Gold and Silver

Got Gold Report: Gold, silver futures in backwardation

Gene Arensberg — Wed, 04 Nov 2009 19:34:55 +0000

Demand forces cash prices higher than futures

ATLANTA – The most important news of this past trading week is that both gold and silver futures on the COMEX in New York finished the week in backwardation. A condition most long-time traders view as more bullish than bearish very short term. We’ll have more about that below, but first here’s this week’s closing table:

This Week’s Bottom Line Summary (in bold)

Our bias remains cautiously bullish for gold, silver and mining shares. Stops tight, but not too tight.

This week we see slightly negative money flow in most gold ETFs, but significant positive money flow into the leading U.S. silver ETF (slightly bullish). Both gold and silver ended the week in moderate backwardation on the COMEX futures markets, with the cash price actually higher than the front active contracts. (Bullish, see comments below.)

Price action suggests a consolidation is still underway, with much wider high-low spreads, but with silver much weaker. (Bearish.)
The U.S. dollar rallied, but ICE commercials dump a good-sized chunk of their DXY net long positions (detailed below). Well-financed mining shares were hammered along with the U.S. Big Markets (our nickname for the DOW, NASDAQ and the S&P 500).

The largest of the largest gold futures traders, the always net short traders the CFTC classes as commercial, reduced their net short positioning somewhat, but remain hugely net short. Although we noted action that has, in the past, been consistent with more aggressive commercial net short reductions late week, our caution flags are still flying. For all the details don’t miss the Gold and Silver COT sections below.

Repeating from the last full report two weeks ago: With a nod to the Trading Gods (so as not to offend them too much), the action right now is reminiscent of the last time the short-happy COMEX commercials were overrun – for months and months – beginning in August, 2005 as gold first challenged, then tested, then blew through the very staunch defenses thrown up by the hedgers and short sellers in the $450 - $475 region. Gold went on to test the $730s the following May, some 60% higher than where the commercials took their “goal line stand” that August of “ought-five.” (A similar move in this event would take gold up to around $1,520 the ounce, give or take $100. That’s not a prediction, just an observation.)

So, we have to keep the caution flags flying because of the enormous net short positioning of the COMEX commercials. But in this case, that caution extends equally to both bulls and bears. While it is usually bearish in times of such extreme commercial net short positioning as we detail below, it is also exactly the condition we expect to be in place when the “Big One,” the seminal technical definition move higher we have been expecting, (a high percentage explosion), finally occurs. We almost certainly cannot have one without the other.

Tight stops remain the standing order of the day, but not too tight! With the over-sized commercial net short positioning and minor backwardation in play, dips should, repeat should, be well bid while advances could potentially be explosive.

MIND YOUR STOPS or employ appropriate “insurance” for all at-risk positioning now, if not already accomplished. Well-placed stops offer protection against unexpected adverse calamity and they make for a much better sleep regimen.

Please note: Gold Newsletter (GNL) subscribers received this issue of the Got Gold Report Monday morning, November 2. GNL 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.

Now, a closer look at a few of this week’s indicators:

Gold ETFs: SPDR Gold Shares (GLD), by far the largest gold exchange traded fund, reported several very small reductions totaling 4.575 tonnes so the trust held 1,104.519 tonnes of gold bars held by a custodian in London.

Source for data SPDR Gold Shares.

Barclay’s (In December it will become BlackRock’s) iShares COMEX Gold Trust (IAU), reported adding a rather large (for it) 4.57 tonnes to show 79.83 tonnes of gold held in COMEX warehouses.

All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively recorded a reduction of 5.13 tonnes of gold metal, to a combined 1,302.88 tonnes worth about $43.6 billion as of Friday’s close.

Apparently, then, there was slightly more selling pressure than buying pressure in the world’s gold ETFs over the past week.

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 ETFs: Barclay’s (also for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), reportedly added a large 131.43 tonnes to show 8,744.00 tonnes of average 1,000-ounce allocated silver bar inventory for the week. That is as expected, as we noted tight spreads between the SLV share price and the implied NAV per share for SLV on Monday and again on Wednesday/Thursday.

Source for data, iShares Silver Trust.

We have to take note of considerably more buying pressure than selling pressure for the largest silver ETF, suggesting that investors were keen to buy the dip on silver over the past week.

SLV Short Interest Normal

On a related issue, earlier this week we noted some web-based commentary regarding short selling on SLV and GLD. One such report suggested that short sales of SLV shares constituted a “fraud,” under the writer’s notion that short sales do not have silver backing them.

Actually, before shares can be sold short they have to first be borrowed from someone who owns them. Since there is/was already an appropriate amount of silver backing the share borrowed to sell short, and since the borrowed share has to be returned to the owner at some point in the future, we do not see this as a legitimate issue. The collective effect of shares being borrowed and short sold against those being covered and returned to the float should be equal over time.

We disagree with those who contend that short selling of SLV or GLD is somehow “fraudulent.”

To the contrary, short selling forms a vital part of the price discovery process for exchange traded funds. Arbitrageurs and day-trading opportunists actually perform a majority of the “price policing” of most of the world’s ETFs. They are constantly on the lookout for the tiny, but lucrative pricing imbalances that occur naturally in any freely-traded market as either buying or selling pressure moves the issues up and down.

Without the collective action of both long and short trading by countless individuals, each acting in their own self interest, prices of the ETFs would almost certainly become much more volatile. Without the long and short selling arbitrageurs, it would be more difficult to manage the price of any ETF, ETN or ETC.

Perhaps more to the point, since the objective of SLV is to track very closely with the spot price of silver, less accumulated fees (SLV has done a fine job of doing exactly that by the way), there really wouldn’t be any realistic motive for over-selling the shares short.

To see exactly how well SLV has tracked with the spot price of silver, take a quick peek at this comparison graph on Stockcharts.com, which shows the relative performance of both spot silver and SLV.

http://stockcharts.com/charts/performance/perf.html?$silver,slv

As anyone can instantly see, the ETF’s performance is nearly identical to spot silver. If there was any short selling hanky-panky going on we sure wouldn’t expect to see the ETF in virtual lock step with spot silver, would we?

Even if there was an overabundance of shares sold short, temporarily driving the price lower than it should be, investors and arbitrageurs would quickly step in to earn the artificial spread such short selling pressure might cause.

As of the most recent short interest reports, SLV showed a total short interest of about 7.5 million shares, or about 2.6%, of the issued and outstanding shares. Since the average daily volume of SLV is upwards of 10 million shares, we see that level of short selling as reasonable and normal for a continuous offering ETF - especially after a long, high-percentage move to the upside when investors are more likely to hedge or bet on the downside. For comparison, the short interest for GLD as of the same report date was 2.5% of the float or about the same.

Short selling can also be an effective way to hedge temporarily as well as an opportunity for those who wish to bet on price weakness. SLV would be a less, not more attractive vehicle if investors were not able to use it as a trading vehicle in both directions. And no matter how much we might want to believe that short selling of SLV could interfere with silver pricing, if we stop and think about it for just half a minute, we realize that silver is a global market. The spot price of silver reflects the collective action of millions of individuals all over the globe. The pricing of just one trading vehicle for silver cannot drive global prices.

It is only when there are larger imbalances between buying and selling pressure that the fund’s managers, the authorized market participants or AMPs, step in to either sell shares of the fund or buy them to restore the share price back to very near its NAV per share. They do so in minimum baskets of just under $50,000 each as we have talked about in previous Got Gold Reports, either increasing or decreasing the number of shares in the float and causing an appropriate amount of silver to be added or sold concurrently with that transaction.

As long as SLV continues to track very closely with the price of spot silver why should we care if someone chooses to take the short side with it? We say “go for it,” if one thinks silver is heading lower, but only with appropriate trading stops, of course.

We understand that those who approach the metals markets with a physical-only bias or don’t like ETFs for whatever reason might like to make something out of the short selling issue, but it really isn’t one.

SLV is not the same thing as physical silver (we like both, by the way). SLV is just an amazingly well-run trading vehicle that uses silver as the basis for its net asset value. It would be impossible to trade physical silver or even silver futures as easily or as inexpensively as we can today with silver ETFs - in both up and down markets.

Having said that, at Got Gold Report, we continue to believe that with premiums for physical silver metal at very reasonable levels, even at discounts for some silver products, right now is an excellent time for longer-term investors to “exchange” their SLV shares for the real deal physical metal, provided the investor has the ability to store silver safely or, for larger amounts, is satisfied with exchange receipts or warehouse certificates for allocated metal from well-established, respected or official sources. (COMEX warehouse receipts held by your commodities broker or in a very safe place are one acceptable option.)

As always, for actual physical metal to store at or near home, we continue to prefer U.S. pre-1965 90% silver dimes, quarters and half dollars, usually sold in $1,000 face value bags. Currently they are still at “par” or slightly discounted locally. We doubt that condition will remain for very much longer, however.

Moving to the price action in Gold, the yellow metal turned in a lower weekly low ($1,026.50 Thursday) and a lower cash market high ($1,059.86 Monday). Although gold probed a lower low, we noted significant and determined buying pressure in the $1,020s both Wednesday and Thursday. We also noted the kind of action on both Thursday and Friday, which has been consistent in the past with substantial commercial short covering. High-low spreads widened considerably as shown in the closing table above, with most of the “give” from the low side. The last trade on Friday printed $1,045.70 on the cash market, down $9.49, or 0.9%, for the week. Interestingly, gold in euro terms actually bumped up a little less than 1%. Please see the gold charts linked below for more technical commentary.

Silver lived up to its reputation of amplifying the movement of its yellow cousin this week, beginning the trading in the $17.60s. As gold moved down to test the $1,020s, silver “answered” with its own move down to test $16.11 on both Wednesday and Thursday. But as gold managed to cut its losses roughly in half, the white metal closed closer to its lows. When the last trade Friday printed $16.31 on the cash market it recorded a weekly loss of $1.36, or 7.7%, versus gold’s minus 0.9%. Both the weekly high ($17.76 Monday) and low ($16.11 both Wednesday and Thursday) were lower week on week, and weekly high/low spreads widened a bunch as shown in the opening table. Like gold, most of the “give” in the spreads came from the low side. We had to note that there was considerably less “recovery” in the silver price compared to gold late Friday, but we definitely noted determined buying of SLV – in size – in the silver equivalent $16.20s just prior. Please see the silver charts linked below for more technical commentary.

Backwardation in Both Gold and Silver

Perhaps the most interesting news this week is that both gold and silver futures ended the week in moderate backwardation, where the cash or spot price was higher than the front active contracts. In the case of gold, cash gold closed at $1,045.70, fully $5.30 above the December contract as shown in the table below courtesy of Barcharts.com. Indeed, this time the backwardation is actually strong enough that the cash price was higher than all the contracts going out to August of 2010.

Barcharts.com

Backwardation is rare and unusual in the metals futures markets, but this week we see the same thing with silver as shown in the table just below.

Barcharts.com

While backwardation by itself does not guarantee that the metals will advance in price, it is most definitely viewed by many analysts and traders as a much more bullish than bearish condition. We need to take note and to trade accordingly. All else being equal, both gold and silver should, repeat should, remain well bid on most any dip in the near term, especially given the over-sized commercial net short positioning detailed below in the Gold and Silver COT sections.

The U.S. dollar finally gained some ground this past week, helped by ailing equity markets and another enormous amount (over $130 billion) of official debt issuance by the U.S. government. As foreigners move funds into place in order to buy U.S. debt that adds at least some upward pressure to the greenback.

The U.S. dollar index (DXY) ended the week at 76.35, about 88 basis points higher than the prior week’s Friday close as shown in the U.S. dollar index graph below in the charts section.

In dollar index COT action, as the DXY rose 67 basis points COT reporting Tuesday to Tuesday, to 76.20, ICE commercial traders dumped 2,456 contracts of their collective net long positioning. The “ICECOMs” reported a net long position of 10,065 DXY contracts out of a total open interest of 36,160 contracts (LCNL:TO = 28%) as of October 27. The U.S. dollar index chart, with commentary, is below in the charts section.

Moving to the Gold/Silver Ratio, the GSR jumped quite a bit higher this past week as silver way over-sold gold, finishing the week at 64.11 ounces to buy one ounce of gold metal. We view this jump higher for the GSR as a bit of a potential warning, both from a metal-centric viewpoint and as a barometer of deepening market fear. We much prefer a falling GSR to the opposite. We wouldn’t want to see the GSR stay above its 50-day moving average for very long and unless it corrects back lower almost immediately (within, say, the next week to two weeks), we intend to take even more aggressive defensive action in the equities markets. A rising GSR is most definitely a bearish omen and vice versa. See the short-term GSR chart below in the charts section.

As we noted in the last full report two weeks ago, large, well-financed mining shares, refused to “answer” the last $60 or so of gold’s advance and we said that was normally a reason for caution. Since then the HUI has indeed taken a 60-point dive closing Friday at 390.89. Much of the decline can be directly attributed to the sell-down in the Big Markets. Please see more in the HUI index and HUI/Gold ratio charts below in the charts section.

Smaller, less liquid and more speculative miners and explorers such as those in the Canadian S&P/TSX Venture Index or CDNX (see the charts linked below in the charts section), which had been showing significant strength two weeks ago also moved lower, but not nearly as much as their bigger cousins relatively speaking. We noted that the CDNX actually outperformed the HUI this week, albeit in a down market. If this were the next waterfall plunge for equities, we would expect the CDNX to be sold off harder and faster than the big companies. That’s not what we are seeing so far.

Gold COT Changes: In the Tuesday 10/27 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercial’s (LCs) collective combined net short positioning (LCNS) declined 14,014 contracts, or 4.7%, from an all time record 297,493 to a still extremely high 283,479 contracts net short Tuesday to Tuesday as U.S. dollar spot gold fell $16.41, or 1.6%, from $1,055.91 to $1,039.50 - while the total open interest fell 12,199 to 497,479 contracts open.

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

Source for data CFTC for COT, cash market for gold.

The chart above looks at just the nominal amount of commercial net short positioning. 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 is now a little farther under the record levels set on September 22 (then at 61.6%), with the LCNS:TO still in “dangerous territory” and equal to 57% of all contracts open on the COMEX, division of NYMEX in New York.

Source for data CFTC for COT, cash market for gold.

Notice that the LCNS:TO is actually declining even though gold remains above $1,000 the ounce.

Repeating from the last full report two weeks ago: Both the very high commercial net short positioning and gold’s determined advances are very reminiscent of that 2005 defeat of the $450 barrier. In 2005 the gold bears were gradually, but steadily overrun, with the hedgers and short sellers doing the stop-out-fall-back-sell-again shuffle for months, all the way up to the $730s before they were able to gain the advantage again.

That has to be the best example so far of when the always net short commercials got it “net wrong.” Given the now record net short positioning of the commercials today, it wouldn’t take all that much of an exogenous event now to make that 2005 example look tame by comparison. The stakes are perhaps an order of magnitude higher today versus then.

Repeating from previous reports: 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.” (See the two-year chart below in the charts section to see the (now defeated) Great Wall of Gold graphically.)

Silver COT: As silver fell 80-cents, or 4.6%, COT reporting Tuesday to Tuesday (from $17.50 to $16.70 on the cash market), the large commercial COMEX silver traders (LCs) reduced their collective net short positioning (LCNS) by 1,642 contracts, or 2.5%, from 66,004 to 64,362 contracts of net short exposure. The total open interest fell a larger 2,613 contracts to 132,843 COMEX 5,000-ounce contracts open, after falling just 559 contracts the week prior. So as silver fell 2.5% the LCNS fell by the same percentage.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

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 actually fell slightly from 48.7% to 48.5% of all COMEX contracts open. For all practical purposes the relative LCNS was unchanged and it remained in the caution zone.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

While we cannot yet say that we see significant “improvement” in the silver LCNS, we do wish to mention that late week we noted action which, in the past, is consistent with more aggressive commercial short covering. Taken together with silver bouncing on three consecutive days at almost precisely the same level ($16.11 Wednesday and Thursday and $16.12 Friday) and with silver ending the week in backwardation we would be willing to attempt a new long ETF entry-sized position on Monday provided it is with a razor thin, new-trade trailing stop.

Although we would normally prefer to wait until the odds very strongly favor reentry, we believe we are seeing signs of stronger overseas demand surfacing for both gold and silver.

General Comments

This is a gold bull market until proven otherwise. In a bull market speculators have but two possible positions: Long or on the sidelines. Definitely not short, except to hedge (at least just yet).

We remain on the hunt for special situations and “vulture opportunities” via “stink bids” for obvious lack-of-liquidity, non-news-related, over-reaction sell-downs on the miners via our Vulture Bargain Hunter Method. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin mentioned in the most recent Gold Newsletter.

One of the small uranium companies we mentioned in the last report, Forum Uranium (TSX: V.FDC), saw a small gain on extreme volume following news reports that Pinetree Capital took six million shares of a private placement for the company. What is interesting about that is that the high volume surge occurred on a delayed basis, so the cause of the very high volume day may or may not be connected to that news. Traders we correspond with speculated Friday that perhaps Forum might be the subject of a possible takeover given their large land holdings in the Athabasca and Thelon basins. We’ll see.

Quite a few of the smaller companies in our universe of former resource company guru favorites, the “little guys,” which reside in our “Vulture Bargain Hunter Shell Collection” (VBHSC) have been seeing stronger bids and an increase in volume of late. The VBHSC is loosely defined as companies that used to be the darlings of the resource company gurus – now fallen off their respective radar screens, but not ours.

Many are currently in post-crash bottom-looking consolidations and while they are still very inexpensive we don’t mind taking positions with what we call our “Vegas Money.” (Small, high-risk capital in amounts we might take on a weekend trip to Las Vegas.)

We mentioned three companies in the last full report two weeks ago. Two more that are exhibiting the kind of consolidation we like to target are Columbus Gold (TSX: V.CGT) and Paragon Minerals (TSX: V.PGR). So long as they remain in their post-crash bottom-looking consolidations (Paragon is actually attempting its first breakout), we don’t mind using good-till-cancel “stink bids” near the bottoms of those consolidations to build low-cost positions in them. Of course that requires the patience of … well, the patience of a Vulture! (Click on the names above to see our tracking charts.)

Once we have what we consider “enough” then we Vultures wait patiently until one of two events occurs. A breakout or a breakdown of the bottom-looking formation. If a breakout of the consolidation occurs, that’s our favorite time to add to the position, usually only once. (Because events seem to have changed enough to alter whatever had been holding the company back up till then.)

If a breakdown occurs, then, unless the company snaps right back into the consolidation, we admit defeat and let the market have those shares back as soon as we can.

We’ll have more about Vulture Bargain Hunting and gaming the resource company gurus in future reports. The method is not for everyone, but when it works it can very quickly affect those Vegas-money-sized high-risk bets in multiples. That’s the fun part.

Got Gold Report Charts

Below are few samples of the Got Gold Report (GGR) technical charts. Gold Newsletter subscribers enjoy access to all GGR charts and all the GGR reports, commentary and trading ideas.

2-year weekly gold
2-year weekly silver
3-year weekly HUI
2-year weekly HUI:gold ratio
2-year weekly U.S. dollar index
3-year weekly CDNX index
2-year weekly CDNX:HUI ratio
6-month gold:silver ratio

End Notes

Frank Holmes, CEO of U.S. Global Investors (and a prince of a guy in person) says gold could easily advance or correct 10% just about any time. He calls that gold’s “DNA of volatility,” but remains convinced the long-term trend for the yellow metal is up.

Before the gold bull market ends, Holmes believes that gold will make a new inflation-adjusted high and suggests that it would be in excess of $2,300 per ounce in today’s dollars. “I think that’s a fair target,” Holmes said Friday, October 30.

In a TV interview with Yahoo Finance, Frank reminds us that when governments keep interest rates artificially low (to spur economic activity) it creates negative real interest rates for that country’s currency, which in turn makes gold an attractive, but “boring” asset. See Holmes’s short interview at this link.

Along those same lines, in a Friday Bloomberg article, Goldcorp founder and CEO of U.S. Gold, Rob McEwen, said he believes that gold will be $2,000 an ounce by the end of 2010. He believes the pullback underway now is “seasonal.”

Why is McEwen smiling?

U.S. Gold Corp.

Because last year, well before the crisis began, he reportedly converted all his considerable liquid cash assets out of government currencies and into physical gold metal. Nice move, Rob.

Kitco’s handy new comparison chart, which tracks the comparative performance of gold and the U.S. dollar index, suggests that Friday’s minus $1.10 action in gold can be explained as the difference between $6.20 to the downside, lost due to strength in the U.S. dollar, against $5.10 to the upside due to “predominant buying.”

For those who haven’t yet discovered Kitco’s excellent new tool, check it at this link. Friday’s closing chart of the Kitco Index is reproduced just below.

On another note, the volatility index (we follow the VXO, the original version of the VIX) snapped over 25% higher on Friday as the Big Markets took a month-end swan dive. That’s a little unsettling, as it suggests rising fear.

But if we are looking hard for a silver lining, maybe there is one we can point to on a very short-term basis. Another measure we look to for guidance is the TED spread, or the difference between LIBOR and three-month T-bills (treasury rates). Although it has moved a little higher, (up to 0.237 as of Friday, which roughly converts to 23.7 bps spread), it remains low enough to give us comfort that the banking system is, at least so far, not signaling overt stress; certainly not Armageddon like it did in 2008.

DROP Tax Hikes

And finally, we figure much of the selling in the Big Markets this past week is because so many funds have their year end on October 31. Between booking profits (to bump up bonuses), a very long and very tired liquidity-induced rally rolling over, tax-loss selling the last week of October and tax avoidance selling, the stars were finally all aligned to give long suffering bears a decent week. But if we look closely at the long-term charts of the DOW we would have to do a repeat of this past week for it to really look ominous technically.

Speaking of tax avoidance selling, we didn’t hear much about it in televised media, but we wonder how much of the fund selling that occurred this past week was motivated by profit taking ahead of the big tax increases set to take effect next year? Socialist-leaning democrats prefer to call it “reversing the Bush tax cuts,” (as if by calling it that they think the stupid voters won’t catch on to them). But what it is, of course, is a whopping big increase in the nominal income tax rates and higher capital gains taxes. Bush may have been involved in the tax cuts, but he certainly doesn’t have anything to do with raising the tax rates. We can thank our current congressional “leadership” for that.

Instead of the Democrat-preferred moniker, why don’t we call it the Dodd-Reid-Obama-Pelosi or DROP Tax Hikes of 2010? It’s appropriate because raising taxes during a financial crisis is one of the causes of the Great Depression – it caused (or at least contributed to) a big DROP in the U.S. stock markets back then, didn’t it?

Or maybe the PROD Tax Hikes, because raising taxes in a very tough economy feels a lot like a cattle prod might.

That’s it from Atlanta this week. Until next time, good luck, good trading and as always, MIND YOUR STOPS. Got gold?

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a net long position in SPDR Gold Shares, net long iShares Silver Trust, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Natcore (NXT.V) Esperanza Silver (EPZ.V), Gold Port Resources (GPO.V), Victoria Gold (VIT.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V) and currently holds various (approximately 20) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).

Got Gold Report: Mixed, mostly bullish signals for gold, silver

Gene Arensberg — Thu, 22 Oct 2009 22:07:03 +0000

Big mining shares dog paddle, but smaller companies catch bids

HOUSTON – Gold remains in a bullish technical environment as all over the world people are still in the mood to convert their sickly fiat currencies into precious metals, probably wishing they had done much more of that a while back.

One of the principal drivers of this Great Gold Bull is the continued erosion of confidence in under-backed paper currencies and the governments that print them. It’s a point we have been making since Day One of the Got Gold Report.

Lately we can heap on a growing fear by the productive class in the United States (the dwindling number who actually earn enough to pay income taxes) that the current “leaders” of government are on the wrong path – fear for good reasons. We’ll have a few words to say about that in the End Notes section at the end of this report, but GGR business first.

Here’s this week’s closing table: Thanks to Dr. Irv Arenberg, portfolio manager with Nostradamus Funds LLC in New York (similar name, no relation) for suggesting we include this recap in the published reports.

This Week’s Bottom Line Summary (in bold)

Our bias remains cautiously bullish for gold, silver and mining shares, but with emphasis on the word “cautiously.” Stops tight, but not too tight.

“Houston, we have mixed signals.”

This week we see slightly positive money flow into some gold ETFs and minor positive money flow into the biggest U.S. silver ETF (slightly bullish). Both gold and silver ended the week in minor backwardation on the COMEX futures markets, with the cash price actually higher than the front active contracts (bullish).

Price action suggests a consolidation is underway, with much narrower high-low spreads, but with silver weaker (neutral to slightly bearish).

The U.S. dollar remains the sickest member of the global fiat currency leper colony and the ICE commercials put on only a modest number of new net long dollar positions (detailed below) despite new 52-week lows for the “buckster” (bullish). Well financed mining shares continued to perform in underwhelming fashion, but great merciful joy, many of the smaller companies on our Vulture Bargain Hunter list caught significant bids over the past two weeks. (Neutral to slightly bearish for the big miners, bully for the little guys!)

Finally, we note that the largest of the largest gold futures traders, the always net short traders the CFTC classes as commercial, are currently net short of gold in record proportions nominally and net short of silver in a somewhat lesser, but still material way. Having said that, we note with some wonderment and cautious optimism that as both gold and silver have advanced over the past two weeks, the commercials have been either unwilling or unable to add to their net short positioning in very large, or frightening amounts. (Nevertheless, caution flags still flying.) For all the details don’t miss the Gold and Silver COT sections below.

With a nod to the Trading Gods (so as not to offend them too much), the action right now is reminiscent of the last time the short-happy COMEX commercials were overrun – for months and months – beginning in August, 2005 as gold first challenged, then tested, then blew through the very staunch defenses thrown up by the hedgers and short sellers in the $450 - $475 region. Gold went on to test the $730s the following May, some 60% higher than where the commercials took their “goal line stand” that August of “ought-five.” (A similar move in this event would take gold up to around $1,520 the ounce, give or take $100. That’s not a prediction, just an observation.)

Now is no time to be a hero. MIND YOUR STOPS or employ appropriate “insurance” for all at-risk positioning now, if not already accomplished.
Well-placed stops offer protection against unexpected adverse calamity and they make for a much better sleep regimen.

Please note: Gold Newsletter (GNL) subscribers received this issue of the Got Gold Report Monday morning, October 19. GNL 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.

Now, a closer look at a few of this week’s indicators:

Gold ETFs: SPDR Gold Shares (GLD), by far the largest gold exchange traded fund, reported no change to its 1,109.314 tonnes of gold bars held by a custodian in London.

Source for data SPDR Gold Shares.

Barclay’s (In December it will become BlackRock’s) iShares COMEX Gold Trust (IAU), reported adding a small 0.64 tonnes to 75.26 tonnes of gold held in COMEX warehouses.

All five of the gold ETFs sponsored by the World Gold Council (WGC) collectively added a net 1.69 tonnes of new gold metal, to a combined 1,308.93 tonnes worth about $44.1 billion.

Apparently there was slightly more buying pressure than selling pressure in the world’s gold ETFs over the past week. 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 ETFs: Barclay’s (also for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), reportedly added a very small 18.35 tonnes to show 8,612.57 tonnes of average 1,000-ounce allocated silver bar inventory for the week.

Source for data, iShares Silver Trust.

We can take note of a tiny bit more buying pressure than selling pressure for the largest silver ETF, but we would also like to highlight the tighter-than-normal spreads for SLV late week, most notably on Friday, October 16. We often see metal added to SLV shortly after we see tight spreads between the share price and the net asset value (NAV) for SLV.

By “spreads” we refer to the difference between the share price of SLV versus the real time spot price of silver relative to the implied net asset value for SLV shares. As of Friday, for example, the posted NAV for SLV was shown as 98.288%. Thus, with silver trading at $17.40 an ounce, that implies a “fair value” for SLV of $17.10 or about 30-cents less than the spot price of silver.

For much of the time on Friday, October 16, we noted spreads in the 23 to 25-cent range with good volume – a slight premium or below “normal” spreads. So, at least on the surface, that suggests a bit more buying pressure than selling pressure for the silver ETF then.

Unfortunately we cannot know in advance if those tighter-than-normal spreads lasted long enough to allow the authorized market participants (AMPs) of SLV to arbitrage them into new shares in the float and more metal at the custodian. If it was long enough, then we should see at least a little metal added the first couple days of next week.

Some newcomers to the silver ETF arena are taking miniscule market share from SLV and that may be contributing in a small way to apparent reduced buying pressure for the largest silver ETF. ETF Securities’ Physical Silver Shares (SIVR) is one of them. With about 7.9 million ounces accumulated so far (about 245.5 tonnes), the “new guys” have some considerable catching up to do. Until they re-work their irritatingly difficult to navigate website, however, we won’t be covering them very much for the time being. We wish that all the metals ETFs would carefully study the GLD website for a model to go by.

Time for Real Metal

At Got Gold Report, we continue to believe that with premiums for physical silver metal at very reasonable levels, even at discounts for some silver products, right now is an excellent time for longer-term investors to “exchange” their SLV shares for the real deal physical metal, provided the investor has the ability to store silver safely or, for larger amounts, is satisfied with exchange receipts or warehouse certificates for allocated metal from well-established, respected or official sources. (COMEX warehouse receipts held by your commodities broker or in a very safe place are one acceptable option.)

Moving to the price action in Gold, the yellow metal recorded a substantially higher weekly low ($1,043.44 Friday) and a higher cash market high ($1,070.73 Wednesday, a new nominal record). In contrast to the prior week, it seemed like gold had a lot more difficulty advancing this week, but failed to gain any downside traction either. High-low spreads tightened considerably as shown in the closing table above. The last trade on Friday printed $1,052.85 on the cash market, edging up $3.70, or 0.4%, for the week. Please see the gold charts linked below for more technical commentary.

Silver was the weaker of the two precious metals. After posting a new high for this move Wednesday with a probe above $18.00, heavy resistance kicked in with the “feel” of profit taking more than anything else. That continued in Thursday’s net 50-cent mini-sell down to the $17.30s before late Friday short covering and late posturing resulted in a net weekly dip of 24 cents or 1.4% to a last trade of $17.46 on the cash market. Both the weekly high ($18.08 Wednesday) and low ($17.17 Friday) were higher week on week, but like gold, silver saw meaningful Thursday profit taking. Please see the silver charts linked below for more technical commentary.

Once again the U.S. dollar was unable to gain any ground this past week. The U.S. dollar index (DXY) ended the week at 75.62, down another 80 basis points from the prior week’s Friday close as shown in the U.S. dollar index graph below in the charts section. The greenback cut yet another 52-week low in the 75.20s along the way.

As the DXY fell 49 basis points, from COT reporting Tuesday to Tuesday, to 75.81, ICE commercial traders added 1,348 contracts to their collective net long positioning. The “ICECOMs” reported a net long position of 11,824 DXY contracts out of a total open interest of 33,891 contracts (LCNL:TO = 35%) as of October 13. The U.S. dollar index chart, with commentary, is below in the charts section.

So long as Mr. Obama continues to vilify American businesses in Saturday press conferences, (as he did this weekend with American insurance companies in an ongoing losing battle to force-feed Americans his agenda of socialized medicine); so long as this Congress continues to promote the growth of government at the expense of private enterprise, the propensity of capital to leave the greenback and seek shelter in other, more favorable climates will almost certainly be sustained.

In a crystal clear case of the pot calling the kettle black, the president accused American healthcare insurance companies of using “smoke and mirrors” in order, Mr. Obama says, to derail the public option and the healthcare reforms his central planners are so keen on. The president called one such healthcare company-sponsored report “bogus.” Is that about as “bogus” as the accounting tricks your own congressional soldiers have employed in order to provide the illusion of a revenue-neutral government takeover of healthcare, sir?

Smoke and mirrors, did you say? Oh, that’s right, $200 billion will magically come out of the old waste, fraud and abuse revenue fairy. In an amazing example of the audacity of doublespeak, Mr. Obama said that the insurance companies are doing this in a “last ditch effort” to kill the proposed legislation. Now that is smoke and mirrors. It is the president who is growing more desperate as Americans, reeling from grotesque government deficits measured in trillions of dollars and confiscatory taxes, learn more and become better informed.

Americans do not like being lied to and mistreated by overbearing “leaders.” They tend to revolt under such circumstances every 240 years or so. King George discovered that in spades toward the end of the eighteenth century…

Moving on, the Gold/Silver Ratio (GSR) edged higher this past week as silver over-sold gold, finishing the week at 60.3 ounces to buy one ounce of gold metal. See the short-term GSR chart below in the charts section.

Large, well-financed mining shares, have refused to “answer” higher gold prices lately. In fact, by our reckoning, the big miners haven’t answered the last $60 or so of gold’s advance (normally a reason for caution). Please see more in the HUI index and HUI/Gold ratio charts below in the charts section.

Two weeks ago the smaller, less liquid and more speculative miners and explorers were strongly underperforming the HUI. While it really doesn’t show up very much in the Canadian S&P/TSX Venture Index or CDNX (see the charts linked below in the charts section), quite a few more of the “little guys” have been catching bids of late, at least in our universe of about 90 small resource companies. We provide several examples below in the General Comments section.

Gold COT Changes: In the Tuesday 10/13 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercial’s (LCs) collective combined net short positioning (LCNS) increased another 14,062 contracts or 5% higher from 281,864 to a new all time record 295,926 contracts net short Tuesday to Tuesday as U.S. dollar spot gold rose $22.47, or 2.2%, from $1,041.96 to $1,064.43 while the total open interest INCREASED 19,880 to 504,187 contracts open.

While the LCNS (the commercial net short positioning) is at new record highs, it comes when the COMEX open interest is well below its January 15, 2008 COT reporting record peak of 593,953 contracts. We have to take note that the commercials really do mean business here, but it doesn’t necessarily mean they will prevail.

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

Source for data CFTC for COT, cash market for gold.

Clearly the largest of the largest gold futures hedgers and short sellers are well-positioned for gold weakness. They have never had a gold price over $1,060 to work with before, however, so perhaps their reaction to the record high nominal prices for gold is understandable. On the other hand, each time the spot gold price cuts a new high we know that all short gold contracts are underwater, all but the last contract opened. Each time gold makes a new thrust at this stage, it is closer to triggering the next wave of short covering.

As measured against all COMEX open contracts, the commercial net short position is now just under the record levels set on September 22 (then at 61.6%), with the LCNS:TO still equal to 58.7% of all contracts open on the COMEX, division of NYMEX in New York.

Source for data CFTC for COT, cash market for gold.

Notice, please, that the LCNS:TO is actually slightly less now that it was four, or even two weeks ago. We think it noteworthy that in the two COT reporting periods since September 29, as gold rose a net $72.13 or 7.3% (from $992.30 to $1,064.43), while the total COMEX open interest increased a net 49,602 contracts or 10.9% (from 454,585 to 504,187 contracts), we note that the LCNS “only” increased 20,692 contracts or 7.5% (from 275,234 to 295,926 contracts net short).

In other words over the past two reporting periods, the COMEX commercial net short positioning increased a good deal less than the increase in the open interest. Gold bears will take little comfort in that statement.

One of the “tells” we are always on the lookout for is very large, abrupt changes in the LCNS positioning. Over-sized moves can sometimes signal a significant shift in the near-term thinking of the largest traders and we pay heed to them in proportion to their relative size.

One example of just such an over-sized move in the LCNS was the August 30, 2005 COT report, which showed an enormous LCNS reduction of 54,224 contracts as gold was just about to assault the US$450 level. That was with gold then at $431 and change, having made a feeble attempt at the high $440s just before then.

That giant plunge in the LCNS told us that the commercials used a very small dip in gold to duck and cover in a big way. An event we viewed very bullishly at the time. Gold went on to blast through the $500 level later that year on its way 60% higher the following May.

The biggest, smartest and best-informed traders aren’t always “right,” however. Just last month on September 8, the commercials piled on a massive 54,089 contracts net short in one week with gold then knocking on the door of $1,000 (at $995.40 that Tuesday).

We believe that most of the 54,000-plus net short contract increase was directly due to just two U.S. bullion banks, as we reported last week (see the article at this link). The banks increased their gold net short positioning a net 41,739 contracts between the September 1 and October 6 reports. But so far that positioning has proven to have been, … well, premature if not dead wrong. Gold has since thrust on up through the $1,000 psychological barrier and cut new all time nominal highs above high technical resistance up to $1,070.

Both the very high commercial net short positioning and gold’s determined advances are very reminiscent of that 2005 defeat of the $450 barrier. In 2005 the gold bears were gradually, but steadily overrun, with the hedgers and short sellers doing the stop-out-fall-back-sell-again shuffle for months, all the way up to the $730s before they were able to gain the advantage again. (Shown in the chart just above.)

Silver COT: What is going on here? We find it kind of puzzling that as silver gained 43 cents or 2.5% COT reporting Tuesday to Tuesday (from $17.35 to $17.78 on the cash market), the large commercial COMEX silver traders (LCs) only added a teeny 238 contracts or 0.4% to their collective net short positioning (LCNS) from 65,188 to 65,426 contracts of net short exposure.

The total open interest ROSE a large 4,214 contracts to 136,015 COMEX 5,000-ounce contracts open, after adding 3,106 contracts the week prior.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

As measured on COT reporting Tuesdays, for the two reporting weeks since September 29, as silver jumped a net $1.63 or 10.1% (from $16.15 to $17.78), the biggest, best-informed silver futures hedgers and short sellers (the commercials) were only willing to increase their collective net short positioning by a meager 1,320 contracts or 2% (from 64,106 to 65,426 contracts net short). This, as the open interest INCREASED a much larger 7,320 contracts or 5.7%.

In Texas English, the commercials are closer to retreating than charging into the battle on silver.

This should be rather unsettling for silver bears.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

General Comments

This is a gold bull market until proven otherwise. In a bull market speculators have but two possible positions: Long or on the sidelines. Definitely not short, except to hedge. (At least just yet.)

We note with guarded optimism that quite a few of the smaller companies, even the more or less “dormant” issues that reside in our resource company Vulture “shell collection” have seen recent bids. The “Vulture Bargain Hunter Shell Collection” is loosely defined as companies that used to be the darlings of the resource company gurus – now fallen off their respective radar screens, but not ours. Companies like Gold Port Resources (GPO.V), Northern Lion (NL.V) and Forum Uranium (FDC.V) all saw post crash consolidation breakout attempts over the past two weeks. (Click on the names above to see our tracking charts.)

As long-time readers know, our favorite time to add to these “little guys” is immediately following bottom consolidation breakouts, having built speculative positions in them at the low edge of those consolidations via “stink bids.”

Got Gold Report Charts

Below are few samples of the Got Gold Report (GGR) technical charts. Gold Newsletter subscribers enjoy access to all GGR charts and all the GGR reports, commentary and trading ideas.

That’s it from Houston this week. Until next time, good luck, good trading and as always, MIND YOUR STOPS. Got gold?

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a net long position in SPDR Gold Shares, net long iShares Silver Trust, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Natcore (NXT.V) Esperanza Silver (EPZ.V), Gold Port Resources (GPO.V), Victoria Gold (VIT.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T) and Northern Lion (NL.V), long DZZ as a gold hedge (but with an extremely tight stop) and currently holds various (approximately 20) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).

Read more Stockhouse articles by Gene Arensberg

New product should be loved by gold bugs

Peter Degraaf — Thu, 22 Oct 2009 21:45:22 +0000

Junior gold companies to trade as ETF

A new ETF is being introduced to the investing community by van Eck Global, the same corporation that is behind a number of ETFs, including the Gold Miners ETF (NYSE: GDX). This ETF (which will trade using the symbol GDXJ) will represent 38 junior mining and exploration companies that have mining potential. The complete listing is available at the bottom of this article.

The launch is expected to take place sometime before the end of this year, and this event will help to make the junior exploration sector even more popular than it is today. It is our contention that this sector will surpass the excitement that was created by the upstart dot-com companies of the late 1990s, since this time the companies involved represent real value.

First a few charts to show that the timing of this launch is excellent, as it fits right in with a major seasonal rise in gold bullion, silver bullion and mining stocks.

Featured is the weekly gold chart. The question whether gold is overpriced is answered here with an emphatic NO. At $1,070 gold is just 38% above its 200-week moving average, compared to 80% in March 2008 and 57% in July 2008.

The RSI is still below the level reached in March 2008 (blue oval), and the MACD is a long way below the level reached in March 2008 (black oval).

Historically gold produces a short-term bottom towards the end of October, and when this occurs as part of the seven to eight week gold cycle, it will likely be the last buying opportunity for a number of months. Due to some incredibly bullish factors, this October bottom is expected to be shallow.

The most important drivers for gold are the unprecedented US budget deficits and the inexperience of the people in charge to deal with the problem. To paraphrase Sir Winston Churchill: “Never in the history of mankind have so few thrown this much money at so many problems.”

Hardly a day goes by that I don’t receive a letter from someone who is spooked by the negative picture painted for gold by some analyst who subscribes to Elliott Wave Analysis.

Pay no attention to the Elliott Wave crowd that warns you of collapsing gold prices!

Their most popular guru is Robert Prechter who has been down on gold for the past six or seven years, and has been wrong all this time!

Here is the problem with applying Elliott Wave analysis to the gold price:

You begin by drawing 5 connected lines that follow a predictable course. Lines number 1, 3 and 5 are slanted upwards, and #2 and #4 are of the downward slanting type.

Next you fit these lines onto a stock or commodity, in this case the gold price. You make the pattern fit your expectations, and if you’re stubborn enough and are currently out of the market, you make the pattern look like we’re at the end of #1 or #3 or #5 and due for the start of #2 or #4.

Meanwhile you totally disregard the fundamentals which are always different!

If the fundamentals were always the same, then Elliott Wave analysis would work like a charm. As it is, these people are like those who drive a car down the freeway while looking only in the rear view mirror without taking into consideration that there are other cars on the road. The premise used by Elliott Wave mal-practitioners is FLAWED.

Elliott Wave analysis works best when viewed in retrospect!

No phenomenon based on human action is a straight line up, down, or horizontal. Substituting numerology for the harder work of thoughtful analysis is fool’s play!

Featured is the weekly chart that compares the price of gold to the long bond price. In an article I wrote in September, I wrote about the likelihood of an upside breakout occurring from the 8.50 level. The implications of this breakout are that bond holders will begin to realize the futility of holding bonds (as inflation is eating up all of the increase in price), and the need to switch into gold.

This breakout at 8.50 is from beneath an area of resistance that has lasted for almost two years and completes the formation of an inverted head and shoulders pattern that has a target at 1150. As I mentioned in my previous article, this target coincides with a target for gold at $1,500.00, with a time frame of November-December 2010.

The reason this target makes sense is because fundamentals for a rising gold price have never been stronger.

I have listed those fundamentals in previous articles.

Those of you who are spooked by the gold bears need to review the track record of those writers. That is what archives are for. Keep a written record yourself, of predictions that are made. This way you can stop reading those stopped clocks, and end up with 3 or 4 writers who have experience and who understand the markets.

Featured above is the monthly chart that compares the HUI index to the gold price. The most bullish part of a gold rush is when the HUI index of gold and silver stocks is rising faster than gold itself (as now). The blue arrows are the expected targets for the current trend. “A trend in motion remains in motion until it is stopped.” A student of Elliott Wave analysis could easily draw his favorite pattern on this chart formation and declare that the current leg is #3 or even #5 in a sequence, but the overriding reason why this trend is bullish is not a set of lines, but bullish fundamentals.

Featured is the chart of a gold recycler. The downtrend in the stock price indicates that the supply of scrap gold is dwindling. This is bullish for the rising gold price.

My sources in the jewelry business confirm that scrap gold is slowing down drastically. Of concern is the fact that 10K gold scrap is almost finished, and much of the gold coming across the counter now is 18K or higher. This indicates that people with low incomes have exhausted their meager treasure chest, and middle class people are now beginning to hurt to the point of having to cash in their jewelry. While Wall Street led by Goldman Sachs (NYSE: GS) is knee-deep in bonuses, Main Street is suffering big-time.

The implication for gold is that the recession is deepening, and government will do what it has always done in the past, print money to try to solve the problem. This will be gold-bullish.

Featured is the CPI trend chart courtesy Federal Reserve Bank of St. Louis. Despite the rhetoric that price inflation is non-existent, this chart shows a steady rise that was interrupted only by the credit crisis plunge during late 2008. Across the board price inflation is always caused by monetary inflation. The two go hand-in-hand, albeit with a delay, as it takes money time to work through the system.

Price inflation is a major driver for a rising gold price. Price inflation is causing real interest rates to turn negative. When you put money into a savings account you MUST DEDUCT the rate of inflation from your rate of interest. According to economist John Williams who keeps track of price inflation on his website Shadowstats.com, the rate of price inflation at the moment is +2%. By the time a saver pays taxes on the interest he or she received from the bank, the net return is break-even at best or a negative return at worst.

This causes investors to look for something better. Gold fills that need.The battle between gold bulls and gold bears is in high gear. The main argument offered by the bears is the very large number of net short positions on the COMEX.

It must be remembered that these short positions are matched by long positions. Actually the matching long positions are potentially more dangerous to the gold price than the short positions, since the short positions will have to be covered at some point, while the long positions can be rolled forward as they become more profitable.

As long as the holders of the long positions (primarily hedge funds), are satisfied that gold is not overpriced (having just broken out above the magic $1,000 level), the gold price can continue to rise.

Quoting from the most recent Hulbert letter: “The Hulbert Gold Newsletter Sentiment Indicator (HGNSI) has been stuck at 53.8% since October 7. It has been as high as 89.58%. This lack of movement from the lower level is not consistent with a blow-off.”At my website www.pdegraaf.com two of the most popular free features are: “My expectations for the future,” and the “Stock pick of the week.” A new pick is listed every Friday, and a running record of previous picks is archived.

Here is that list of junior explorers I promised you at the top of this article. May I suggest you print this section out, or cut and paste it onto a blank document so you can file it for future reference. For your convenience I have added the percentage that each stock makes up as a part of the total ETF. As well I have added the company website to all of the stocks.

Company - Ticker symbol(s) – Percentage of ETF – Website.

Alamos Gold Inc. AGI.TO; 5.11%; www.alamosgold.com
Allied Nevada Gold Corp. ANV.A; 2.22%; www.alliednevada.com
Andean Resources Ltd. AND.TO; AND.ASX; 2.99%; www.andean.com.au
Aurizon Mines Ltd. AZK; ARZ.TO; 3.52%; www.aurizon.com
Avoca Resources Ltd. AVO.AX; 2.06%; www.avocaresources.com.au
Avocet Mining PLC. AVM.L; 0.88%; www.avocet.co.uk
Coeur d’Alene Mines Corp. CDE; CDM.TO; 6.2%; www.coeur.com
Colossus Minerals Inc. CSI.TO; 0.89%; www.colossusminerals.com
Detour Gold Corp. DGC.TO; 1.38%; www.detourgold.com
Dominion Mining Ltd DOM.AX; 1.33%; www.dml.com.au
European Goldfields Ltd. EGU.TO; 2.13%; www.egoldfields.com
Fronteer Development Group Inc. FRG; FRG.TO; 2.37%; www.fronteergroup.com
Gabriel Resources Ltd. GBU.TO; 1.55; www.gabrielresources.com
Gammon Gold Inc. GRS; GAM.TO; 4.32%; www.gammongold.com
Gold Wheaton Gold Corp. GLW.V; 1.07%; www.goldwheaton.com
Golden Star Resources Ltd. GSS; GSC.TO; 3.31%; www.gsr.com
Great Basin Gold Ltd. GBG; GBG.TO; 2.54%; www.greatbasingold.com
Hecla Mining Co. HL; 3.8%; www.hecla-mining.com
Jaguar Mining Inc. JAG.TO; 3.67%; www.jaguarmining.com
Kingsgate Consolidated Ltd. KCN.AX; 2.96%; www.kingsgate.com.au
Kirkland Lake Gold Inc. KGI.TO; 2.41%; www.klgold.com
Lake Shore Gold Corp. LSG.TO; 1.78%; www.lsgold.com
Medusa Mining Ltd. MML.AX; 1.22%; www.medusamining.com.au
Lingbao Gold Co Ltd. 3330. HK; 0.52; www.lbgold.com
Minefinders Corp Ltd. MFN; MFL.TO; 2.79%; www.minefinders.com
New Gold Inc. NGD; NGD.TO; 6.13%; www.newgoldinc.com
Northgate Minerals Corp. NXG; NXG.TO; 3.11%; www.northgateminerals.com
Novagold Resources Inc. NG; NG.TO; 2.74%; www.novagold.com
Real Gold Mining Ltd. 0246. HK; 0.80%; www.realgoldmining.com
Romarco Minerals Inc. R.V; 1.69%; www.romarco.com
Rubicon Minerals Corp. RBY; RMX.TO; 2.17% www.rubiconminerals.com
San Gold Corp. SGR.V; 3.73%; www.sangoldcorp.com
Semafo Inc. SMF.TO; 2.71%; www.semafo.com
Silver Standard Resources Inc. SSRI; SSO.TO; 6.7%; www.silverstandard.com
SilverCorp Metals Inc. SVM; SVM.TO; www.silvercorpmetals.com
St Barbara Ltd. SBM.AX; 1.6%; www.stbarbara.com.au
US Gold Corp. UXG; UXG.TO; www.usgold.com
Ventana Gold Corp. VEN.TO; 1.21% www.ventanagold.com
This listing courtesy www.pdegraaf.com

DISCLAIMER:
Please do your own due diligence. Investing involves taking risks. I am NOT responsible for your trading decisions.

Happy trading!
Peter Degraaf

ABOUT THE AUTHOR
Peter Degraaf
Peter Degraaf is an online stock trader with over 50 years of investing experience. He issues a weekend report for his many subscribers. For a 60 day free trial send him an E-mail at itiswell@cogeco.net or visit his website www.pdegraaf.com

Best way to profit when silver upstages gold

Editorial Staff — Thu, 22 Oct 2009 18:52:04 +0000

Jim Rogers thinks it’s historically undervalued

While prices of gold don’t necessarily affect silver prices or vice versa, history has demonstrated that when gold rises or falls, silver usually follows suit.

This time around, silver has failed to match the gains that gold posted in recent months, spawning a widespread believe that silver is poised for a bull run. Such factors as a decline in supply and a weakening U.S. dollar have buttressed that bullish belief. And so has the fact that China’s government is strongly encouraging that country’s residents to buy the white metal.

With Beijing’s plan to inject $587 billion (four trillion yuan) into China’s economy, and a growing desire to diversify away from the U.S. dollar as its key reserve currency, the Asian giant could increase its reliance on such precious metals as gold and silver – especially if global inflation takes hold.

China’s central bank “could use gold, silver or even a basket of commodities” to diversify away from the dollar, said Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks. “It’s impossible to know how they’d go about it.”

This wouldn’t be the first time that silver played an important economic and transactional role in Mainland China. Nearly 2,500 years ago, the Red Dragon was the first to use silver as money. While China invented paper money in the ninth century, silver made its way back several dynasties later as legal tender until the government again prohibited its ownership in 1935.

Now, 75 years later – in the wake of the worst economic downturn since World War II – China has reversed its stance on silver.

In July, state-run China Central Television (CCTV) began a campaign that pushes the purchase of silver bullion as investment opportunity. Analysts say silver has been undervalued in the last few years, and is a good investment for individual investors, according to CCTV.

“The investment threshold [for silver] is not high, and is more suitable for the general public,” said Want Chunli, GM of Beijing’s Caibai Shopping Mall, the first to offer silver as an investment opportunity. “Silver is much cheaper than gold.”

Silver’s investment potential is best measured by the silver-gold ratio, or the price of gold divided by the price of silver. Over the past five years, the ratio has held fairly steady, requiring 55 ounces of silver to buy an ounce of gold. Earlier this year, as gold increased at a faster rate than silver, the ratio skyrocketed to 70 to 1. It has since corrected to around 60.

Money Morning’s Krauth says that when this relative price ratio does correct, it tends to overshoot.

“I see it going to 50 at least,” Krauth said. “With gold at $1,000, that means silver could trade to $20 or even higher, which is another 20% from [the current price].”

Silver closed last Friday at $16.06, while gold closed at $991.10 – implying a silver-to-gold ratio of 61.71.

Krauth sees China returning to an asset-backed currency and says ownership of silver could help the average citizen, even if its central bank is unable to diversify out of the U.S. dollar fast enough.

The more Chinese citizens who own silver, “the stronger the country will be in the eventuality that the world establishes a new world reserve currency backed by (most likely) precious metal(s).”

China’s middle class is estimated at 300 million – roughly equal to the entire U.S. population. And that consumer group in China is growing. As those incomes continue to rise, so, too, will the demand for silver.

China’s use for silver goes beyond jewelry or as a safeguard against inflation. Thanks to the antibacterial properties of silver ions, the white metal is used for everything from socks to wash machines, to name a few.

Silver supply is falling

The world once had 2.2 billion ounces of silver above ground, but that figure has plummeted 86% to the current 300 million ounces, according to Addison Wiggin, a best-selling author and an executive publisher at Agora Financial LLC, which, like Money Morning, is part of the Agora Inc. group of companies.

However, above-ground silver accounts for only 25% of the silver produced today, says Money Morning’s Krauth. The other three-quarters is actually a byproduct of such mined base metals as iron, nickel or lead.

When the financial markets nearly collapsed last fall, base-metals producers weren’t’t spared. As demand forecasts were cut, they quickly throttled back on production, expansion and exploration.

“More has to come from mine production, which can only grow so fast,” Krauth said. “The fact that base-metals producers have cut back a lot hurts silver production because it’s a byproduct of base-metal mining.”

Once the recovery begins – and it’s already under way in China – supplies will be hard to come by as demand for base metals returns, resulting in higher prices for silver.

Gold’s “lap dog”

The price of gold doesn’t’t necessarily affect the price of silver, but when other economic factors such as the U.S. dollar falter, prices traditionally rise at the same pace. But when the global financial crisis took hold last year, the silver-to-gold ratio shot up to 84.

Much like a “nervous little lapdog,” the price of silver follows gold closely, Krauth says.

Since its mid-July low of $12.46 an ounce, silver has rebounded roughly 30% to current levels. But if gold supplies run short, silver may have even more room to run.

When gold hit its all-time high of $1,033.90 per ounce in March 2008, silver prices soared as high as $20.92. But when gold hit its 18-month high earlier this month, silver stayed in check.

“Silver has lagged the rise in gold prices since 2000,” said Money Morning Contributing Editor Martin Hutchinson, a former investment banker with more than 25 years’ experience in the global financial markets. “If gold really takes off and the big money finds there isn’t enough of it, there should be spillover into silver.”

Famed commodities investor Jim Rogers also noted the lag in silver and gold’s prices.

“I’m looking at all commodities, but some commodity prices are very depressed,” Rogers told China International Business. “Silver is 70% or so below its historical highs, coffee is 70% or so, as is sugar, while gold is only 10% off its all time high.”

Making the investment

While buying physical silver is an option for investors, the simplest way to get in, Krauth says, is via the iShares Silver Trust (NYSE: SLV) exchange-traded fund (ETF). In the three years since its inception, SLV has accumulated $3.91 billion in assets, and the share price – which is the equivalent to one ounce of silver – is up more than 50% this year.

During last fall’s market crash, SLV’s holdings remained nearly flat, around 220 million silver ounces. Since then, it has grown a further 22% to about 280 million ounces.

“That’s a testament to investor commitment,” Krauth said.

Hutchinson calls SLV “quite a good vehicle” over the big silver miners – such as Coeur d’Alene Mines Corp. (NYSE: CDE).

Coeur d’Alene has a large silver deposit in Bolivia. But Hutchinson characterizes Bolivia as a country that he “wouldn’t touch,” thanks chiefly to the Venezuela-like nationalization of the country’s other commodities, including oil and natural gas.

ABOUT THE AUTHORBob Blandeburgo, Money Morning
Money Morning is a free daily newsletter that delivers global news and investment advice directly to your inbox. Its worldwide research staff includes former investment bankers, international financers, emerging markets specialists and veteran financial journalists who report on profit opportunities that you won’t read or hear about anywhere else. Money Morning extensively covers emerging markets, currencies, commodity plays, sovereign wealth funds, global energy, U.S. Federal Reserve, ETFs and many more topics that shape the world’s financial landscape. We exist to even the playing field; to help you reclaim control of your own financial destiny… at no charge. For more information, visit www.moneymorning.com

Preserve your wealth with precious metals

Nick Barisheff — Thu, 08 Oct 2009 20:49:12 +0000

An allocation of 20% or more is suggested in this secular bear market

In this extraordinary environment, preserving your personal wealth becomes priority one. Before you make another major financial decision, it is imperative to understand the big picture by recognizing and understanding three critical issues. First, we are in a secular bear market for financial assets (stocks and bonds). Second, the consequences of the global bailouts will likely be highly inflationary. Third, we are at a pivotal point in the long-term investment cycle. Let’s examine each of these three keys in more detail.

Key 1: We have entered a secular bear market

In a secular (long-term) bear market, stocks plunge in value, single digit price/earnings ratios become the norm, and they can stay that way for decades. The secular bear we are experiencing now actually began when the stock markets crashed in 2000-2001, but few investors noticed because in 2003 the markets were artificially propped up by massive amounts of easy money from the U.S. Federal Reserve under Chairman Alan Greenspan. This was not a new monetary policy. Greenspan’s response to every financial “crisis” he faced  starting with the stock market crash of 1987 all the way through to and past 9/11  was to pour money into the system. The system was never allowed to self- correct, allowing a variety of asset bubbles to form.

During a secular bear market such as this one, stocks habitually move down or sideways. But there are occasional and sometimes violent bear market rallies to the upside that suck in naïve investors hopeful of a quick market turnaround. The most recent example is the spring/summer 2009 rally in which the S&P TSX, the Dow and the S&P 500 has risen between 48 and 56% from their March lows. Since we are just in the early to middle stages of this secular bear market for stocks, investors still have time to rebalance their portfolios into negatively correlated assets. That means selling stocks and bonds (which will decline when interest rates rise) and buying an asset class that will thrive in this uncertain market: precious metals.

Cash may seem to be a safe haven but it won’t protect against rising inflation. Bonds did well in 2008 because interest rates were slashed to zero. But rates have nowhere to go but up, which means adding or keeping bonds in your portfolio is likely to produce a negative return. It is important to note that bonds no longer provide true diversification protection because stocks and bonds have become positively correlated, meaning they generally move in the same direction.

Buy and hold doesn’t work in a secular bear market

Following traditional bull market mantras such as ‘Buy-and-Hold’ and ‘Stay the Course’ is a recipe for disaster in a secular bear market. Because secular trends last for years, they also take years to break. The most recent examples are the1966-1982 bear market in equities which, on an inflation-adjusted basis, investors lost nearly two thirds of their value during this period. As Warren Buffett points out “During these 17 years, the stock market went exactly nowhere.”

During this current bear market, the DOW has been negative over the past 10 years, the MSCI World Index is only marginally positive, yet precious metals have soared over 200% (Figure 1). If inflation is taken into account the stock indices would be in significant negative territory, while volatility has been extreme: many of the stocks that formed the DOW in 1999 are no longer even in existence. One more fact: if you are counting on stock dividends to help you get through this downturn, consider this: at the time of writing, companies are cutting dividends at the fastest and deepest pace in at least 50 years.

Key 2: Massive bailouts will trigger massive inflation

As Merrill Lynch economist David Rosenberg wryly points out, “the new growth engine for the economy is government spending.” We are in the early stages of a global government spending spree of unprecedented proportions which, coupled with zero percent interest and extraordinary money supply growth, will be hugely inflationary. Financial assets will continue to lose purchasing power in this kind of environment, but gold and precious metals will hold theirs because they are a proven hedge against an investor’s two worst enemies — inflation and economic turmoil.

In recent years, the U.S. money supply has been growing at an alarming rate. In 2008, despite a slowdown in lending and credit, money supply still grew dramatically with M3 (the broadest measure of money supply) increasing at about 11%, as Figure 2 shows. In 2009 the money supply is still growing at approximately 9% on an annualized basis. Over the long term, M3 increases have been the best leading indicators of future increases in the price of goods and services.

Most people think of inflation as a rise in the price of goods and services but in actuality price rises are the effect, not the cause, of inflation. As famed economist Milton Friedman pointed out many years ago, “inflation is always and everywhere the result of an increase in the money supply.”

Precious metals are the only currency to own when central bank printing presses are debasing global currencies at unprecedented rates. Because they are a proven store of value, precious metals are likely to be the only asset class that will preserve the purchasing power of your savings as we enter into a prolonged period of ‘–flation’: deflation, stagflation or inflation (one of the latter two being much more likely).

Key 3: Ride the investment cycle
A buy and hold strategy might work if it weren’t for the existence of cycles that drive bull and bear markets. A good way to understand the investment cycle is to look at what is called the Dow:Gold ratio. The Dow:Gold ratio (Figure 3) calculates the number of ounces of physical gold bullion it would take to ‘purchase’ one share of the Dow Jones during any given time period. When the ratio rises, as it did in the 1920s, 1960s and 1990s, it tells us that portfolios should be overweight stocks. When the ratio slumps, as it did in the 1970s and today, it tells us that portfolios should be overweight precious metals bullion.

The last three major stock market bubbles ended with the Dow:Gold ratio above 18:1, while the last two major bear markets (1932 and 1980) ended with the ratio near 1:1 At the height of the equities bull market in 1999, the Dow:Gold ratio peaked at over 40:1. But now the current ratio is below 10:1 and falling. It is certainly not too late to increase your allocation to gold and precious metals.

Precious metals preserve wealth

Precious metals have successfully preserved wealth for thousands of years because, unlike stocks and bonds and paper currencies, they are not someone else’s promise of performance and they are not someone else’s liability. Massive credit expansion has put U.S. debt at over $11 trillion, but if the $60 trillion in unfunded pension liabilities and Medicare obligations that the U.S. owes its citizens is included, actual debt is approaching a staggering 500% of GDP.

America’s spiraling debt crisis is leading many experts to consider the previously unthinkable: that the U.S. might become the next Argentina, which famously defaulted on its debt 10 years ago. To learn more about the debt crisis, visit www.ChrisMartenson.com. Dr. Martenson has created a superbly researched video called the “Crash Course,” which explains in layman’s terms how massive debt is destroying investors’ wealth.

Precious metals are a safe haven

In 2008, stocks lost 30-70% of their value, while gold increased about 5% in U.S. dollars. But equally significant, in a year of record-setting volatility, gold’s volatility was reassuringly low. At its lowest point, gold was only down 14% and at its highest it was up 21%. Both Goldman Sachs and UBS see the price of gold rising, and UBS expects investment demand for gold to pull the price of silver and platinum up along with it. Citigroup is calling for gold to rise above $2,000.

Precious metals protect against depreciating dollars

Since gold and precious metals are priced and traded in U.S. dollars, they surge in value when the U.S. dollar declines. As trillions in new money is printed, the dollar and other currencies will fall precipitously relative to gold. In an environment where the dollar is already weak and other currencies are weaker, investors seeking to preserve and grow their wealth must understand the impact of declining currencies on their portfolios.

Figure 4 shows the Canadian and U.S. dollars have lost approximately 84% of their purchasing power since 1970. The world’s other currencies have fared no better. Not coincidentally, 1971 was the year the link to the gold standard was cut. Only gold, along with its two precious metals brethren – silver and platinum – will hold their value in periods of severe deflation and inflation.

Physical bullion versus proxies

Few investors are aware of all the precious metals investment options available to them. Some precious metals investments such as futures contracts and options are better suited for speculation and a higher tolerance for risk. But certificates, pooled accounts, ETFs and mining stocks also have higher risk. Only physical, bullion stored on a fully allocated, insured basis can guarantee peace of mind because it gives the investor exclusive title to the safest and lowest risk precious metals investment of all.

For absolute security, physical bullion should always be stored in allocated and insured form. If not, investors take the risk that their bullion may be lent out without their knowledge or consent or may not be there at all. Today, buying and storing physical, allocated bullion has never been simpler. You can privately and securely purchase bars of gold, silver and platinum in large bar sizes and have them insured and stored for you at a registered LBMA vault without ever breaking the Chain of Integrity. Visit www.bmgbullionbars.com to learn more or read our BMG Special Reports on how to invest in precious metals at: www.investinpreciousmetals.ca and www.goldmyths.com.

It’s time to preserve your portfolio’s purchasing power

A minimum 10% allocation in precious metals is considered adequate in a bull market, but a much larger allocation of 20% or more is suggested for protection in a secular bear market. If you have not already done so, now is the time to rethink your investment strategy and preserve your hard-earned wealth. Physical bullion will keep its value regardless of whether the economy is headed for inflation, deflation or hyperinflation.

For the first time in history, the central banks have an unlimited ability to print as much money as they need. Precious metals are the only currency that will survive intact in this environment, because while governments can print infinite amounts of money, they cannot “print” more precious metals. More and more investors and institutions are turning to precious metals, because this secular bear market is expected to last for many years, eating away at investors’ hopes and dreams and portfolios along the way. Don’t let your portfolio be one of them. Now is the time to make an investment in your future, because the future is precious metals bullion.

How to know when to buy gold stocks

Jeff Clark — Wed, 07 Oct 2009 21:10:07 +0000

An interesting technical indicator may provide clues

Almost everyone loves gold. And everyone seems to know the best way to get leveraged exposure to gold is through owning gold stocks.

But there’s a good time and a bad time to buy gold stocks. Right now is a bad time. Soon, however, it’ll be a good time. Stay with me for a moment and I’ll show you how to tell the difference…

Gold stocks move around a lot. They fluctuate with the price of gold and they also fluctuate with the overall stock market. This double dose of schizophrenia makes it extraordinarily difficult to trade gold stocks over the short term with any degree of accuracy.

Part of the difficulty has to do with the volatility of the sector. Another part has to do with the fact that gold trades around the clock. And since gold stocks move in relation to price changes in the metal, the stocks often gap up or down a large percentage from the previous day’s closing price.

So bullish percent indexes (BPIs) – which are the basis for a lot of short-term trading systems – don’t work so well with the gold sector. A bullish percent index is a measure of overbought and oversold conditions. A sector is overbought when the BPI rallies above 70 and is oversold when it declines below 20. For most sectors, a buy signal occurs when the BPI gets oversold and then turns higher. A sell signal occurs when a BPI reaches overbought levels and then turns lower.

That’s not the case with the gold sector, though. Gold stocks whip around so much, normal BPI signals trigger too late to be of much use. But there’s an interesting correlation between the gold stock bullish percent index and its eight-day moving average.

Take a look at the correlation over the past few months…

The red circles indicate when the eight-day moving average crossed below the bullish percent indicator and generated a sell signal. The green circles show where the eight-day moving average crossed above the BPI and created a buy signal.

Here’s how the signals played out on the AMEX Gold Stock Index…

The short-term performance of the buy and sell signals looks pretty good.

This is still a “work in progress.” And I’ll probably tweak the system a bit as we get more signals over the next few months. But if you’re anxious to buy into the gold sector, the next buy signal will happen when the eight-day moving average crosses back over the bullish percent index.

That looks like as good a spot as any to dip a toe into the gold sector.

What if everyone in the world wanted one ounce of gold?

Jeff Clark — Tue, 06 Oct 2009 19:17:23 +0000

Most of us will be out of luck

If we’re right about where the price of gold is headed, the general public will someday clamor to buy all things gold. While gold stocks will be where the real leverage is, the rush will start with gold itself. As a gold editor, I have a very natural question: is there enough to go around?

According to the U.S. Census Bureau, there are 6.783 billion earthlings. Meanwhile, CPM Group, a highly respected industry organization, estimates there are 4.8 billion ounces of above-ground gold in the world. And this includes jewelry, electronics, and dental. So, even if everyone around the world volunteered to have their chain, cross, or tooth melted into a coin, we’re already short. Those towards the end of the line are out of luck.

However, it’s worse than that. Of all the physical metal ever mined…

2.1 billion ounces, or 43%, is found in jewelry, decorative, and religious items.
Private stock – gold already held by various private parties – accounts for 1.1 billion ounces.
Official reserves (central banks, IMF, etc.) stand at one billion ounces.
Industrial use accounts for 530 million ounces.

Very little of this is likely to come available for purchase in coin form. After all, you’re not selling any of your gold, and neither are many banks or institutions. Most everyone is buying.

So for those who don’t yet have a gold coin (or you greedy investors who want more than one), this pretty much leaves us with mine production and scrap sources.

CPM forecasts that total new supply in 2009 will be around 122 million ounces. Only a small percentage of this is made into gold coins and bars, but if all of it were, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth this year. A product of this dimension is about half the size of that small button on your shirt collar.

Since this supply is only available annually, it means 0.018% of the global population – one in every 55 people – could buy a one-ounce gold coin this year. Or, said differently, it would take 55 years before everybody had one, assuming the population never increased (it is) and supply never decreased (it is).

But it’s worse than that. Actual 2009 coin production will be around five million ounces (excluding medallions or “rounds”), leaving two one-hundredths of a gram of gold (or 0.3 of a grain) available this year for each of the planet’s inhabitants. This is about half the size of the sesame seed that fell off your hamburger bun at dinner last night. It means that only 0.0007% of earth’s citizens – or one in 1,356 – can buy a one-ounce gold coin this year, and it would take 1,356 years for everyone to get one.

How’s that for a supply squeeze?

But it’s worse than that. Demand continues rising. Gold is more frequently in the news, attracting more customers every day. Hedge funds, which never before considered gold, are now buying physical metal (Greenlight Capital actually sold $500 million of GLD and bought physical gold). Central banks are net buyers of gold for the first time in 22 years. China is running TV ads encouraging its citizens to buy gold and silver. Last month Russia bought more gold than they actually produced. In a recent survey, 20 out of 22 fund managers bought physical gold for their personal investments. In other words, some investors are already scrambling to get it… and in big quantities.

But it’s worse than that. Most of the ramifications of the money printing and dollar debasement haven’t even surfaced yet. How will the general public react when the dollar is crashing and standards of living are threatened? What will they do when milk and gas prices surge to twice what they are now? How will the greater collective respond when they lose faith in government interventions? Where will they invest when they see gold and silver prices screaming upward and don’t want to be left behind?

The panic into gold by the general public hasn’t begun yet. Available supply is scarce and will get smaller. There won’t be enough.

Better get your speck while you can.

Easiest way to tell if gold is in a bubble

Chris Weber — Mon, 05 Oct 2009 15:53:25 +0000

Answer may surprise you

When spot gold closed on September 11 in New York at $1,005.10, it was the highest price on record… though by the time you read this, it may have been surpassed.

Gold traded higher than this, back on March 17, 2008. When that day opened in Asia, the early morning Australian and Hong Kong markets pushed gold quickly up from $1,000 to a high – so far an all-time inter-day high – of $1,033.

But as Europe opened later in the day, the price fluctuated between $1,020 and $1,030. As the U.S. markets opened, the price plunged down to $1,000 and ended just three dollars more than this.

So if you are going by the closing trade of that day, which happens to be New York as time zones go, then what happened on Friday, September 11 broke the record.

This breakthrough has drawn a lot of publicity. Hedge funds are now heavily tilted toward the long side of the gold futures market. Many gold stocks sit near all-time highs. Mainstream newspapers and magazines are starting to carry stories about gold.

This bullish sentiment has led many people to ask me if gold is far too popular now… or even in a “bubble.”

My answer: I see nothing like a bubble yet. Ask your friends or neighbors these questions:

“What do you think about gold or silver as an investment?” and if they answer in a positive manner, further ask: “What are the best ways to own it? How do you own it? What percentage of your assets do you have in the precious metals area?” If this seems too invasive, ask, “What percentage of a person’s assets do you think should be in the precious metals area?”

That’s what I do. The people I ask have no idea what I think about gold or silver. I ask just as a sort of person – maybe on the slow side and not that bright – who wants to know about the area.

From what I’m told, almost no one is in gold or silver. Maybe a few shares of Newmont Mining, but as a percentage of their total net worth, we are talking tiny here.

People who think gold is in a bubble are often people who did not see real bubbles when they happened. In the real estate boom, the easy profits were on everyone’s lips. Same with the Internet bubble 10 years ago.

When I mentioned gold back in 2001 and 2002, when I accumulated it, I got looks from people as if I were crazy.

These days, the crazy looks are gone. But now I often only get answers that gold or silver may be a good investment, but they don’t have any themselves. Try it yourself.

Of course, if you’ve been mouthing off about how great gold and silver are, you probably want to ask people who don’t already know your views: They won’t think you are trying to “lay your propaganda” on them.

Granted, the public awareness of gold and silver as investments is much, much higher today than in 2001. No one was buying then, and people thought you were crazy if you told them you were. But things haven’t changed in that the average person still does not own any.

When everyone you know is talking about how to make “easy money” buying gold or silver, then we may be in a different era. But right now, I think both metals have more room, and most likely much more room, to go.

Gold & silver: Why these are the best investments

Mary Anne and Pamela Aden — Thu, 01 Oct 2009 20:45:27 +0000

Gold price could hit $5000 before it’s all over

Gold, silver and gold shares are jumping up. Gold hit a record high this month and all three are in ‘break out’ mode. The time of truth is at hand and it won’t take much more strength to confirm that a stronger phase of the eight year old bull market has begun.

Gold is money

We have often talked about gold’s role in the monetary system. For many years it was tossed aside as a barbaric relic and the thinking was that it was old fashioned. Nixon reinforced this in the 1970s when he closed the gold window by taking the U. S. dollar off the gold standard. An energetic economy then became most important.

But in spite of the generally strong U.S. economy and the growing global economies since the 1970s, the dollar has been weakening. Gold has been moving up quietly this decade and your average person or investor is still essentially unaware of its strength, but that will likely soon change.

GOLD: Strong in all currencies…

In today’s world it’s important that gold rise in all currencies. Why? Very simply, it will reconfirm that gold’s strength is powerful and real. We think this is ready to happen.

Looking at Chart 1 (left side), you can see that the gold price has tested the $1000 level twice since March 2008, when it first reached a record high. If gold now stays above $1004, it will clearly be breaking into record high territory and it’ll confirm a stronger phase of the ongoing bull market. You can bet this will attract attention and eventually mainstream investors will jump on board, driving the price much higher.

Interestingly, gold has also formed a head and shoulders technical pattern (see S, H, S). The rule of thumb is, if the NL resistance is broken on the upside, which it was when gold hit a record high, the price could rise the same distance as the size of this formation. In other words, gold could then continue up to near the $1400 level.

We’ll soon see what happens but most interesting is that gold is strong in euro terms as well (see Chart 1, right side). Note that it reached a new bull market high last February when it closed at its 1980 highs. The main point is, if gold can now reach a new record high in both dollars and euros it would be extremely bullish because it would be reaching a record high in the two most widely used currencies in the world.

… AND READY TO FLEX ITS MUSCLES

For now, what we call a “C” rise is ready to go. C rises are recurring, and they’re the best intermediate rises in a bull market when gold reaches new highs (see top of Chart 2). This is why the current C rise is so important, because it’s the first C rise since the financial meltdown last year.

The gold price is the central bankers’ only real discipline. The Federal Reserve has created more credit and injected the most money into the system this year than any other time in its 95-year history, in order to save the economy from a deflationary collapse. But the Fed’s actions, together with Obama’s spending, and the massive stimulus from central banks around the world nearly guarantees that the end result will be inflation.

The economy is recovering at a heavy price. And this month’s gold rise suggests that inflation will eventually prevail. This will be especially true if gold breaks clearly out to new record highs. It will be saying that the government is actively creating inflation. This is also why the current C rise is so important.

Chart 2 shows that gold has the power and the room to rise strongly into record high territory. The leading indicator (B) is poised to complete a strong C rise and the gold price (A) shows that once a record high is sustained, gold could indeed jump up to the $1200 level as its first target. The long-term indicator (C) is also in a special situation that usually precedes a strong rise.

Once gold embarks on a stronger phase of the bull market, it’s not inconceivable that gold could eventually reach the $2,000 to even the $5000 level before the mega rise is over, looking out to the years ahead.

GOLD: Better than stocks, currencies & bonds

The stock market and the currencies have been good investments, but it’s important to know that gold is the best investment. It’s stronger than the currencies as you saw, and it’s stronger than the stock and bond markets. Chart 3 shows this clearly. Note that when comparing these markets, gold has been steadily stronger than the Dow Jones Industrials, and the U.S. bond market since 2001. Both ratios have been moving up since rising above the mega trend, the 80-month moving average, in 2003. This means that gold is solidly stronger than these other markets and its gains have been greater.

We are invested in the different market sectors because the trends are up and we’ll stay diversified as long as the trends stay up, but keep in mind that the strongest markets are in the gold and metals sectors. Most important, it’s not too late to buy.

Top-10 reasons to own gold now

Peter Degraaf — Wed, 30 Sep 2009 20:38:07 +0000

A chart is like a photograph. It locks in ‘the activity’ right up to the last moment. A chart is a reflection of the actions of multiple humans interacting in the marketplace. Since humans tend to act in ‘herd-like’ manner, reacting to the news they hear, read and see, a chart has a certain amount of predictive energy while it reflects the past.

“A trend in motion remains in motion until it is stopped.”

Although technical analysis based on charts should not be used in isolation, but always in conjunction with fundamentals, a chart is nevertheless a valuable tool as it conveys recent history, and since history repeats, it can provide clues for the future.

In the words of wise king Solomon: “That which has been is what will be, that which is done is what will be done, and there is nothing new under the sun.” Ecl. 1:9

The first chart in this essay compares the price of gold to the price of the 30-year bond, (often referred to as the ‘long bond)’. People who buy long bonds are not worried about price inflation. They are laboring under the influence of the ‘deflationists’. They see prices falling in sectors like the housing market and extrapolate that trend into other sectors, while forgetting that the reason prices in the housing sector are falling is because they had risen too high, due to the ‘easy money’ policy of the U.S. Federal Reserve under Mr. Greenspan. Prices in the food and energy sectors are not falling. They are at best holding steady. Deflationists expect falling prices everywhere. If they were right, then this next chart would not be the most important chart you’ll see all day.

Featured is the index that compares the performance of gold to the performance of the long bond price. For the past two years there has been a struggle between two trends: Gold versus Bonds - Inflation versus Deflation.

The chart pattern is a bullish ‘reverse Head and Shoulders’ pattern. A breakout at the blue arrow sets up a target at 1150. This breakout may not happen today, but it could, and it appears ready to do so soon.

On September 22, the price closed at 8.51. This was the highest closing price since the gold bull market began in 2001. The RSI and MACD (supporting indicators) are positive (green lines). The 50DMA is in positive alignment to the 200DMA (green arrows). The last time the ‘50’ rose above the ‘200’ was in early 2007. The index subsequently rose for a whole year, from 5.75 to 8.50.

The implications of a bullish trend in the above chart are positive for gold on two levels. Fundamentally it causes investors to sell their bonds to buy gold, and technically, as the trend in this chart rises, so does the trend in the price of gold itself – see next chart and compare.

“Historically, bonds have always turned out to be ‘certificates of guaranteed confiscation’.”

Ludwig von Mises.

Featured is the gold price chart that covers the same time span as the first chart we examined. Notice the similarities. Notice a price that is ‘itching’ to break out at the blue arrow. The gold price has now closed at or above the magic ‘1000’ level for the past eight trading days. The supporting indicators are positive. The 50DMA is in positive alignment to the 200DMA and both are rising strongly. The last time the ‘50’ turned positive to the ‘200’ was in early 2007. Gold subsequently rose up from 600 to 1025. The likelihood of an upside breakout in the first chart (the most important chart you’ll see today) is very real. Once it breaks out above the blue arrow, the target is 1150. This translates into a gold price of $1,500. The expected date for that target, once the breakout occurs, is 12 – 13 months hence - October-November 2010.

“History does not always repeat – but it often rhymes.”
Mark Twain.

Here are some fundamental reasons why this target is realistic:

Once the $1,000.00 level for gold in U.S. dollars is history, there are no more barriers to the price.
The massive currency degradation occurring on a worldwide scale is unprecedented in history.
Central banks that formerly ‘capped’ the gold price by dumping gold have stopped selling, and some have turned to buying: The Russian Central Bank is reported to have purchased 300,000 ounces in August. The Chinese Central Bank has expressed an interest in buying the entire 403 tonnes of IMF gold that is up for sale. The Chinese bankers have indicated that they will buy gold ‘during any dips in price.’ Much of the gold on the books of some Central Banks has been leased out. It no longer exists except on the books at those banks. The gold at Fort Knox has not been audited since 1953. The threat of IMF gold coming on-stream caused barely a ripple in the gold price last week.
The Chinese government is encouraging its citizens to buy gold. This is a total reversal of the policy that formerly forbade its citizens to own gold. This policy is extremely bullish for gold, as an increasing number of Chinese banks and coin stores will be stocking up in order to have inventory. This inventory takes supply away from the market since it is replaced as soon as it is sold to retail customers.
The Chinese government is expressing its dissatisfaction with the U.S. administration for causing the U.S. dollar to drop due to the loose U.S. monetary policy, and for imposing a 25% tariff on Chinese tires. This anger on the part of Chinese officials will translate into increased dumping of U.S. Treasury bills and bonds and converting the proceeds into ‘real stuff’, such as gold and commodities.
The huge ‘net short’ position accumulated by the commercial traders and the two or three U.S. bullion banks will have to be covered. The vast majority of these contracts are now showing a loss and margin calls are mounting.
Once the gold price is firmly established above the 1000 level, the hedge funds that own most of the ‘net long’ positions on the Comex will likely add to their positions, using some of the margin money they have accumulated on the way up. This will put further pressure on the two or three bullion banks to ‘cut bait.’ At the moment the hedge funds have these banks over a barrel.
More and more investors are becoming aware of the fact that the GLD and SLV gold and silver ETFs probably do not have as much gold and silver backing them as they should have. There are no regular independent audits conducted on these two ETFs. The next chart in this essay supports this observation. This will cause investors to abandon those ETFs and opt for physical gold.
Monetary inflation continues worldwide at double-digit levels. Meanwhile the gold supply is limited to an annual increase of about 1.5%. ‘More money chasing fewer goods’ invariably causes those goods to rise in price.
Gold mines are a ‘depleting assets’. Each mine has a predictable mine life. Unless new deposits are found, every gold mine eventually faces extinction. According to mining experts, new deposits are not keeping up with the current rates of mine depletion. Production in South Africa has been steadily declining. Environmental concerns in many countries make the production of a gold mine expensive and very time consuming.

Featured is the Consumer Price Index chart courtesy Federal Reserve Bank of Cleveland. No deflation here. The chart shows an up-tick in price inflation during the month of August. Economist John Williams at Shadowstats.com shows price inflation numbers even higher than this. This is one more factor in support of higher gold prices.

Featured is the chart that compares the performance of CEF, the Central Fund of Canada, to the performance of the GLD gold ETF, since the credit crisis of last year.

The rising channel and the positive alignment of the 50DMA above the 200DMA clearly show CEF to be a superior investment. (Part of the reason why CEF is outperforming GLD is the fact that CEF is 50% gold and 50% silver). The main reason however is the fact that CEF conducts independent audits twice a year and has a 30+ year history of good management.

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DISCLAIMER:

Please do your own due diligence. There are risks in investing. I am NOT responsible for your trading decisions.

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