-- Posted Monday, 9 August 2010 | | Source: GoldSeek.com

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

China driving the bullion bus likely means a Chinese “put” in play.  

HOUSTON – It seems pretty clear to us Vultures that the Chinese, who hold just under $900 billion in U.S. debt, are convinced that the United States has a huge incentive to reduce its debt burden by inflating (devaluing) the greenback over time. 

Over the past three weeks since our last full Got Gold Report China made it clear to anyone looking that they value gold and silver more than they do “paper.”  Multiple news sources say that China opened the Shanghai Gold Exchange to more foreign involvement. (Sound the ‘China Forex Diversification’ and ‘China Embracing the Gold Trade’ klaxons – a new dynamic is unfolding in the bullion markets.) 

China is encouraging its banks to finance acquisitions in the bullion sector.  The Chinese command and control wants its business leaders involved in bullion projects across the globe. China is encouraging its citizens to own gold and silver.  Bullion is available at government-run banks.  China is paying premiums for raw ore to be shipped there for contract milling (or milling at discounted prices). … China has shown its gold-loving hand regardless of their official protestations to the contrary.  

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

(Note the conflict between the gold LCNS and silver LCNS this week.  More about that in the Gold and Silver COT Sections below.)    

With China on the demand side, … on the bull side of the gold market, who is going to take the sell side?  It certainly hasn’t been central banks lately.  Central banks have been net buyers.  We can say now there is a Chinese “put” under the bullion markets.  That just means that bullion bears have less to work with.

We might want to keep that idea in mind as we look over the various indicators in this week’s data pile.  How on earth can anyone consider being bearish of gold when they are up against more than a billion potential buyers, so to speak? 

Before moving into this week’s Radar Screen, just a quick bit of housekeeping:  There will not be a report next weekend as we will be taking a short vacation.  

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 just 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 tons 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 reentered gold on the long side July 27-29 as we noted on the web log.  Our average entry is roughly $1,159 equivalent.  (We had been on the sideline since May 20 when our stops were profitably hit at $1,184 in a steep selloff then.)  Please see additional commentary in the actual linked charts at the end of this report.  

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

Given that silver was actually trading stronger than we expected, and given the very strong bidding action we noted as gold tested the $1,150s, we opted to take a full normal position with this entry.  We began with a tight trading stop of just under $1,144 equivalent.  Then, almost immediately gold snapped up above $1,180, so we upped our trading stop to our entry level for a no-loss stop.  As this week closed on a short-covering drive to above $1,200, we are compelled to raise our trading stops again, but not a lot – yet. 

We will begin this coming week with our trading stops near $1,171, hoping to allow plenty of room for volatility while protecting at least a minor profit on this fledgling gold trade.  We believe that gold is about to enter a favorable period, both seasonally and economically, but we cannot rule out another downward leg first. 

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.  Silver ran into a price capping barrage of “hedging” by the COMEX commercials in mid-May.  Since then resistance has drifted down to roughly the $18.50s, thus forming a tightening triangular formation on daily charts.  Silver has formed a choppy zone of support roughly in the $17.40s to the $17.50s, slightly above our preferred targets.   

As mentioned in our linked silver graphs below, we look for overwhelming silver support to show somewhere in the $16 to $17 range.  However, the fact that silver has seen good support in the bottom of the consolidation is impressive and not to be ignored.  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 and we have considerably more about silver near the end of the Silver COT Section this time, but with the last part of August yet to come – a time that has historically seen unreasonably large and unexplainable dips in the past – we intend to keep our target for reentry for silver right where it is to begin this coming trading week. 

That is unless silver goes “velocity breakout” on us.  We are just as likely to join in on that kind of breakout event as we are to wait for a Vulture bargain “op.”      

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 Friday, August 6, 2010.  The report is for the close of trading as of Tuesday, August 3.

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 $24.54 or 2.1% from $1,161.54 to $1,186.08 COT reporting Tues/Tues  COMEX commercial traders actually DECREASED their combined collective net short positioning (LCNS) by 5,526 contracts or 2.4% from 227,555 to 222,029 contracts net short. 

As expected, the COMEX gold futures open interest plunged by a gigantic 41,423 contracts from 560,066 to 518,643 contracts open.  That is the largest one-week drop in open interest for gold since August 12, 2008 when the gold open interest then fell 42,819 contracts.   

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

 Source for data CFTC for COT, cash market for gold

We normally view a reduction in the LCNS on a material increase in the price of the metal as more bullish than bearish short term. 

On June 29, with gold then trading at $1,240.50, the largest of the largest traders of gold futures (the combined commercials or what we sometimes call the “LCs”) reported a net short position of 289,956 contracts with the open interest then 601,138 contracts open. 

In the five reporting weeks since then, as gold traded lower to test the $1,150s (as expected), then bounced back up to $1,186.08 (as of Tuesday, Aug 3), the LCs have reduced their collective net short positioning by a big 67,927 contracts net. By any measure that shows the LCs are demonstrably less confident of lower gold prices than they were in June.   

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) rose  again this week, up from 40.6% to 42.8% of all COMEX contracts open. 

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

 Source for data CFTC for COT, cash market for gold

The LCNS actually fell this week, but it fell a lot less than the open interest, hence the increase in the LCNS:TO.  Note that the LCNS:TO is still near its lows and a long way from its highs for the year.  As the LCNS:TO moves higher it suggests that the largest commercial traders are more willing to increase their net short positioning for gold futures and vice versa. 

Producer/Merchant… Commercials Reduce Gold Short Positions   

The Producer/Merchant commercials (PMs), the category in which we believe the largest bullion banks “live,” covered or offset 11,752 contracts of their net short positioning, showing 154,427 contracts net short. 

That is about 68,582 contracts less than their all time high net short position of 223,009 contracts in the June 22 COT report with gold then just under $1,240.   

Just below is the Producer/Merchant (PM) positioning graph as of Tuesday, from the disaggregated COT data (COT Graph 3). 

Source CFTC for disaggregated trader data, Cash Market for gold

Remember that the blue line in the graph above is expressed as a negative number, so when the commercial net short position falls, the blue line rises and vice versa. 

Swap Dealers Add Shorts

The “other commercials,” the large traders the CFTC classes as Swap Dealers, added 6,226 contracts to their net short positioning, showing 67,602 contracts net short.  

We think it is interesting that the two classes of commercial traders are not exactly “on the same team” this week.  Still, we have to take note that the SDs are not far from their lowest net short positioning of the year set June 1 at 56,946 contracts net short.

We note that the SDs were on the sell side of gold before the Tuesday cutoff, but gold did not break through its $1,190s resistance until the following day, Wednesday, August 4.  It will be interesting to see next week’s COT data to know if they kept adding to their net short positions or Delta-hedged themselves once gold surged above that resistance.     

Just below is the Swap Dealer no-spread net position graph (COT Graph 4). 

Source CFTC for disaggregated trader data, Cash Market for gold

So, as gold increased by 2.1% the net effect of a reduction in net shorts by the PMs and an increase in net shorts by the SDs is that the commercial net short position FELL by 5,526 contracts, but that was while the open interest fell by almost eight times that much.

The bottom line is that even though the commercial traders are net short 222,029 contracts, which seems like a lot, the combined commercials have only been less net short in five reporting weeks of the past year.  They were more net short in 46 COT reports.    

That, along with the over-sized drop in open interest doesn’t necessarily mean that gold is set to rally further.  It might, and it might not.   Just about anything is possible in the short term.  But it does hint that there is a good deal of bull-side firepower which can be deployed for gold and it tells us once again the PMs and the SDs are not working off the same page of the same playbook.    

Our view is that the COT action for gold is slightly more bullish than bearish short term and it suggests that significant dips should be well bid just ahead, even with the weaker summer liquidity. 

***

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, other important indicators and his conclusions please click on this link.   

And thank you for doing so. 

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 Monday, 9 August 2010 | Digg This Article | Source: GoldSeek.com

Previous Articles

© 1995 - 2019

Live GoldSeek Visitor Map | Disclaimer