-- Posted Tuesday, 6 July 2010 | | Source: GoldSeek.com

By Gene Arensberg       Esse quam videri – To be rather than to seem. 

Gold sold off sharply, silver answers. 

ATLANTA – We have been on the sidelines for a while now waiting for gold and silver to correct in summer thin trading, as it usually does this time of year.  It took a little longer than we thought it might, but gold finally balked as the third quarter got underway. There were actually a number of harsh reversals happening simultaneously, so gold investors shouldn’t feel alone.

The U.S. dollar index repelled lower as the euro index popped and popped big.  The TED spread, which is sort of a measure of bank confidence dropped for a second week, falling below 38 basis points, down more than 10 points or more than 20% in two weeks suggesting that Eurozone systemic banking fears are easing.    

The Big Sellers of gold and silver seem to have prevailed, finally, perhaps sending us into a summer correction.  So far the sell-down hasn’t yet made it into our expected zones of support and there is no guarantee they will.  But, until this pullback got underway we feared a runaway breakout might take off without our short-term trades on.  Now, we are hopeful this pullback will take both gold and silver into our “wheelhouse,” which is where we are more comfortable attempting a reentry.

More in a moment, but first here’s this week’s closing table: 

On this 234^th “birthday” for the United States we are once again beginning the upcoming holiday-shortened, thin liquidity summer trading week on the sidelines with our short-term metal trading ammunition, glad as ever that we hold physical metal for longer-term purposes, but waiting for a sure-enough Vulture opportunity to fire our short-term bullets.  Should the Big Sellers or fearful late longs running for the exits drive precious metals not all that much lower from Friday’s close and into our expected zones of potential support we are very likely to rejoin the short-term metal battle.

That’s our Simple Simon game plan for summer trading we have mapped out, as we detail below, but if we do get the chance for reentry just ahead, as always it will only be with appropriate new-trade trading stops for peace of mind and protection.  How else could we ever leave the computer to go fishing?       

Two weeks ago in our last full Got Gold Report, we said: “Longer term we still see nothing which undermines the secular bull market thesis for gold metal, but short term we think traders should consider tightening stops for gold, silver and larger mining shares.”

Well, the day after that report, Monday, June 21, gold went on to print a marginally higher high at $1,265 the ounce but as it did the open interest on the COMEX exploded over 33,000 contracts higher, meaning that a tremendous amount of bull firepower was expended on just a few measly dollars of gold gain.  Another way to say that is that as gold advanced to a little higher high it encountered very stiff opposition – at least in the New York futures pit it did. 

With a record or near record COMEX open interest gold then consolidated for most of the two week period in a range bounded roughly and nervously by the $1,220s and the $1,250s until Thursday, July 1, the start of a new quarter and of the second half of the year.  As if a switch was thrown, lots of markets suddenly and violently corrected.  Thursday saw gold thumped for more than $40, Silver thwacked for more than 80-cents, the U.S. buck was gutted for 150 basis points, the euro index popped more than 270 ticks(!) … and on down the screen it was a day of remarkable and frankly unsettling harsh corrections to the recent trends.  Violence and chaos, yes, stability and certainty … no.   

There are no guarantees in this business, only indications.  Nothing at all says that a record-sized COMEX open interest of over 600,000 contracts is a “speed limit” or “stop sign,” much less a guarantee that gold is about to correct.  Nothing says that the open interest couldn’t go much higher.  It probably will someday – maybe soon.

However, record high open interest is not among the bullish signals we prefer to see. Indeed, extremely high open interest often (but not always) occurs near gold market pullbacks and corrections with some very unusual and spectacular exceptions when the Big Sellers of gold were overrun by overwhelming demand – twice in 2007 for example.    

High open interest is but one signal though.  There are others equally important to our impressions of the market. In just a moment we will touch on several more of the other indicators we are following in this uncertain, shaky market.

Gold, Silver Exempt From Financial Regulation Bill

Some analysts as well as policy makers had hoped that the current financial regulation bill, the one just passed by the House and being contemplated by the Senate, would force banks to separate out their derivatives (including futures and swaps) trading to outside subsidiaries which would have required more capital and would have made that part of the business more transparent.

If anyone was actually thinking that “FinReg” was going to make any big changes, then think again.  Consider this quote from Jill Schlesinger at CBS News:

“Derivatives Industry: Hours after the bill was announced, one derivatives trader told me, "Well, it could've been a lot worse!" The industry lobbied hard against Senator Blanche Lincoln's efforts to force the spin-off of all derivatives from banks. In the end, the provision allowed interest-rate swaps, foreign exchange swaps, and gold and silver swaps to remain at the big banks. That means that of the $615 trillion over-the-counter market, almost $500 trillion will be exempt.” (Emphasis ours.)

For bullet points on the revised bill try this link to an Associated Press summary.  

Consider the matter closed as far as the gold and silver derivatives markets are concerned. If the bill passes the Senate following the current short recess, that is.  The Big Banks are still in the driver’s seat and look to retain their dominance unless there are actually any substantive changes to futures, forwards and options trading proposed or imposed by the Commodities Futures Trading Commission (CFTC) later this year.  We are not all that hopeful there will be any such changes, not that we ever were hopeful there would be. 

The one overriding issue we do wish the CFTC would address is the blatant advantage the current system of position size and accountability exemptions grants to the short-side “hedgers,” as we have written about extensively in the past.  

We won’t be looking for much in the way of real “change” from the crew in power now. To them it’s a doublespeak slogan to mask higher taxes, punitive anti-business attitudes and crony capitalism in the name of…

Let’s move on, shall we? 

***

This Week’s Radar Screen  

This section is for new readers.  GGR veterans might want to skip to the next section.

The Got Gold Report – the full report – is published biweekly at least 24 times per year.  Between reports we communicate more regularly on the GGR web log, so it pays to stop by once in a while to catch the latest offerings. 

The purpose of the Radar Screen is to briefly summarize our positioning for the gold and silver markets, and also to highlight a few of the dozens of indicators, ratios and graphs we keep in constant touch with at Got Gold Report.  Long-time readers know we update most of the Got Gold Report linked charts each week, even the weekends when we don’t publish the full report.

For a little while longer, readers need only pull up the last full report (even this one) and click on the chart links on “off weeks” to see any updated comments.  Changes are almost always completed by 6:00 pm EDT on Sunday evening (except when Monday is a holiday) and occasionally during the week itself as events unfold.  The chart links are always at or near the bottom of the reports.  

Pretty soon now, however, all of the chart links will have to change as we have transitioned to our new permanent web home, which we are proud to say is up, functioning and gaining lots of new readership at www.GotGoldReport.com. 

In the near future Got Gold Report will transition to a subscription-based model.  The biweekly full GGR, COT analysis, our linkable charts, support and our Vulture Bargain Hunter commentary will require a paid subscription to view.  Look for all the details of that change in the not-too-distant future.  

Now back to this week’s Radar Screen. 

Gold

It has been tough to stay on the sidelines while worrying that a runaway breakout might occur without us on board with our short-term “traders” in play, but the sideline is where we have been camped out since May 20 when our stops were hit at $1,184 in a vicious sell-down. Like we said in the last full report two weeks ago:  “We plan to stay opportunistic for gold, waiting like patient Vultures for a juicy opportunity to redeploy our short-term trading ammo, glad that we hold long-term physical metal in our arsenal.  We will have more about our positioning in the linked charts below and likely on the web log later this coming week.  As we like to say, we are like a bird dog on point waiting for a re-entry sign.  Please see additional commentary in the actual linked charts at the end of this report.” 

We worried that we might end up missing the “Big One” to the upside, but we just couldn’t get comfortable with the indicators to redeploy since then.  As of Friday, even with this week’s harsh pullback, we are still not comfortable, but perhaps that might be changing in the very near future – if the signals converge the way we think they just might.  We’ll see.    

Here is this week’s short-term trading chart for gold:

One of our trading brethren, who because of his affiliation with a big firm has to remain nameless, argues that we have our support zone “way too high.” He sees gold trading to well below the 200-day moving average by end-August, and “probably to the $1,040s again.”  His reasoning is that most everyone who is apt to be involved with gold has already invested and therefore it is now time for what he calls a “major-major correction.” Not just a garden variety pullback.   

We argue that in May gold bounced smartly at the very top of the zone we thought might be former resistance morphing into current support, and that we find it difficult (but not impossible) to imagine gold being driven down 18% from its June 21 highs - with so high a short interest in place, so much demand for physical metal and so much uncertainty out there. 

If my friend turns out to be right, and if gold does plough on down a total of 18% or more, we will have likely entered and been stopped out at least once!

We plan to continue to tentatively mark the high $1,150s as potential support for gold with resistance now marked at $1,265 – until proven otherwise on both counts. 

As we said two weeks ago:  Interestingly, gold could suffer a fast $100 pullback from this level and not even threaten its very bullish uptrend technically.  With one class of COMEX commercial futures traders record net short, global worries about sovereign debt, weakening confidence in all fiat currencies and downright disdain for the current cast and crew in Washington - we find it easy to imagine that gold will be well-supported on most any significant pullback.

Therefore we believe that significant to strong dips for gold may be bought with confidence, but we do not think significant advances should be sold.  We cannot conceive of an acceptable reason to short gold metal, except to hedge.   

That pretty much sums up our impressions of the market this week as well.

***  

The above is an excerpt of the full Got Gold Report update.  To continue reading as Gene turns next to the silver market, the gold and silver COT reports, numerous technical charts, gold and silver ETF data and other important indicators in the gold and silver arena please click on this link: 

And thank you for doing so. 

Disclosure: 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 and/or his family currently holds a net long position in iShares Silver Trust, long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last year: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Terraco Gold (TEN.V), Hathor Uranium (HAT.V),  Gold Port Resources (GPO.V), Bravo Gold (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Constantine Metal Resources (CEM.V), Canadian Shield Resources (EXP.V), Rye Patch Minerals (RPM.V) and currently holds various other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report with the following exceptions:  Canadian Shield is a sponsor of www.gotgoldreport.com.   To contact Gene use LLCCMAN (at) AOL (dotcom).  

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 available at www.GotGoldReport.com.  -30-

-- Posted Tuesday, 6 July 2010 | Digg This Article | Source: GoldSeek.com

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