach would be of short duration, no pun intended.

Please also see the 2-year weekly version for context as well as additional commentary. This indicator remains bullish and as of Friday (12/22) negative momentum developed over the past three weeks seems to be pausing, if not losing steam. (Note the histogram in the MACD). A convincing dip into the low $600s (below $607) would alter the chart signature if not immediately (within a few days) corrected. Emphasis on the word “convincing.”

U.S. Dollar. Data in the 12/19 commitments of traders report (COT) show that as the U.S. dollar index rose 51 basis points from 82.94 to 83.45 Tuesday to Tuesday the LCs pared their considerable net long positions by a scant 616 contracts to 15,177 NYBOT contracts net long. Since Tuesday the index tacked on 35 ticks to close Friday at 83.80.

The last U.S. Dollar section two weeks ago included: “Given the apparent support forming for the U.S. paper currency here this indicator has to move over to the short-term bearish side of the market ledger for gold. Even though the former lock-step inverse correlation of gold and the U.S. dollar ended convincingly in 2005, large moves in the dollar still affect gold in short term bursts. Over time though gold more or less trades independently now, answering primarily to demand and liquidity in all paper currencies.”

For whatever reasons the LCs are way long the greenback and at the same time they are short the British Pound in a hefty way, long the Canadian dollar, modestly long the euro, long the Japanese yen, while short the Mexican peso, and flat Swiss francs. Judging by that it looks like the LCs are strongly positioned for weaker pounds versus the other paper currencies while remaining short gold in what has become an average sort of way.

Given that set up, this report suspects that gold will once again break free from the anti-dollar reverse correlation (ingrained in so many short-term traders) imminently, a matter of days or weeks, not months. Gold remains strongly undervalued basis the paper promises issued by governments and central banks of the world and we should not forget that some central banks and probably other large holders of U.S. dollar denominated forex reserves are likely to add the metal as part of a long-term diversification away from U.S. dollars.

This indicator has to stay on the bearish side of the gold market ledger for now. Although the LCs have not exactly been in sync with the USD of late this indicator tracks changes to their positioning in the buck and they most likely won’t be out of sync for long.

Please see the 1-year daily USD chart and the 2-year weekly USD version for additional commentary about our large commercial paper currency trader friends.

Gold Indexes. All over the globe technically minded portfolio and fund managers, long and short-term traders and investors large and small track their favorite indexes and make trading decisions based on them. The AMEX Gold Bugs index, [AMEX:^HUI] which follows a basket of fifteen of the most popular mining companies that generally do not use hedging and therefore should have more leverage to the gold market, is one of the most popular of those indexes and is the index that this report tends to focus on.

The 6-month daily HUI chart has mining shares stepping out to the downside of the steep up-trending channel formed as the index shot 46% higher in just two months to 362.53 from its October nadir of 274.72. Fibonacci enthusiasts will be looking for support to form near the current level (328.02) as the 38.2% Fibonacci target for that short-term move resides at about 329.05. Next on the Fib-scale is the 50% level at 318.67, then the 61.8% Fib on down below at 308.30. This report has the rounded bottom breakout near 313, so there are a multitude of potential support targets in the neighborhood.

Unless gold bears are rewarded with a key support gold technical breakdown (convincingly below $607-$610) a strong bullish case can be made for sustained support to form here or not very far below. “Here” is the intra-day low marked Friday 12/22 at 324.70. “Not very far below” includes the Fibonacci targets mentioned above or within 10% in other words.

Please also see the 3-year weekly HUI chart for context and additional commentary. One long-time reader who runs a medium size fund based in California focused on the natural resources sector commented Friday that he felt that some of the weakness seen in the past week was from book squaring ahead of the holiday. In addition late year profit taking ahead of the January bonus month (presumably for funds and firms with calendar year ends?) might also have a little skin in the game. Meanwhile he notes that at least so far we have not witnessed the harsh, high percentage plunges which followed both the May and September highs. “They (mining shares) seem more resilient this time than then,” he said.

In both the May and September periods mining shares refused to answer the last impulses up for gold metal prior to those harsh plunges as gold sold off. This time, however, is different. Mining shares were outperforming the metal at the most recent high for the HUI at the same time as a flood of liquidity was entering the gold ETFs (November). Can we make the connection that so much new wealth having flowed into gold and silver ETFs over the past two months might be correlated directly to the reluctance of the miners to fall? And is that a reliable signal? We’ll see.

HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performance of mining shares versus gold. When the ratio is rising mining shares are putting in a stronger performance relative to the metal and vice versa.

The one-year daily HUI/Gold ratio chart shows mining shares finally answering the gold and silver pullbacks some, but certainly not as much as they are capable of. For an example of what the HUI components are capable of when a liquidity exodus is in play take a look at the September period. Nothing prevents such a mining share liquidity exodus from taking place, it just hasn’t yet. While gold has pulled back as much as roughly $40 the ounce off its December 1 high, or about 6.1%, mining shares on the HUI are off about 10.4% off theirs. That’s not even a 2:1 ratio.

The last HUI/Gold Ratio section two weeks ago said: “A reasonable pullback in the ratio here while the HUI stages for another run at its 350-ish resistance would not be surprising at all and would still be within the context of a continued trend of mining share strength.”

Well, please also see the 2-year weekly HUI/Gold version for additional commentary which includes that the action seen over the past two weeks remains consistent with what has been a steady, but choppy outperformance by mining shares versus the metal since September.

For now this indicator remains bullish.

Cash Gold-HUI. The cash gold minus HUI indicator comes in this report at 293.19, a jump of 16.82 points from the 276.37 reading in the last full report two weeks ago. Ordinarily a large jump in the spread is cause for concern if sustained so this indicator bears watching near term. Having said that, the jump higher was from what has been a low-ish level for all of 2006 and could just be a snapback to equilibrium. For an example of what would raise caution flags at this level, a move over 305-310 from here would signal a short-term loss of collective confidence by mining share investors in this report’s opinion.

Source for data Thompson Financial via Stockcharts.com

Short-Term Outlook: (Continued cautiously bullish; add into significant dips; add more aggressively into strong dips. Trailing stops normal for gold and mining shares.)

On the bullish side of the gold market indicator ledger we have the LCs reducing their collective net short interest by the largest percentage since September 12, (-13%). Positive money flow into gold ETFs continued as gold moved sideways following a dip. A galactic sized increase in silver holdings shows in the silver ETF of over 325 tonnes the past two weeks which makes the phrase “positive money flow” seem inadequate. Gold charts still possess bullish technical signatures although trading has neared key implied support. And, mining shares seem reluctant to sell off like mining shares can do.

On the bearish side of the ledger, the LCs remained very strongly long the greenback, some weakening of mining share investor confidence surfaced via the Cash Gold-HUI indicator albeit from a low level, physical gold demand was lackluster for much of the prior week although it picked up noticeably late week, and premiums for physical precious metals on electronic bourses remained noticeably less firm for much of the week, also firming somewhat late week.

The last full Got Gold Report two weeks ago included: “…an apparent bull market style pullback, the third of the current advance, is once again underway as expected. As mentioned above so far the current pullback is not supported by most of the indicators followed closely by this report. That is not to say that the indicators couldn’t turn right around and answer a determined sell-down, they just haven’t done so. Given that, and assuming that there is not a significant deterioration of the indicators over the near term gold metal is nearing significant dip status and any further weakness, if any, ought to trigger a legion of dip buyers into action.”

Sure enough, dip buying is certainly underway as evidenced by the metal additions to the ETFs, with the additions to the silver ETF no less than spectacular. While we have to note some weakening of collective confidence for mining shares, the miners continue to not (repeat not) lead this market lower. Instead they seem reluctant to sell off as they are capable of.

Ever mindful of the occasional light-liquidity holiday period hi jinx attempted by energetic funds with access to electronic bourses and more leverage than they deserve, unless there is an unexpectedly significant deterioration in the indicators between now and the next scheduled report in two weeks, this report plans to remain cautiously bullish for gold and mining shares with normal trailing stops. Provided resource investors are disciplined in the use of reasonable new-trade trailing stops for protection, significant dips can be bought in scale-in measured increments and stronger dips bought more aggressively.

Mentioned last, but not least, in the event of a gold metal technical breakdown during the upcoming light-liquidity period, it is this report’s intention to add gold metal in measured increments using reasonable new-trade trailing stops and to add aggressively should that breakdown turn into a high percentage sell stop triggering event. It just might be the last opportunity for cheap gold for some time to come.

Until next time as always MIND YOUR STOPS.

Long-Term Outlook: A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies, probably continued de-hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing. In real terms gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world’s fiat paper promises.... The Great Gold Bull has a long way to go. It just won’t go straight up.

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 streetTRACKS Gold Shares and iShares Silver Trust, and holds various long positions in mining and exploration companies.