After suffering a $21 decline August 16, gold went on a tear and with Friday’s $10 gain traded in the $744 range. In about six weeks, gold tacked on nearly $100 for a 15% increase. Silver, which suffered a $1.06 drop on 8/16, posted an 18% gain of $2.20 since 8/16 but did not take out its May 2006 high as did gold. Many analysts see silver’s failure to take out it May 2006 high as negative for silver, but I’m not concerned, being confident that before this bull market is over silver will outpace gold. Fact is silver took a bigger hit than gold August 16, which also does not concern me. Silver has always been more volatile than gold.
Meanwhile, Gene Arensberg, in his excellent Got Gold Report, a biweekly feature of resourceinvestor.com, has an insightful look into the precious metals markets. He’s flying short term caution flags for gold and silver because of the big increase in the large commercial traders’ (LCs) short positions but remains bullish over the long term. He notes:
In the Tuesday 9/25 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions jumped a big 32,748 contracts or 19% from 175,264 to a staggering 208,012 contracts net short Tuesday to Tuesday while gold metal ground upward $7.75 or 1.1% from $723.85 to $731.60 on the cash market.
The large commercials (LCs) mostly are the bullion banks that are notorious for taking short positions in gold and silver. Some analysts see the bullion banks as having great insight into the precious metals markets; others say the bullion banks manipulate precious metals prices via their huge positions.
Arensberg also noted that the last time the LCs were this confident of lower gold prices that were right in the short-term but wrong in the long-term.
. . . the last time they set a record net short position, in October of 2005 with gold then trading in the $470s (not a misprint), there was a teensy pullback shortly after that down to the $450s (first week of November 2005) and the COMEX commercials managed to get the heck out of about 60,000 of those net short contracts just before gold took out the psychological $500 barrier on its 5-month, 59% romp higher to $730 in May of 2006.
Although the LCs can be quite nimble, they were not able to get out of most of their positions and suffered big losses as gold climbed to $730. So, it is not a guarantee that gold is going lower just because the LCs have increased their short positions. However, the LCs must be given their due; they are often right (probably because of their might!).
In a recent article (also linked to in the 9/27 post), Ted Butler also said that the big LCs’ short positions in gold have to be recognized as short-term bearish. Still, he noted that the LCs are seemingly no longer willing to take huge short positions in silver. As Arensberg notes, the LCs’ short positions in gold are huge, second largest ever. However, the LCs’ short positions in silver are nowhere near record levels.
What’s this mean? Probably a 70% chance of a precious metals price drop, which enables the LCs to cover some of their short positions. But, here’s the rub: gold and silver could go still higher before the correction. Perhaps the LCs’ short positions will climb to a new high before the correction.
It’s not easy knowing when to buy gold and silver, but normally a good time is on price drops. So, if the LCs are right, be prepared to buy but don’t count out higher prices before the correction that everyone seems to think is inevitable because of the LCs’ positions.