Wednesday, October 19, 2011

Special GGR Excerpt – Silver COT Most Bullish in Eight Years

HOUSTON – In a moment we share an excerpt of the full Got Gold Report which was delivered to subscribers Sunday evening, October 16, and posted on the password protected subscriber pages by the intrepid staff of GGR, but first a brief comment.    

With the markets still kind of going through a giant sausage grinder; with a premium on uncertainty and a discount currently for confidence; with Greek people chunking rocks and Molotov cocktails at police in Athens – because they are “shocked, shocked” that their government can’t continue to cook the books and get away with it.  

Greek pols have been coddling Greek voters with an Aegean Sea of borrowed Euros. Instead of being “real” with the people, they have been “real sweet” to them for a very long time.  Naturally the Greek people now want and demand to be kept in the “style to which they have become accustomed.”  Thus, a hissy-fit eruption in the land of Santorini* - even though the government is broke and likely broken by their own hand. (Not unlike people everywhere that get sucked into the socialist model government dependency trap.) 

We hear of plans to expand the EFSF, and if the talk proves to be true, we are indeed talking about a new form of Q.E., another major expansion of liquidity, further debasement of fiat currencies and a guaranteed continuation of uncertainty for the foreseeable future. 

Continued… 

Confidence in Currencies or Metal?  

Very short term who knows what to expect from gold or silver as liquidity rushes to and fro in thin and thinning, very choppy markets.  But longer term, and looking ahead into the coming U.S. election year it seems to us that the fundamental factors which have underpinned the precious metals markets are likely to remain as robustly bullish as they will be dangerous for anyone trading using leverage.  As we have said so many times over the years, we shall remain bullish on gold and silver so long as these conditions prevail and until we see increasing confidence in fiat currencies generally (not just short-term capital flight into them) and a lessening of disdain for the governments that print them.

If one believes that confidence in fiat currencies and in governments is or will be ascendant from now on, then the time to be involved with precious metals has passed and it is time to convert precious metals into the paper mediums of exchange or buy “stuff” with them.  

We don’t believe that right now, how about you?  

Meanwhile, we remain in a nasty negative liquidity event where it is very difficult for any of our chosen mining or exploration companies to sustain advances and the Vulture Bargain battlefield is a very target rich environment.  Difficult except for when our issues see takeover bids, such as our Vulture Bargain #9, Trade Winds Ventures recently did (thank you very much Ian, at Trade Winds!) or like our Vulture Bargain #2, Hathor Exploration, just announced this morning – a higher bid than the Cameco offer by none other than Rio Tinto (Thank you very much Tony, at Hathor!).  By the way, Vultures (Got Gold Report Subscribers) please see the related note on Hathor in the VultureInReview section and our disclosure note at the bottom of it.  We are out on the pop with all of our Trophy Shares.) 

We won’t go on and on about the news today.  Just remember that the markets are not really pricing in today’s news.  The markets are trying every moment of every day to discount the news we will be reading three, six and nine months hence.  At times it is easy to forget that or to become morose and disenchanted by the news of the day, but that’s why the majority of our time is spent tracking technical charts and consuming the data behind them rather than glued to a TV screen watching cable TV. Emphasis on the word “majority” in that last sentence as we admit to being CNBC and Bloomberg junkies too more than we’d like these days. 

Metals Also Uncertain Short Term  

Just below is an excerpt from Sunday’s full Got Gold Report, the section that looks at the legacy commitments of traders report for silver as we hinted at earlier in the week.  Since Sunday neither gold nor silver, which are consolidating after harsh corrections, have shown their hand definitively.  Gold is currently, near the close on Wednesday, October 19, 2011, grinding through the $1,640s and silver is drifting lower in the $31 arena. Yesterday, as we reported here, the silver ETF gapped lower but recovered all the gap, which is anything but bearish.  Today, however, silver shows us “bupkiss” and is a limp-wristed “sister kisser.”    

We suspect that both will “show their hand” before long, if for no other reason than they don’t usually go sideways very much longer than they already have and trend-following traders cannot participate until there is a trend to follow.  We are personally in a strange, but okay place with regard to silver.  Our attitude is that if it were to break lower here and retest the panic lows of September (near $26) that would be great, because we would feel comfortable adding to our own physical position there or below there.  On the other hand, if silver were to break out of its $32.50 resistance and keep on trucking higher, that would be great too, because we have some.  We think that’s a good ‘place’ to be.

But if we didn’t own any silver at all, and knowing what we know and report just below, we’d just about have to be adding at least some physical silver on any significant to strong dips right here and right now – in tranches.  The cheaper the better, of course.      

Excerpt from the October 16 Got Gold Report    

Silver COT Most Bullish in Eight Years         

The Commodity Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET Friday, October 14. The report is for the close of trading as of Tuesday, October 11.    

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,” or sometimes the “Big Sellers,” because they are the largest sellers of gold and silver futures. 

Remember that the COT trading week is from Tuesday to Tuesday and for this COT week gold traded in a tighter band of between roughly $1,600 on the low side to about $1,680 at resistance, ending the COT week stronger, with a test of the $1,680s early Tuesday, near resistance, before settling in the $1,660s – down on the day, but still closer to the highs than the lows for the COT week.  

Silver COT   

Like gold, silver traded in a much narrower range this COT week, consolidating a bounce the previous week up from what may have proven itself as near-support in the $28s.  Indeed, for all of this calendar week silver found consistent support above $31, with determined bidding showing up on Monday right after a faux 90-cent selloff Friday Oct 7 to $31.10.   

20111019SilverSmall

         Silver, daily, 3-month courtesy of Finviz.com

Interesting to note that the weekly low for silver rose by $2.75 to $31.16 while the weekly high only rose 33-cents to $33.06, suggesting ample opposition just above, but also a sense of urgency on the part of bidders underneath.  When we see the lows increasing quickly but the highs staying relatively steady it usually means we are in an ascending triangle (AT) or a similar formation.   ATs are either continuation or reversal patterns. A break either way out of the formation is usually followed hard upon by significant follow-through. Our experience is that ATs are more often than not continuation patterns, which is to say that in silver’s case (and very short term) our technical expectation would be for silver to break to the downside out of the current AT, say six or seven times out of ten tries (intuitively, we don’t have the data to back it up).  

If we were looking at an AT following an upsurge, our expectation would be for the resolution to be a breakout, for silver to continue on higher.  Having said that, when combined with the very, very bullish COT data we have to review just below, we just about have to expect this particular AT to resolve in the form of a near-term reversal - higher.  Once the data is clear, see if you agree.      

For the COT week, as silver added $1.98 or 6.6% Tues/Tues, from $30.04 to $32.02, the combined COMEX large commercial traders added to their collective net short positioning (LCNS) for the first time in five weeks by a relatively small 1,905 contracts or 10.1% from a very low 18,923 to a still quite low 20,828 contracts net short.  As shown in the chart below, we are at very low levels of commercial net short positioning in silver futures.  Indeed we are at 8-year lows for the silver LCNS, meaning we have to go back to 2003 to find a period when the commercial traders were less confident in the price of silver moving lower.  The opposite way to say that is that we have to go back to 2003 to find a period where the commercial traders of silver futures held so few downside bets on silver and then the price of silver was in the $4.40s (not a misprint).      

The open interest for silver actually declined again, for the sixth consecutive week, by 1,404 contracts to just 99,698 lots open. The COMEX open interest for silver futures has not been this low since August 4 of 2009 with silver then $14.63.   

Just below is the nominal LCNS graph for silver futures.  

20111019SilverLCNS

Source CFTC for COT data, Cash Market for silver. 

Needless to say that now, with silver near the $32 mark, we are currently very near the lowest commercial net short position for silver futures since the bull market began in 2003.  As of Tuesday (and as of the prior Tuesday), COMEX futures veterans the CFTC classes as “commercial,” including the bullion banks and the Swap Dealers combined are not positioned as though they believe that silver has very much downside action left in it.  

Part of the reason for that is that the more mercenary Swap Dealers currently hold the largest net long position in silver futures they have held in our records as we will see in a moment.     

As we do with gold, we compare the nominal silver LCNS to the total open interest.  We think 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 – compared to all the other traders on the COMEX.  

When compared to all contracts open, the relative commercial net short positioning (LCNS:TO) for silver rose for the first week in five, from an extremely low and very bullish 18.7% to a higher, but still extremely low and should be very bullish 20.9% of all COMEX contracts open.  

The silver LCNS:TO graph is just below.  

20111019SilverLCNSto

Source CFTC for COT data, Cash Market for silver.

Amazingly, five reporting weeks ago the silver LCNS:TO reached 41.7%, the highest LCNS:TO of the year, with silver then in the $42 arena.  We’ve wiped out roughly $10 or, call it 23.5% in price since then, but goodness, look at the huge, enormous, historic net 26,478-contract (56%) get-out of the short-side of silver futures by the Big Sellers as a group since then (no matter if part of that is because one class of commercial traders went net long in a big way – it counts, brothers and sisters).  That has the LCNS:TO down to levels not seen since silver traded under $5.00 (actually under $4.50) the ounce eight years ago!       

However one wants to look at it, and regardless of what silver does very short term in the days and weeks just ahead, the graphs above are screaming at the top of their lungs like a bullish klaxon.  The graphs tell a tale of longer-term opportunity with a high degree of confidence.  There are never any guarantees in this business.  The price of silver is governed by lots of factors, not the least of which is the much larger and more opaque physical and OTC markets in London, Zurich, Tokyo, Hong Kong, and lest we forget, New York, etc.  The price of silver is affected by more than just the futures markets by themselves, in other words. But, friends and fellow Vultures now hear this:  

Under these extraordinary COT conditions, when so much of the bullish firepower has been swept out of the futures market (and is therefore at the ready to return at the first sign of a new uptrend) – when even after a huge exodus of speculators we can document the apparent reticence of the commercials to take on more downside bets - when indeed one class of commercial traders now holds the largest net LONG position in years – and after all that, with the price of silver still sporting a $30+ handle, it is most definitely a sign that the normal Big Sellers of silver futures are not, repeat not confident in the price of silver falling all that much farther. If their positioning in futures is any guide, we have to note that the Big Sellers have very strongly and decisively positioned for the opposite.  

Look closely at the charts above – both of them. Note the few times in the past when the LCNS and the LCNS.TO have reached even close to this low on the graphs and see if there is one and only one common occurrence following those spikes down so low (and continuing for quite some time thereafter in each and every case).   And how about if we look farther back in time than just those two graphs? 

20111019SilverLCNSlongTerm

If we look back to the beginning of the bull market for silver, all the way back to the last time that the silver LCNS touched as low as it has this past two weeks, we see the same story, except it is reinforced by just how rare it is for the LCNS to travel under 25,000 contracts.  Very simply, the market has sold out and is  attempting to re-set very similar to the way it did after the 2008-Panic, but at a much higher starting level for the price, apparently.       

As we are wont to say at times like this, it would be arrogance of the first order to predict the very near term direction of the price of silver.  The market is unsettled, finding its footing, potentially still hyper volatile and so on, but if pressed to wager, we’d give very high odds that the price of silver will be considerably higher in price two months and four months from now.  The charts above suggest that we should expect that, so we do indeed.  

Naturally, if we were to short-term trade based on our confidence it would only be with the appropriate new-trade trading stops in place for peace of mind and for protection against unforeseen calamity, sudden exogenous events and our being dead wrong, of course!  We can read the signs we can see pretty well, but it is never those signs, the signs we can see and understand, that end up biting us in the caboose.  

 *** 

End of this excerpt.  Original from Sunday, October 16, 2011.  

Thanks for investing your valuable time with us here at Got Gold Report.  We hope to meet with and talk with as many of you as possible at the New Orleans Investment Conference next week.  For last minute information, reservations and other information about the conference, please click on the ad link on the NOIC link on the right side of the Home Page.

That is all for now, but there is more to come.  

*A Volcano in Greece.  The original used Vesuvius, which most people know is a Volcano, but as reader "Bill" pointed out, is in Italy.  Thanks Bill. 


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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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