Action in silver & Gold Futures positioning is the most favorable since July '09...
The LARGEST of the largest traders of Gold Futures on the Comex in New York continued to drastically reduce their net short exposure to both gold and silver last week, reports Gene Arensberg in his Got Gold Report for the Gold Newsletter.
A net short futures position – which is the sum difference between a particular group's bullish and bearish bets – increases in value if prices of the commodity declines, and vice versa. Some veteran investors track this positioning amongst the very large actors, using it as a predictive gauge of future buying and selling pressure.
Others believe that positioning has no predictive value. But we believe that the commercial players' "commitment of traders" data – reported by the Commodity Futures Trading Commission (CFTC) each week – is one of many important gold and silver indicators, and one that is moving into a more bullish than bearish structure right now.
In Gold Futures, the net short positioning of large commercial traders (LCNS) has not been this "small" since September of last year, with gold then trading in the $950s. For silver futures in New York, the always-short commercials haven't held fewer net short silver positions since July of 2009, with silver then in the $13.70s.
That is only part of the story as we return to a bullish bias for gold, up from neutral. Those Got Gold subscribers who checked out latest technical charts at the start of last week saw we switched to "cautiously bullish" on Feb. 5th, with gold in the $1050s, immediately after Gold Futures traded harshly down – back to where India bought 200 tonnes of gold from the International Monetary Fund (IMF) in October.
We had been neutral on gold since our 2nd December 2009 report, as gold flirted with $1200 the ounce. But in our last full report two weeks ago we said "that may change very shortly, depending on how the gold market behaves over the next few trading days to two weeks."
So far so good, as gold has indeed bounced up off the implied support range indicated, slightly insulating our new positioning. We note several corroborating signs in a number of the indicators we rely on.
Unfortunately, however, as is nearly always the case at turning points – and also at false turning points – not all of our indicators are unanimous.
- We still note only minimal reductions of metal holdings in Gold ETFs, but we call attention to significant buying pressure for silver ETFs over the past week;
- Large Gold Mining shares are no longer underperforming gold and that is encouraging. The big miners held their ground despite gold and silver weakness over the past two weeks, but they do not seem robust enough for comfort. That is probably due to the very nervous and fearful tenor of most equity markets presently. Persistent mining share weakness was one of the main reasons we were reluctant to return to a bullish bias for gold;
- Despite even more troubling revelations and fearful news out of the Eurozone on Greece, the US Dollar index could not close higher on the week. Now commercial traders on the ICE exchange are record net short the US Dollar index as a percentage of the open interest – what we call a "Kamikaze Short";
- Meanwhile, Comex traders classed by the CFTC as commercial (i.e. industry, rather than speculative) are dumping their collective net short bets for gold and silver futures in a really big way.
The very large reductions in commercial net short positioning has to be the big news of this week's report and that's why it takes the lead.
Indeed, since gold challenged the $1200 level in early December, Comex Gold Futures commercial traders have now reduced their net short positioning by 31% as gold corrected a net 10% in price. The story is similar for silver.
Once again we reiterate our longer-term view that the world will most likely continue down a path of fiat currency debasement, weakening confidence in all fiat currencies. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead – if the world "holds it more or less together."
Therefore, based on a preponderance of all the indicators we follow closely, we believe we have seen enough to return to a cautiously bullish bias for gold and we maintain our cautiously bullish bias for silver. With the Gold/Silver Ratio near 70 ounces, we believe silver is very strongly undervalued relative to gold.
Could we be wrong or early? Could we see further material declines in gold, silver and mining shares? Yep. But we are uncomfortable on the sidelines now, and no human can see the future. We certainly could be proven wrong, early or both. The best we have to work with are probabilities and our experience. Our trading stops take care of the rest.
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