-- Posted Sunday, 18 July 2010 | | Source: GoldSeek.com

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

Gold and silver nearing our expected support zones. 

ATLANTA – It seems like we have been on the sidelines for an awfully long time now waiting for gold and silver to correct as it sometimes does this time of year.  We thought gold was beginning to correct in our last full report two weeks ago and it has corrected a goodly amount in euro terms, but in U.S. dollar terms gold seems to be range bound.  It has been knocked around a bit by rumors and rumors of rumors, but since our last full Got Gold Report offering two weeks ago gold has been confined in a range bounded by about $1,217 on the upside and the $1,180s on the downside. 

Silver has seen a similar range for the period, but we sense the trading for silver has been a teeny bit stronger than gold.  Silver saw good resistance in the $18.50s, but saw aggressive bidding in the $17.50s since our last full report. It may not seem like it with a Friday sell-down for the metals, but both gold and silver turned in slightly higher highs and lows for this most recent thin-liquidity summer trading week.  

The U.S. dollar index continued to fall off a Forex cliff, losing another 143 basis points to 82.55 as remaining short-euro-long-dollar and gold trades were chased off the boards. 

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

We are once again beginning the upcoming 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, still waiting for a sure-enough Vulture opportunity to reenter with our short-term trading ammunition. 

This week both gold and silver ended not all that far from the upper ends of our expected support zones.  We will go into the reasons why a little later, but if precious metals are driven lower and into our expected zones of potential support we are very likely to take long positions as we mentioned in our last full report two weeks ago.

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.  We think there are ample arguments to support where we mark potential technical support for gold and silver, but if those support zones prove to be just plain wrong, then we want out and quick. 

The only thing worse than being wrong in a short-term trade is staying wrong on that trade.  That is why we use reasonable trading stops and constantly mind them.  Stops help us to maintain good trading discipline, about which we will undoubtedly share more as we go forward. 

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 running nicely and gaining lots of new readership at www.GotGoldReport.com. 

In the not-too-distant 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 a short while. 

Now back to this week’s Radar Screen. 

Gold

We have been on the sideline since May 20 when our stops were profitably hit at $1,184 in a steep selloff then. For the last six weeks we have been saying: “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 at times 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.  So far that has been a reasonably wise posture. After all, gold failed to take out its determined resistance in the $1,260s having met with formidable opposition there.  As we look down through the indications we review every week (and often daily and sometimes by the minute) we are still of a mind to stand firm with our suggested gold support zone for now.  

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

Four weeks ago in our 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.”

Remember at the time that the open interest for COMEX gold futures was at a near record 601,138 contracts and the Producer/Merchant commercials were then record net short.   

Gold has since then met significant resistance in the $1,260s and has probably begun a correction.  Over the past two weeks the largest commercial traders in gold have strongly reduced their net short bets and the open interest has fallen about 33,000 contracts. 

The way we would characterize the market at the moment is that both gold and silver are attempting to redefine overwhelming support now that resistance is “known.” 

Again, we plan to continue to mark the high $1,150s as potential support for gold with resistance now marked at $1,265 – until proven otherwise on both counts. We believe that the indications we rely on continue to support that simple game plan for now. 

The fact that gold has corrected strongly in euro terms, but more or less moved sideways in USD over the past two weeks is a “tell.”  We could be wrong, but we strongly suspect that the gold correction is not yet over; we see the potential for further downside, but we suspect that downside is now more limited.  We will get to why in the course of the rest of this offering. 

Our indicators suggest that significant to strong dips for gold may be bought with confidence, but as always, only with appropriate new-trade trading stops for peace of mind and protection.  They are merely indicators, not a functioning crystal ball. 

Silver

We have been on the sidelines with our short-term silver trading ammo since we were profitably stopped in the last trade the first week of May.  Since running into a price capping barrage of “hedging” by the COMEX commercials in mid-May, silver has formed a choppy zone of support roughly in the $17.40s to the $17.50s. 

Pure technicians kindly cut us a little slack with definitions and in getting the support nailed to the “cents.”  We aren’t really interested in guessing potential support to the last penny and we tire quickly in discussions along those lines.  Instead of trying to find “exact” we are much more interested in determining where “close” lives, so to speak. 

For example, when using the silver exchange traded fund SLV as a proxy for silver, here is how we are likely to look at support and resistance.  (Please remember that charts such as these are constantly changing.  Also remember that SLV trades at a 35 to 40-cent discount to spot silver at this level.)

As mentioned in our linked silver graphs below, we look for overwhelming silver support to show somewhere in the $16 to $17 range, but it would not surprise us if silver were to show support right here in the $17.80s ($17.40s for SLV).  Given silver’s relatively high volatility we are more likely to scale into a new position with silver than we are with gold. 

Please see the linked charts below for more information on silver this week.

Don’t Forget the Charts 

As usual, much of this week’s technical and market commentary is contained in comments inserted in the actual linked charts below, and we will be adding additional “intel” to the “blog” often going forward. 

Moving on here is our look at this week’s COT report.

Gold COT

The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET yesterday, Friday, July 16, 2010.  The report is for the close of trading as of Tuesday, July 13.

Remember that GotGoldReport.com is focused on the changes in positioning of the largest futures traders in that report – the traders the CFTC classes as “commercial,” including the bullion banks, large dealers and Swap Dealers combined.  We refer to those commercial traders as “LCs” for “Large Commercials.”  

As gold ROSE a net $19.61 or 1.6%  to $1,212.21 COT reporting Tues/Tues, COMEX commercial traders DECREASED their combined collective net short positioning (LCNS) by a small 794 contracts or 0.3% from 249,142 to 248,348 contracts net short as the open interest fell by 9,654 contracts (1.7%) from 577,732 to a still elevated 568,078 contracts open. 

Remember that last week’s reduction in the large commercial net short positioning (LCNS) was the largest nominal one-week LCNS reduction since August 12, 2008 as we reported in our GGR – COT Flash report for July 10.  This reporting week we note a further reduction in the LCNS on a material increase in the price of the metal. 

We tend to view rapid reductions in the LCNS (like last week) and decreases in LCNS on increases in the gold price (like this week) as more bullish than bearish short term. 

Here's the nominal LCNS graph for gold futures (COT Graph1): 

 Source for data CFTC for COT, cash market for gold

We compare the nominal gold LCNS to the total open interest.  That gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category - on the COMEX.   

When compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO -  the most important graph we track) was almost flat, edging up slightly from 43.1% to 43.7% of all COMEX contracts open.  The LCNS:TO is very close to the lows for the year.   

Here's the LCNS:TO graph for gold (COT Graph 2):

 Source for data CFTC for COT, cash market for gold

We view the current LCNS:TO of 43.7% as arguing more bullish than bearish.  We think it suggests that the largest gold “hedgers” are taking advantage of most any dip in the gold price to reduce their relative net short exposure. 

Using just COT reporting Tuesdays as a guide, over the past two COT reporting periods the large commercial traders have covered or offset 41,608 contracts or 14.3% of their collective net short positioning as gold metal moved a net $28.29 or 2.3% lower (from $1,240.50 to $1,212.21).  For each dollar lower in price the LCs reduced their net short positioning by about 1,470 contracts using net figures.  We see that as a fairly “hot” pace of LCNS reduction.

That doesn’t necessarily mean that gold won’t continue to sell off even more.  It can and it might, but it certainly does mean that the largest “hedgers” and short sellers of paper gold closed out a big chunk of their collective net short positioning on a $50 drop in the gold price last week and didn’t put the shorts back on as gold recovered $19 this week. We would call that another “tell.”

***

The above is an excerpt of the full Got Gold Report update provided gratis to all this week.  To continue reading as Gene turns next to the silver COT, gold and silver ETFs, euro intervention and his conclusions 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 Candidates” or “Vulture Bargain 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. 

-- Posted Sunday, 18 July 2010 | Digg This Article | Source: GoldSeek.com

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