Sunday, August 29, 2010

Focus on Silver

HOUSTON - Although we are unable to produce a full Got Gold Report for this weekend due to time constraints, we do want to cover some key issues in this special Sunday web log update.  That includes where we plan on placing our own trading stops for gold and silver as well as some interesting developments we are watching closely with a focus on silver.  

Silver Shines Following Tuesday Outside Reversal 

Silver turned in an “outside reversal” Tuesday, August 24  (which happened to coincide with COT reporting cutoff day),  and in the process it surged up and out of the wide triangular consolidation which, as regular readers know, we have been following here at Got Gold Report all along.  An outside reversal occurs when the trading breaks below the previous day’s lows and then reverses to close higher than the previous day’s high.  Outside reversals often, but not always, mark significant turning points and technically minded traders view such action as a more bullish event. 

Below is our own trading graph of SLV, which we use as a proxy for silver trading in New York. 

(SLV - If the image is too small, click on it for a larger version.) (Continued)

Outside reversals are fairly common.  What separates the “impressive” outside reversals from the mediocre in our own opinion, can be measured by the “follow through” which occurs or doesn’t occur immediately following the event. 

In this particular event silver reversed, turning a potential 23-cent loss into a 35-cent gain on Tuesday, and then followed through with another 56-cent advance on Wednesday.  That’s impressive.  For the week, silver surged USD $1.07, an advance of 5.9%, strongly outperforming its larger cousin gold, which added $10.15 to $1,237.88, up 0.8%. 

The fact that the new silver surge occurred just ahead of options and futures expiry (even if it was just the “who cares” August contract) makes it all the more impressive to us.  It suggests that even in the light liquidity of August, the Big Sellers of gold and silver were unable to use their CFTC-granted COMEX futures position limit exemption trading advantage to overwhelm buying pressure to the downside as has happened so often in the past at this time of the trading month.   

We can all conclude that something material has changed in the COMEX futures silver market.  As we noted on the web log, we managed to secure a one-half normal sized short-term trading position with an average entry of $18.71 equivalent. 

We Raise Stop for Silver

The Trading Gods delivered us a strong, 56-cent upside follow through on Wednesday.  (Speaking tongue in cheek) we wish not to anger the Gods by being complacent and ignoring their “gift.”  On Friday we did indeed raise our trading stops on our new short-term silver trade up to a no-loss level near the close. 

Silver has surged in late August.  Something has potentially changed.  Silver has broken out of its triangular consolidation and is now challenging its longer-term resistance and the area that has been heavily defended by the Big Sellers of silver in the recent past (in the $19s). 

We also note that silver closed the week in minor backwardation with the cash price at $19.06 and the near-active September ’10 contract at $19.03 – meaning that there was heavier demand for actual physical silver than there were sell orders to accommodate it and/or traders were unwilling to wait a fairly short time for metal even though it would be less expensive.  Most traders view backwardation in silver, even the most minor of examples of it, as more bullish than bearish short term.  

In addition, the September contract shows a 13,880 contract open interest with first notice day looming just ahead on Tuesday, August 31.   That represents about 69 million ounces of silver metal which “could” be stopped for delivery.  Not all the September contracts will actually be delivered into, but the potential is interesting because there is not 69 million ounces of physical silver in the Registered category today at the COMEX.  Indeed, as of Friday’s CME report, the COMEX warehouses held about 51.9 million ounces of Registered silver. 

Another roughly 59 million ounces are currently stored in the COMEX vaults in the Eligible category.  That silver could be coaxed into the Registered category at some price theoretically.   

We mention the COMEX inventory to show that it would not take all that many silver contracts standing for delivery to completely exhaust the relatively small amount of physical silver metal that backs up all the COMEX contracts trading today.  The open interest plunged by 4,663 contracts to 124,185 contracts open in this week’s COT report (roughly 621 million ounces worth), but with the sharp rally the open interest was back up to over 128,000 by Thursday. 

In our brief interview with Eric King of King World News on Friday (a link to that interview is posted on the web log just below this post), we mentioned that the COMEX commercial traders are a lot less confident of lower silver prices than they were at the beginning of the year.  The basis for that comment is our own look at the commitments of traders reports and the relative commercial net short position.  Regular readers will recognize the graph just below which illustrates the idea well. 


The key point is that as 2010 got underway, with silver then in the $17.70s, the combined commercial traders, the Big Sellers of silver futures on the COMEX, held net short positions equal to about 46% of all the open contracts for silver on that bourse (January 5 report).  As of Tuesday, August 24, with silver trading then at $18.35 (65 cents higher) the Big Seller’s net short positioning amounted to about 41% of all the open contracts (about 5% lower). 

We believe that indicates that with silver in the $18s the largest of the largest sellers of silver futures are now less confident in lower silver prices than they were then.  Does that mean that silver will move one way or another?  No, not by itself.  The LCNS:TO is just one gauge, but it does indicate that the commercials have not positioned aggressively net short as silver approaches its recent heavy resistance on technical charts.  

The simplest way to view the relative commercial net short positioning is that as the LCNS:TO goes lower there is less “opposition” to  - and more bullish “horsepower” for - the silver market, all else being equal. 

There are no magic levels or guarantees, but if thinking about adding metal one can look at the LCNS:TO for guidance and to see if the Big Sellers are being aggressive or not on the sell side.  The lower the LCNS:TO the more favorable the silver market usually is looking ahead.   

Having said that, the commercials have been overrun in the past even after they have taken overly large and seemingly commanding net short positions.  Most notably in 2005 and again in 2007 as the prime examples.  They absolutely have an advantage in trading on the sell side by virtue of their ability to use CFTC-granted exemptions to position and accountability limits as we have written about extensively in the past.  But even the commercials must bow to intense physical and popular demand when it occurs.  We’ll have much more about that in future reports. 

Here’s the short term silver graph we are using.   


Should silver power on higher and actually break above its heavier resistance in the $19.50 - $19.80 region, and do so convincingly, we will likely add the other half of our new silver trade at that time, provided the world is not showing signs of impending major trouble.   

We are pressed for time, so we will move on to a few of the more important signals and indicators that we have on our radar screen this weekend. 

It has been more than two years since silver has shown us a new “definition move,” the signature surge higher which comes after a material breakout above strong resistance.

In long-term bull markets, such as the historic one we are in today, there is often a kind of disbelief in the market precisely when it is ripe for a new definition move.  That was certainly the case in 2007, just before silver broke out of its $14-$15 resistance and surged more than $6 in four months.  Incidentally that definition move occurred with the large commercial traders then heavily net short silver to the tune of as much as 75,000 contracts nominal, but never more than 46% relative to the total open interest. Below is a chart of the last definition move for silver from that 2007-8 time period for reference.


Looking at a longer term chart like the one just above, one gets the sense that silver is now overdue for another definition move.  As much as we believe one is now overdue, we are conditioned as veteran traders not to expect them to occur overnight (as the 2008 definition move chart immediately above reminds us).  We EXPECT that a battle will be fought over obvious and sometimes not-so-obvious lines in the silver market sand. 

We may be feeling that a strong breakout surge is imminent and even position for it, but we are never, ever so arrogant to presume that such a move is guaranteed.  Nothing in the future is even known, much less a certainty … period.  That is why we short-term traders ALWAYS use and constantly manage our trading stops.  Those unable or unwilling to do so should not attempt this high-risk short-term game in our opinion. 

Having said all that, we believe the market for silver is primed for a major move higher.  Whether or not the timing is right now, soon, or farther into the future remains to be seen.  All we know is that we want to be a part of that move if it is now, but protect our ammunition if it isn’t.  We hope we are clear. 

As always we are glad that we hold physical silver metal in our long-term arsenal, and which we plan to add to on a regular basis opportunistically.  

As Bill Haynes of CMI Gold and Silver said in his King World News interview linked in the post just below this one, all summer the “little guy” has been selling more silver than buying it, which is a bullish contrary indicator.  Haynes noted that premiums for silver were “about as low as they can get,” which is also a bullish contrary indicator. 

We are completely out of time, so we will close this special Sunday message with our own short-term trading graph for gold metal.  We have opted to raise our trading stops as shown in the graph, and as we have also noted in the linked charts at the bottom of the most recent COT Flash Got Gold Report for August 22 .  A link to that report is on the right side of the web log.  The linked charts are always at or near the bottom of the reports.  Readers will find considerably more commentary in the actual linked technical charts.

Vulture Bargains 2010: 

#1.  Bravo Gold  (TSX:BVG.V or BVGIF) at C$0.18 June 25.  Possible bottom consolidation C $0.17 - $0.225.  Summer drill program near-term catalyst.

#2. Hathor Exploration (TSX:HAT.V or HTHXF) at C$1.43 July 9.  Richest U-deposit found this resource cycle. Summer and upcoming winter drill programs key.  Resource estimates to come. 

#3. Riverstone Resources (TSX:RVS.V or RVREF) at C$0.49 July 9.  Expanding large-scale shallow gold deposits in Burkina Faso. Probable increase to resources imminent.  Excellent potential for positive news.

#4. Timberline Resources (AMEX:TLR or TSX:TBR.V) at USD $0.75 July 26.  Idaho-based gold miner/driller.  Developing low-cost underground gold mine in Montana, production expected 2011. Intriguing exploration possibilities Battle Mountain-Eureka trend in Nevada. Well-run.  Undervalued. Underground drilling at Butte Highlands and in South Eureka potential near-term catalysts. 

Disclosure:  The author holds long positions in all of the VB companies.

As always we expect all Vultures to do their own full due diligence and to never rely solely on anything we say.  Every Vulture is responsible for himself … as it should be.

Caveat Utilitor. 

Potential VBH candidates:  FDC.V, TEN.V, CEM.V, GPD.T, ATN.T, ANI.V, MDW.V et al.   

Last, but not least, below is this week’s closing table:


Note the strong outperformance of silver over gold, which sent the gold/silver ratio plunging.


A falling GSR bodes well for precious metals, mining shares and the Big Markets more than not - and vice versa. 
That is all from Houston this week.  Until next time thank you for investing your time with us.  Good luck, good trading and as always MIND YOUR STOPS.  Got gold? 


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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