-- Posted Monday, 4 October 2010 | | Source: GoldSeek.com

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

Silver surges to 30-year highs, as expected.  

ATLANTA (Got Gold Report) – Gold at $1,300, silver at $22, Big Mining Stocks within inches of breaking out; the buck gets gutted (and skinned), oil pops above $80, copper above $3.65 and the Fed is worried about deflation?  Really?

Hey, wait a minute.  Isn’t this the scenario we thought would happen in 2008 when the dollar was under so much pressure then?  You know, just before the July Massacre and the world plunged into the 2008 panic from hell?  

We are witnessing the process of liquidity fleeing the dollar and trying to find some kind of “stuff” that will hold its value.  This, as confidence in paper and in the governments that print that paper evaporates as the global sovereign race to cheapen most all fiat currencies accelerates.  It’s just great for gold and silver mavens to be alive. 

We worry though, as we probably should, that there is not a happy ending to this movie.  To stretch that metaphor, we seem to be in the frantic car chase scene right now, barreling headlong toward a sign up ahead… Let’s just hope the sign doesn’t say “Bridge Out.” 

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

We note silver still outperforming gold, which is always a more bullish than bearish sign.  This is the first time since last October that the GSR has moved below 60 ounces of silver to “buy” an ounce of gold.  Notice that the ICE commercial traders have now gone net long the USDX – a little, following a very harsh plunge in the greenback.  We can expect further intervention by the BoJ most any time, but especially if the yen trades to below 82.5 versus the USD. Note also that even though gold and silver are at their new highs, the High/Low spreads were not contracting this week.  By itself that suggests strength more than weakness, except when extreme and/or when one is out of proportion to the other. Finally notice that the gains for both gold and silver are “reasonable” as opposed to “overheated.”  

This Week’s Radar Screen  

First things first, 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, or in our COT Flash reports and Vulture Bargain Hunter reports for subscribers.  COT Flash reports appear on off weeks for the Got Gold Report when there are what we consider important changes in the commitments of traders reports.  Vulture Bargain offerings appear ad hoc as there are developments we feel merit comment for and in the issues we track closely. 

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.

Changes to the linked charts are almost always completed by 6:00 pm ET 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.  

Now on to this week’s gold and silver Radar Screen. 

Gold

We reentered gold on the long side July 27-29 with a full position at an average of $1,159.00 as we noted on the web log. …

As we said last time, gold has seen a remarkable and unusually linear run up to this point.  We made a really good, timely entry and now we want to protect the majority of our hard-won gains while allowing enough volatility to give us a shot at staying in the game if gold continues its historic advance. 

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

As we said last time, we still believe that gold has entered a favorable period, both seasonally and economically.  However, we cannot ignore its being significantly overbought, the continued non-confirmation by the largest mining shares and the material “opposition” in the futures markets, all of which we detail below. 

Silver  

As we noted on the web log, when silver broke out of its wide triangular consolidation we managed to secure a one-half normal sized breakout position with an average of $18.71 equivalent.  As we also noted on the web log, once we were convinced this current breakout “meant business” we took the other half of the position at an average $20.30 equivalent. …

We said in our last full report two weeks ago:  “Should silver manage to continue higher, and if it clears $21.44 on a closing basis, we will be “Game-On” for this current breakout attempt (BOA).  We cannot say that silver will also be in uncharted waters as we can for gold, but it has been a long time since anyone has seen these Silver seas above $20.50 on a closing basis.” 

Well, silver did indeed clear its $21.44 previous 2008 pinnacle and then some.         

Here is this week’s short-term trading graph for silver metal.

Silver is usually much more volatile than gold, and therefore more challenging to short term trade.  As we detail below, we are not yet seeing aggressive hedging by the Big Sellers in COMEX futures, otherwise we would have placed our stop closer to this week’s low print of $21.05.

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.   

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, October 1, 2010.  The report is for the close of trading as of Tuesday, September 28.

At Got Gold Report we are 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 gained a net $21.86 or 1.7% from $1,287.03 to $1,308.89 COT reporting Tues/Tues COMEX commercial traders increased their combined collective net short positioning (LCNS) by 10,432 contracts or 3.6% from 292,308 to 302,740 contracts net short. 

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

Source for data CFTC for COT, cash market for gold

The COMEX gold futures open interest (all the action, long and short) rose by a much larger 21,816 contracts from 597,592 to 619,408 contracts open.  That is the highest total open interest for gold in our records.  A very high open interest suggests that a great deal of the available “firepower” on both sides of the battlefield has already been expended. It will take extraordinary buying power in physical gold and in gold futures to continue to press this market higher. …  

Resistance is currently undefined and unknowable, but traders will likely view $1,330 or $1,350 as important psychological battlegrounds looking higher. For the past 8 weeks most all dips, even the smallest of them, have been eagerly bid back higher.  That has led to a most unusual looking, near linear upward chart move for gold.  We suspect that we are very near now to a more meaningful correction, purely on technical grounds, but even then we suspect that any correction very short term will also be as brief as it is harsh. 

When we have had central banks like Russia, China, India, Sri Lanka, Bangladesh, Mauritius, Kazakhstan, and Venezuela on the big for gold in the past year and most probably still on the bid, and when we have  Japan, Switzerland, the U.K., Korea, Taiwan, Brazil and arguably the U.S. and China also attempting to devalue their fiat currencies at the same time, that strong bid for gold becomes understandable, does it not? 

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 statistically flat at 48.9% of all COMEX contracts open.  That is the fourth consecutive week of no material change in the relative net short positioning for the commercial traders.  

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

Source for data CFTC for COT, cash market for gold

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.

We find it remarkable that with gold at an all time nominal USD high, and with the total open interest also at a record, the LCNS:TO is surprisingly still slightly under 50%. …

For the fourth week in a row, our view is that the COT action for gold this week is intriguingly less bearish than we expected, but we wonder how much longer that will continue.  Sooner or later the short side will be looking for blood following such a material move higher.

Speaking very short term, and, mindful of the robust action in silver the past five weeks, it is clear that substantial and perhaps unparalleled liquidity has been flooding into precious metals since August. To us it seemed to accelerate following Fed chairman Ben S. Bernanke’s comments regarding possibly more quantitative easing in Jackson Hole on August 27^th.  His focus then upon deflation and how the Fed would “strongly resist” it and his amazing statement that the Fed would continue to resist it until the economy returned to inflation has been very supportive of the bullish case for gold, silver and some other commodities.  

This may not be the first time a Fed chairman has said he would force inflation upon the economy come hell or high water, but it is the first time anyone we talk to has heard such a thing.   

We will save the balance of our gold COT analysis for the conclusion, but as we have been saying and we still believe:  Given the very strong demand for physical metal on the commercial bullion markets and a now very large offside short position in futures, we fully expect that dips in the price of gold will likely be extraordinarily well bid near term.

***

The above is an abbreviated excerpt of the full bi-weekly 25-page Got Gold Report available by subscription at www.gotgoldreport.com.  GotGoldReport.com also features a very popular free web log with timely and interesting gold, silver and resource company “intel.” To read more as Gene turns next to in-depth analysis of one of the most interesting and important silver COT reports in decades, in-depth coverage of our gold and silver positioning, trading analysis and market intelligence, visit the link above to visit the “blog” and consider subscribing for the full report.  Thank you for your investment of time with us.    

Caveat Utilitor.  

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, 4 October 2010 | Digg This Article | Source: GoldSeek.com

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