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US banks dumped a huge chunk of their "short" positions in gold just before it surged...

BAM! Gold broke out of its huge consolidation triangle, Wednesday 2nd Sept., writes Gene Arensberg in the weekly Got Gold Report for the Gold Newsletter.

What are we going to do now? Why, for the short-term trading portion of the ammo pile, we recommend executing trading strategy and letting the strategy do the trading, of course. More about that below.

As the first week of September rolled in, the markets for gold and silver heated up. Why? "Tonnes" of reasons. Perhaps Adrian Day summed up one of our favorite drivers of this gold bull market in a CNBC interview with Bob Pisani Friday, when he said, in essence, that gold going up now is a vote of no confidence in the world's "leadership" and another no confidence vote in the world's fiat currencies.

Gold is going higher primarily because the supply of paper with ink on it is seemingly inexhaustible but precious metals supply is relatively constant. Gold is going higher because more and more people are converting the former into the latter pure and simple.

All over the world, chart-watching technical analysts have been waiting for exactly the event unfolded just as we entered the long three-day Labor Day holiday in the US and "Labour Day" in Canada. Whether or not gold follows through to the upside, make no mistake about it, this is certainly a convincing move underway.

A quick look at the two-year gold graph presents the bullish technical picture pretty well. The short version (no pun intended) is that gold has left the confines of a wide, symmetrical triangle consolidation; a consolidation firmly in place since the February turning high near $1,007 the ounce and the corresponding April turning low near $860. Since those two definition extremes gold has put in higher lows and lower highs, tightening into a narrower and narrower range until this past Wednesday.

Technicians love breakouts because they often mark periods of very strongly increased volatility in self-reinforcing fashion. Upside breakouts in a bull trend also confirm one of the primary tenants of technical analysis, to wit: "Consolidations are more often than not continuation patterns." Meaning, of course, that the trading is expected to continue in the direction of the trend which preceded the consolidation.

If we look at a much longer term chart of gold, one going back to the beginning of the Great Gold Bull in 2001-2002, the clear trend has been for gold to "move from the lower left to the upper right," as hedge fund operator and famous spread trader Dennis Gartman of the Gartman Letter is wont to say.

We'll let some of the indicators do most of the talking from here on in this report. Since there is a lot to cover, let's get right into them.

Please note: Gold Newsletter subscribers received this issue of the Got Gold Report Monday morning, September 7. Subscribers enjoy access to all Got Gold Reports, technical charts, analysis and information, as well as Brien Lundin's timely and actionable analysis of specific resource related companies. For more information or to subscribe visit the Gold Newsletter home page...

First up, let's take a look at a very interesting development which has just occurred with the much maligned large US bank's positioning in futures markets. An event that some will probably not believe when they see it, but nevertheless is what the data just released shows.

Each month the Commodities Futures Trading Commission (CFTC) publishes its Bank Participation in the Futures and Options Markets Report which shows the positioning of reporting banks in the US futures markets for commodities including gold and silver.

The most recent report was for bank positioning as of September 1st. As of that report the number of US banks reporting positions in gold rose back up from two to three. The report shows that the big US banks got the heck out of a big portion of their net short positioning just ahead of this breakout higher for gold. That almost has to be a bullish development (or at least a tail wind) for the yellow metal.

As of Tuesday, September 1, with gold then at $955.90, the three US banks with reportable futures positions held a total of 509 contracts long gold and a total of 75,550 contracts short gold for a total net short position of 75,041 Comex Gold Futures 100-ounce contracts. That was with a total open interest of 384,703 contracts open. As shown below in the Gold Commitment of Traders (COT) section, all commercial traders as a group (all 48 of them) reported a net short position of 216,708 contracts the same day.

A net short futures position benefits if prices fall, but could theoretically represent offsetting transactions to hedge the risk of opposite positions or financial derivatives in other markets.

For comparison, as of June 2nd, three reporting months prior, three reporting US banks held a net short position of 123,110 gold contracts while all commercial traders as a group reported 226,521 gold contracts net short, with gold then at $981.45 and a total open interest then of 391,057 contracts. The US bank's nominal net short position is shown in the graph just below.

Since June 2nd, when the net short positioning of the US banks peaked, and especially over the past month, it is quite clear that the large, well-funded and presumably well-informed banks decided, for whatever reasons, to greatly reduce their net short positioning in the US Gold Futures markets. Indeed, based on the monthly reporting above, as gold metal actually traded a net $25.55 lower (from $981.45 to $955.90) the US banks covered or offset a whopping 48,069 or 39% of those short gold bets.

During the same June-September period the total combined collective commercial net short positioning (from all traders classed as commercial, the Large Commercial Net Shorts or LCNS) fell 9,813 contracts or 4.3% from 226,521 to a still quite high 216,708 contracts net short.

Measured as a percentage of all commercial net short positions, the three US banks' net short positioning fell from almost 61% in July to less than 35% in two reporting months with gold trending higher as shown in the chart below (the last three data points of the right axis).

Contrary to some analyst's expectations, the US banks net short positioning fell at a fast clip over the past two months. We cannot help but notice that it fell very sharply IN ADVANCE of this most recent breakout for gold metal. Coincidence?

We suspect that the same confusion and chaos which has befallen the Nymex futures market for natural gas is in some small part to blame for this turn of events, as the US regulator, the CFTC, has already threatened to renege on position limit exemptions for some financial aggregators on the long side of the natural gas, oil and wheat markets. That action has temporarily put unnaturally strong downward pressure on the North American-centric natural gas market as ETFs were forced to quickly downsize their long positioning in futures.

The banks could be in the process of reducing their collective futures positioning ahead of what they fear could be future CFTC-enforced restrictions on the aggregate size of their position-taking in financially settled futures contracts. (In Texas English, the banks could be "getting smaller" out of caution before the rules change and they are forced to do so abruptly.)

Up to now the banks and other very large traders who cater to commercial clients have been able to amass virtually any size position under exemptions to position limits afforded "bona fide hedgers". While the CFTC has not explicitly said that it intends to more strictly enforce position limits for interests who are merely hedging financial risk (as opposed to actual producer hedging for deliverables) some market watchers and commentators believe the CFTC intends to redefine which interests will be allowed to avail themselves of the exemptions now granted to most traders classed by the CFTC as "commercial" or "hedgers".

The CFTC has also not specifically laid down new rules or position limits in the metals futures markets, so far, however both Chairman Gary Gensler and Commissioner Bart Chilton mentioned the metals markets as within the scope of recent CFTC hearings on position limits at the CFTC.

Here at Got Gold Report we remain very highly skeptical that the CFTC really intends to limit the size of futures positioning for the hedging or short side of the market at all. But as we called for in a public comment letter to the CFTC, if the Commission intends to limit the size of traders on the long side then they should also limit the position size for all traders on the short side as well, equally, fairly and without exception or exemptions.

Whether the US banks "got out of Dodge" with their gold net short positioning because of the possibility of new position limits or simply because they were "lucky" is kind of beside the main point, which is that they have represented some large fraction of the support which the gold market has seen of late. One probably cannot cover 48,000 short gold contracts without it propping up the market at least a little.

We have to note a somewhat different picture when it comes to the US banks' positioning in silver. As of September 1st, exactly two US banks reported holding 13 contracts long silver and 29,888 contracts short silver for a total net short position of 29,875 Comex 5,000-ounce contracts - with the total open interest of 106,671 contracts open and silver closing on the cash market then at $15.01.

The nominal net short positioning of the US banks in silver is shown in the graph just below.

All commercial traders as a group (all 36 of them) held a net short silver futures position of 48,056 contracts as of last Tuesday (as detailed below in the Silver COT section), so the two US banks' percentage of the total commercial net short positioning actually fell from 76.3% to 62.2% over the past month.

Although the nominal size of the bank's net short positioning was virtually unchanged, because the net short positioning of all commercial traders increased for the period, the effective relative positioning of the banks to all commercial futures traders is less than it was a month ago. Indeed, as silver is just now breaking out of its consolidation along with gold the bank's relative net short positioning is the lowest it has been this year as shown in the chart below.

The overall commercial net short positioning for Comex silver futures remained very highly concentrated in the two US banks as of September 1.

Moving on briefly to some of the other indicators...

Gold ETFs: As gold metal powered $39.48 higher for the week (to $994.40 on the cash market), SPDR Gold Shares, by far the largest gold exchange traded fund (GLD), reported a net weekly increase of 15.8 tonnes to show 1,077.63 tonnes of gold bars held by a custodian in London.

In addition, Barclay's (soon to be BlackRock's) iShares Comex Gold Trust (IAU), reported an addition of 1.2 tonnes, to 74.67 tonnes of gold held in Comex warehouses.

All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively added a net 17.58 tonnes of new gold metal, to a combined 1,263,85 tonnes worth about $38.8 billion.

That may sound like a lot of money tied up in that allocated gold stash, but it really isn't if we consider that the US government had to use over four times that much bailing out just one US insurance company, AIG, which had a bunch of wrong-way derivatives bets this time last year.

Apparently the negative money flow seen in the Gold ETFs since July has now reversed back into positive money flow. The authorized market participants for Gold ETFs add gold (and increase the number of shares in the trading float) in response to more buying pressure than selling pressure and vice versa.

Silver ETF: Barclay's (also for now, and soon to be BlackRock's) sponsored iShares Silver Trust (SLV), actually began the last week by reporting a 73.42-tonne reduction followed by a 3.63-tonne maintenance reduction, but as silver also moved up with gold, buying pressure reasserted itself. SLV reported a 61.13-tonne addition to its silver holdings on Thursday to show 8,726.20 tonnes of average 1,000-ounce allocated silver bar inventory. For the week that's a net 15.87-tonne reduction.

Earlier in the week we took note of much wider than normal spreads between the share price of SLV and the then net asset value or NAV, so the early-week reductions to SLV metal holdings were not unexpected. The spreads tightened considerably on Wednesday and Thursday, however, which explains the reversal from negative to positive money flow for the largest silver ETF.

As one might expect with a full-blown breakout underway, the Gold Price recorded a higher weekly low ($944.87 Monday) and a significantly higher cash market high ($997.67 Thursday), and perhaps the most surprising aspect of this week's rally was the almost total absence of Friday profit taking ahead of the long holiday weekend. The last print on Friday showed $994.40 on the cash market, just $3.27 under the Thursday high. For the week the yellow metal booked a dandy net gain of $39.48 an ounce or 4.1%.

Apparently the fear of being short overpowered the fear of being long ahead of the weekend. Having blown through its middle resistance of near $15, Silver surged strongly in a lightning-fast romp, right up to its upper resistance near $16.20. For the week silver boasts a whopping net advance of $1.51 or 10.3%! Both the weekly high ($16.34 Friday) and low ($14.55 Monday) were much higher week on week and like gold, silver managed to close near its high for the week with little to no profit taking.

Despite the fact that many traders think the US Dollar bearish trade is overly "crowded," the Dollar was unable to gain ground this past week. The US Dollar index (DXY) went nowhere, closing the week at 78.16, down 13 "ticks" from the prior week's Friday close as shown in the US Dollar index graph below in the charts section.

As kind of an alert to our readership, we want to highlight the action in ICE futures in the DXY. As the "Dixey" ROSE 50 basis points, from 78.23 to 78.73 COT reporting Tuesday to Tuesday, ICE commercial traders dumped a whopping 7,115 contracts (83%) of their collective net long positioning. The "ICECOMs" reported a net long position of 1,462 DXY contracts out of a total open interest of 30,351 contracts (LCNL:TO = 5%) as of September 1. As recently as one month ago the ICE commercials had long Dollar index bets equal to 50% of the open interest.

Apparently the ICE commercials fear unfavorable Dollar news in the near future. Either that or else the inability of the greenback to mark a significantly higher high for the prior week has them extremely cautious.

The Gold/Silver Ratio (GSR) meantime plunged last week as silver way-outperformed its yellow cousin, finishing the week at 61 and change. (A most gratifying development for yours truly, by the way.)

Large, well-financed silver and Gold Mining shares, which have been more or less treading water for months, answered the pop higher for gold this past week as shown in the HUI index charts. Interestingly, the Big Miners as a group are also at a key technical resistance area now, but remain well under their pre-2008 crisis levels. The Friday close of 409 and change is the highest close of 2009 so far.

Smaller, less liquid and more speculative miners and explorers also advanced on the week, but continue to woefully underperform relative to their larger relatives as people remember all too well how they were mistreated with them in 2008. We follow the Canadian S&P/TSX Venture Index or CDNX as a proxy for the "little guys", and as the charts linked below in the charts section show, they have a lot more "room to improve".

If, repeat IF, this current breakout attempt by gold and silver turns out to have real "legs", we have little doubt that the "little guys" will explode to the upside in very short order as collective fear and disdain for speculative issues morphs into intense greed and interest in them virtually overnight. Some of the more popular or better promoted issues have already launched to the upside over the summer.

Gold COT Changes: In the Tuesday 9/1 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold, the Comex large commercial's (LCs) collective combined net short positioning (LCNS) edged 5,366 contracts or 2.5% higher from 211,342 to 216,708 contracts net short Tuesday to Tuesday as US Dollar spot gold rose $10.85 or 1.2% from $945.05 to $955.90 while the total open interest INCREASED 5,074 to 384,703 contracts open.

The LCNS rose 6,797 contracts and the open interest rose 5,819 contracts the week prior, so up to the gold breakout the Comex commercials were actually adding more to their net short positioning than the increase in open interest.

Despite the US bank's big reductions in net short positions, all commercials as a group increased their short bets a little. However, as of Tuesday, they were not quite as strongly net short nominally as they were five weeks prior.

Gold versus the commercial net short positions as of the Tuesday COT cutoff:

The chart above looks at just the nominal amount of commercial net short positioning. The chart below compares the Comex Gold Futures commercial net short position for gold with the total open interest (LCNS:TO). That gives us a better idea of how the largest hedgers and short sellers are positioned relative to the rest of the Comex traders.

As measured against all Comex open contracts, the commercial net short position remained quite high at 56.3% of all open contracts.

A very high LCNS:TO is dangerous and usually bearish, but as we have been saying, a very high LCNS:TO does not necessarily mean the commercials are "right". Indeed we have expected that the LCNS:TO would be quite high if and when gold would challenge the "Great Wall of Gold".

Silver COT: As silver hustled 73 cents or 5.1% higher COT reporting Tuesday to Tuesday (from $14.28 to $15.01 on the cash market), the large commercial Comex silver traders (LCs) added a very large 5,338 contracts or 12.5% to their collective net short positioning (LCNS) from 42,718 to 48,056 contracts of net short exposure. The LCNS actually dipped a small 403 contracts the prior week. The total open interest ROSE 5,132 contracts to 106,671 Comex 5,000-ounce contracts open, after falling 1,988 contracts the week prior.

For context, the chart below compares the silver LCNS to the total number of open contracts on the Comex division of Nymex (LCNS:TO). That gives us a better idea of how the commercials are positioned relative to all the Comex traders. When compared to all the contracts open, the commercial net short positioning in silver futures jumped from 42.1% to 45.1%. Not surprisingly, that is the highest LCNS:TO of the year.

Since last Tuesday's cut-off date for the Commitment of Traders' report, the open interest for both gold and silver has mushroomed substantially higher. The gold open interest is at least 50,000 contracts higher and silver more than 12,000 contracts higher and trading volumes have been robust. This particular breakout attempt has not been a meek one in other words.

It is as if someone fired a long-awaited starting gun or, perhaps to mix metaphors, it is very much like a seismic shift of some kind has occurred.

The fact that gold is rising reflects growing contempt of government's inability to stay within its means; contempt of government interference into free markets; contempt of government removing all ties of our currency to gold and silver, and a growing mistrust of our overly intrusive government seeking more oppressive control of what it now views as its subjects. They are stealing our freedom by a thousand cuts and borrowing against the labor of our children in amounts that cannot be repaid. The current path is completely unsustainable. The productive among us are weary, angry and disgusted with the national socialist elitists. The productive class, the ones who actually still pay income taxes, have taken about as much of this bureaucratic steamroller (a.k.a. "BS") as they can stomach.

Atlas is beginning to shrug. Got gold?

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A land developer, professional numismatist, self-taught bullion trader and investor since 1980,the late, lamented Gene Arensberg analyzed 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 still available at GotGoldReport.

See the full archive of Gene Arensberg.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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