Market Update February 11 2010
NOTE: Published at Metal Augmentor on February 11, 2010 at 2:21PM EST.
This morning both gold and silver are showing some spunk even in the face of a strong U.S. dollar trading over 80 on the USD Index. While the monetary metals are hardly out of the woods yet, the price action is encouraging as it appears conducive to the formation of a bottom (higher highs and higher lows all this week). In particular, gold was able to easily pierce this morning the 1080 level that previously served as support (but over the past few days it has been resistance). It appears we could have one last pullback in the next several days, perhaps to the 1065-1070 level in gold and back to 15.25 or so in silver. If these levels hold, we could then see a relief rally that takes the monetary metals toward a retracement of their recent losses with initial targets in gold of 1137.50 and silver of 16.75, possibly accompanied by a drop in the U.S. dollar back into the 78.80 area.
From a price point as well as our own positioning in the silver market, we are effectively no longer short-term neutral and therefore we should really be turning our “alert flag” (which is a legacy device from the old SILVERAXIS days to gauge our own sentiment toward the silver market) from YELLOW back to GREEN. All other time horizons remain GREEN as well for now. For perspective, we came close to turning this “alert flag” to RED on October 27, 2009 [link only works for Metal Augmentor subscribers] after having turned to YELLOW all the way back on May 29, 2009 [link only works for Metal Augmentor subscribers]. While we did get a vigorous pullback in the monetary metals from May into early July, we pretty much blew it in late August and early September and failed to recognize the unfolding of the powerful speculative fervor that would eventually take gold over 1200 and silver to nearly 20. On a positive note, however, we are hopeful that very shortly Metal Augmentor will have the benefit of an institutional level technician and market analyst who not only called the record-breaking run in gold last fall but also picked the fall 2008 bottom in gold almost to the dollar. We believe integrating this gentleman’s analysis in our trading and speculating will have us on the right side of the market much more often going forward.
We would also like to see some confirmation from the gold and silver basis, in particular the ETF basis, but these measures remain somewhat inscrutable for now. On the other hand, the gold basis, according to one of the charts we have constructed, does appear to have dropped into ever-so-slight backwardation earlier this week, and this is indicative of solid physical buying (bargain hunting) at lower gold prices. For now it looks like we are back in one of those modes where we should be paying very close attention to the basis (once our live chart tools are built, you will be able to do the same).
On a separate topic, we have been keenly observing the open interest and commitments of traders (COT) positions in both COMEX gold and silver during the ongoing correction and it appears we are now starting to approach a much healthier situation after having worked off most of the froth that helped drive gold prices to record levels above 1200 between early September and December last year. Ideally we would like to see the open interest come down even further but it is not necessary from a seasonal perspective since gold and silver will remain in technical position to undergo price spikes for at least the next several months regardless of how much repair to the speculative portion of the market may or may not have occurred. Looking at the COT structure itself, there has been moderate improvement between early December when the metals were putting in their highs and the latest report on February 2, 2010, and this improvement may be sufficient to have cleaned out enough of the chaff so as to prepare the market for the next rally. For example, swap dealers in COMEX silver have actually gone from being net short about 1000 contracts to being net long about 8000 contracts. These swap dealers primarily hedge paper contracts so a move in commitments from net short to net long effectively means that paper itself is on the demand side of the equation. Keep in mind, however, that swap dealers in COMEX gold remain net short a bunch and in both COMEX gold and silver the true commercials (producer/merchant/processor/user) are still quite a bit net short. So it’s a mixed bag but definitely much better than where we were last October and November.
To follow on this topic of COT and COMEX silver, I’m a bit surprised that Ted Butler does not seem to have incorporated the new disaggregated reporting into his repertoire and instead he still appears to be using trader concentration ratios and “Raptors” (presumably smaller commercial dealers) to analyze the state of the silver market. I don’t have a subscription to his new subscription service so I’m simply going by his interviews on King World News, but perhaps somebody can correct me on this account. If he is not using the disaggregated reports, he is doing a great disservice to the precious metals community by failing to explain the market in more precise strokes than the wide brush of “commercials” and “funds” that has been the mainstay of his conspiracy theories for these so many years.
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