We had planned on writing about China’s emergence as the world’s new superpower, while the United States keeps sliding into Third World status, but we cannot escape the more cogent political implications/ramifications of the diverging paths between the two countries. Actually, the United States has turned direction from a positive influence to a negative one with almost all other countries in the world. There is no other country aggressively pursuing war and human rights violations more than the United States is, today. The US has engaged in perpetual warfare with one country after another in the Middle East: Iraq, on totally false pretenses, [Weapons of Mass Destruction]; Afghanistan, [seeking control […]
Author Archive: Zeal Research
Today per the latest CoT this 2013 deviation is back down to 116.3k contracts. Futures speculators still have to buy back the equivalent of 11.6m ozs of gold merely to mean revert to their 2009-to-2012 average levels of total longs and shorts with no overshooting. This remainder is 1.7x larger than the big chunk of shorts the traders initially covered in July and August which catapulted gold sharply higher! It is very bullish.
After plummeting a brutal 39% in the first half of 2013, silver naturally remains deeply out of favor today. Investors don’t want to touch it with a ten-foot pole, convinced silver will soon roll over to plumb ugly new depths. Investors as a herd always hit peak bearishness after exceptionally-large selloffs, extrapolating the downtrend continuing indefinitely. But when major lows are witnessed is exactly the wrong time to be bearish. Silver’s bullish price action since late June yet again proves this truth.
The focus on this imminent FOMC meeting is so hyper-intense that its impact should be considerable no matter what the Fed decides. The QE3 taper (or lack thereof), its size, and what the FOMC implies for future tapering will almost certainly spark sharp price reactions in the bond markets, currency markets, stock markets, and precious metals. All have moved violently this year on mere QE3-taper anticipation.
I truly believe it will be the lack of backfill that will smack the gold-mining industry the hardest. Not only are the large producers cutting way back on their exploration spending, the junior sector has all but ceased exploring and advancing projects. I discussed the huge crisis of confidence currently strangling the junior sector in a previous essay. And it’s not hard to conclude that a lack of activity in this realm will adversely impact global mine production in the years ahead.
Both last Friday and this Wednesday, GLD experienced enough differential buying pressure to necessitate builds of 0.2% each day. These are modest, but they are still noteworthy. It is actually the first time in all of 2013 that GLD has enjoyed two builds in less than a single week. The GLD exodus reversal looks to be starting!
The only way for speculators to unwind futures short positions is by buying other contracts to offset their earlier sales. To go short they sell futures contracts, then to close these trades they buy them back. And this buying drives up silver’s futures price exactly like new long-side buying. So the massive shorts in silver futures guarantee proportional massive buying in the coming months to cover and close these bets.
The CFTC releases its CoT late every Friday afternoon, current to the preceding Tuesday. So the latest available data when this essay was published was Tuesday July 9th’s. And it is truly stunning. Gold-futures speculators held the short side of an astounding 178.9k contracts that day! This was at least a 12.3-year high, the most-extreme gold-futures spec short position by far in gold’s entire secular bull.
I think traders, especially in the futures realm, are missing the forest for the trees. They are so worried about what Bernanke had for breakfast that they’ve totally lost sight of the big picture. It doesn’t matter one bit what the Fed says, but what the Fed does. And throughout this entire raucous 2013 “debate” about what the FOMC is planning for QE3, it has continued to aggressively monetize debt without respite.
Despite the popular misconception, long rates are not always highly correlated with gold. Gold has never paid a yield, yet it has remained a popular investment for millennia. The investors buying gold are not looking for yields from that portion of their portfolio. They want proven protection from monetary inflation, financial insurance for unforeseen market events, and most of all capital gains.
Any investor who has a position in juniors has no doubt felt the pain. And to show how bad it’s been, we need look no farther than the performance of the GDXJ Junior Gold Miners ETF. This ETF (managed by Van Eck Global) is the most popular and liquid of its kind, and offers a good pulse of the subsector it represents.
The extreme contrarian appeal of gold stocks today is readily evident both technically and fundamentally. Gold stocks as a sector have only been this oversold one other time in their decade-plus secular bull, and that was during 2008’s crazy stock panic. When prices move too far too fast in either direction, sentiment gets unsustainably excessive. And then a mean reversion soon reverses the trend.
You have to realize how crazy-anomalous 2013 has been. Melting-up stock markets breeding euphoria are very rare, only seen at the ends of major bull markets. Stock euphoria diverting capital away from all other asset classes is equally as rare. But if you’d told me how 2013 would play out in the stock markets, GLD, and gold, but said SLV would ignore the carnage, I would have thought that was utterly impossible.
The markets are tyrannically cyclical, every sector out of favor eventually returns to favor again and vice versa. That law of sentiment is as immutable as stock prices ultimately reflecting underlying corporate earnings. Based on today’s still-battered gold prices, a 0.511x HGR would put the HUI at 731. This is 157% higher than it was in the middle of this week even after recovering 3/7ths of its gold-panic losses!
Gold’s technical breakdown suffered in its recent capitulation selloff naturally unleashed a flood of bearish sentiment. Traders are totally convinced gold’s woes are just starting, that the worst is yet to come. This pessimistic worldview is largely universal, even among futures traders. But their collective bets are actually a strong contrarian indicator. Their bearishness peaks right before major rallies erupt.