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Got Gold Report

Commercial gold and silver players remained confident of falling prices last week...

GOLD CLOSED the month of September with a four-digit price of $1007 and change, writes Gene Arensberg in Houston in his deep technical analysis for the Got Gold Report – its first ever monthly close above $1000 an ounce.

For the past two weeks Gold has consistently shown support in the $990s on a closing basis. Material resistance seems to have formed at slightly lower levels, first forming in the $1020s and then edging a little lower to just under $1010.

That shows up on the charts as a technical "flag" or small consolidation. And the fact that we have a consolidation – at upper and historic resistance – means that the jury is still out whether gold has what it takes to complete a convincing breakout.

So far, the massive resistance put up by the largest gold hedgers and short sellers of "paper gold" futures has been enough to keep gold from printing new all time highs. And the longer gold fails to advance convincingly beyond the upper edge of the developing technical "flag", the more emboldened those who would sell gold become.

On the other hand, the longer that gold fails to violate its obvious new support in the $990s, the more confident gold bulls will become.

Obviously, such a gold bull-bear stalemate will be short lived (no pun intended). Sooner or later gold will "show" its hand, forcing one side or the other to take defensive action.

We are convinced that whichever way gold ends up moving out of this high-consolidation there will be significant and rapid follow through. We are intensely interested as to which of the battling armies will achieve victory, but the indicators we follow religiously are in short-term conflict, rather than agreement.

The fact that gold has managed to hang onto chart real estate in four-digit territory for more than just a few days is a very strong bullish indication. Up to now, all forays of gold above the $1,000 line were fleeting and immediately followed by very harsh sell-downs. The fact that gold has not even once attempted to challenge its initial consolidation breakout near $976 is also supportive. It suggests that gold is well bid on any dip currently.

We are nearing the one-month mark since gold first crossed the $1,000 line this time on September 8th. Gold bulls may have become nervous since gold has stalled in its ascent, but if gold doesn't break high-support soon (by closing below the $990s), it will be the bears who will get the "willies" and furnish the buying needed to blast gold northward as they exit.

We have personally been stopped out (very nicely profitably) on a majority of our short-term gold positioning. And as short-term speculators with large paper profits at the Got Gold Report, our job is to protect those profits, especially at points of obvious and historic resistance.

Having said that, we remain at the ready, like a bird dog on point, to redeploy back into gold (and silver) following Friday's stunning reversal after the worse-than-expected US payroll figures. The sell-down on that report was not only stopped in its tracks, but short covering right after that caused an impressive Friday near-high-close for gold. (Not as impressive for silver.)

Short term trading aside for just a moment, we see no reason to change our longer term positioning in physical gold and silver metal. If anything, the events of the past few weeks have only added support to our primary thesis – that the entire world will want to convert their fiat currencies into precious metals on just about any dip.

Please note: The public issue of Got Gold Report is usually released only after a delay following delivery to Gold Newsletter subscribers. However, due to our speaking at the New Orleans Investment Conference, this particular issue is being released to the public at the same time. Gold Newsletter subscribers also 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...

Let's see what some of the indicators are indicating:

Gold ETFs
As gold edged up $12.09 for the week, SPDR Gold Shares (GLD) – by far the largest gold exchange traded fund – reported a net weekly increase of 2.441 tonnes to show 1,096.548 tonnes of gold bars held by a custodian in London.

All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively added a net 3.51 tonnes of new gold metal, to a combined 1,292.76 tonnes worth about $41.7 billion.

Apparently there was again somewhat more buying pressure than selling pressure in the world's Gold ETFs over the past week. (The authorized market participants for Gold ETFs add bullion and increase the number of shares in the trading float in response to more buying pressure than selling pressure and vice versa.) But not enough to suggest a surge of buying interest.

Silver ETF
Barclay's (soon to be BlackRock's) sponsored iShares Silver Trust (SLV) reported a small, maintenance reduction of 3.53 tonnes to 8,594.22 tonnes of average 1,000-ounce allocated silver bar inventory.

As expected in the last full Got Gold Report, SLV reported a reduction of 128.45 tonnes the week ending September 25. That sale of metal by SLV had been telegraphed by the market in the form of wider than normal spreads between the spot price of silver and the net asset value of SLV per share as we reported.

We have to take note, then, of some modest negative money flow (more selling pressure than buying pressure) for the largest silver ETF. Taken in context with continued lower premiums for physical silver products, this lends support to the bearish case for silver very short term.

However, we would not be at all surprised if silver were to find overwhelming support not all that far below the current trading.

Gold COT Changes
Basis Friday's Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal, the Comex Gold Futures large commercial's collective combined net short positioning (LCNS) declined 12,376 contracts or 4.3% from an all-time record 287,610 to a still stratospheric 275,234 in the week-ending last Tuesday.

US Dollar Spot Gold fell $22.20 or 2.2% during that period, down from $1,014.50 to $992.30. Total open interest in the US Gold Futures market fell 12,560 to 454,585 contracts open.

Notice, please, that the decline in LCNS was roughly equal to the drop in open interest. That argues against those who blindly contend that "the commercial traders drove down the price". Because instead, as gold declined a little in price, the LCNS declined a little.

And if the commercials had "driven gold lower" wouldn't their net short positioning have increased?

The chart above looks at just the nominal amount of commercial net short positioning  (the number of bearish bets minus bullish bets, held by traders acting for gold-industry players such as refineries and bullion banks). The chart below compares the Comex 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 remains at extremely high levels. As of Tuesday, September 29, the LCNS:TO was equal to 60.6% of all contracts open on the Comex division of the New York Mercantile Exchange (Nymex).

That is only just slightly lower than the all time record 61.6% of the prior week. So clearly, the large, well-funded and presumably well-informed traders classed by the CFTC as "commercial" remained strongly positioned for gold weakness.

Silver COT Changes
As silver declined 97 cents or 5.7% from Tuesday to Tuesday, down from $17.12 to $16.15 on the cash market, the large commercial Comex silver traders (LCs) reduced their collective net short positioning (LCNS) by a dinky 249 contracts, from 64,355 to 64,106 contracts of net short exposure.

The total open interest meantime rose by 571 contracts to 128,695 after rising 4,251 contracts the week prior. The Comex commercial traders sure didn't exit very many of their net short positions as silver fell by just under a Dollar. They were apparently convinced that silver has much more downside with the white metal in the low $16s. 

When compared to all the contracts open, the Comex commercial net short positioning in silver futures edged down slightly from 50.2% to 49.8% of all open contracts.

Frankly, we are disappointed in the very small amount of commercial net short reduction as silver tested the $16 level. That suggests that the commercials are pretty secure in their short-silver positioning at present. Of course, as we have said so many times, that doesn't necessarily mean the commercials are "right".

Although a very high LCNS:TO is usually bearish, sometimes a very high LCNS:TO is actually a precursor to a major breakout higher.

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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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