What’s Next For Gold & Silver – Some Signals

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These are exciting times for gold and silver. The pessimism has reached extremes. The gold chart (below) clearly shows that the price is within a major support zone. Everything is possible, a break below support or a third successful retest before the next leg up starts. Being observers, we are on the outlook for every valid signal that could spell what is coming. This article presents the latest signals from the field.

gold_price_chart_2008-2013

On the bearish side, the negative momentum is for sure problematic. Driven by a herd mentality, financial markets tend to exaggerate during each momentum. There is for sure a chance that this extreme pessimism vis-à-vis the metals will lead to a break below the major support. All will depend how many buyers will pop up at each price point.

One of the headlines yesterday was the SPDR Gold Trust experiencing its largest one-day outflows since August 2011.

On the bullish side, we wrote about the “death cross” gold’s chart is going through now. Although it seems common wisdom that it is a bearish sign, we wrote that the opposite is true in gold (at least, in the past 40 years).

Moreover, during his interview on King World News, experienced precious metals trader Andrew Maguire shared the following extremely interesting facts & figures:

  • Eastern central banks have taken 225 tons out of the physical gold market on this recent takedown.
  • The daily tonnage being drawn down is some 20 to 30 tons per day (through London and Shanghai).
  • The bids in the physical gold market are exponentially increasing.
  • The premiums in Shanghai on February 22nd were over $24 an ounce for gold.  Gold is trading $1,608 in Shanghai.

Now over to the core of short term price setting (read the crash course with precious metals strategist K. Xeroudakis): the gold and silver futures positions of “the big shots”. Below data are coming from the most recent Commitment of Traders reports. To put the figures into perspective, we have added the futures positions from beginning October 2012 (when the metals were at major break out points, right at the start of the 5 month waterfall decline) and mid August 2012 (right at the start of the major 2 month rally). As appears, although open interest and short positions are high in gold, it is remarkable how the commercials (most important market participants and driving forces in the short term price setting, as explained by Ted Butler) have covered their shorts significantly. Their positions are comparable with the situation right before the big rally of past summer.

Harvey Organ concludes the picture is hugely bullish for gold for the following two reasons. He adds to it that gold will rise next week.

  1. The commercials went net long by a wide margin of 28,571 contracts.  This must be a record.
  2. The large speculators went hugely net short and they will be annihilated.

The same goes for silver where a hugely bullish situation occurs for two reasons:

  1. The commercials went net long by 8851 contracts
  2. The speculators went net short by a huge margin.

It should be noted though that the picture in gold and silver is not 100% consistent as commercials still hold a long short position. It is not clear for us what it exactly means, and we will avoid guessing. It’s a point to pay close attention to, in our opinion.

gold_cot_reports_2012-2013

The open interest in gold in each of the three reports: 447,290 in the first table; 480,908 in the second table;  398,747 in the third table.

silver_cot_reports_2012-2013

The open interest in silver in each of the three reports: 155,353 in the first table; 139,117 in the second table; 127,776 in the third table.

Furthermore, it appears from the latest US Fed data that their balance sheet is growing again. After several flat months (because of maturing bonds) the Fed is again expanding its balance sheet. Reuters wrote on Thursday: “The U.S. Federal Reserve’s balance sheet expanded for a third straight week to another record size in the latest week, due to its purchases of Treasuries and mortgage-backed securities.” As we know, an expanding balance sheet is almost one-to-one correlated with the gold price denominated in the currency of the concerning central bank.

In closing, we would like to add that the latest speculation about the US Fed ending their easing policy in 2013 is pure speculation. Readers should not get caught in that trap. In line with prior meeting minutes, the latest Fed minutes remained somehow vague.  Reuters reported:

“A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,” the minutes said.

At the same time, Examiner.com published a quote from Dick Fisher, President of the Dallas Federal Reserve bank: “The Fed has artificially sustained markets. With the head of the Dallas Fed today admitting today that the central bank has been artificially manipulating stock prices higher, even this economic indicator is nothing more than an artificially created monetary bubble.”

Even in this artificial world, the precious metals prices could get sold off even harder, until logic will prevail again. Stay tuned, and be prepared for every scenario.

Follow the gold and silver price evolution week on week.

Gold & Silver Price Short Term Outlook  (11th March 2013)
Gold & Silver Traders Positions on March 5th – Weekly Update  (March 4th)
This One Chart Shows Gold Is Bullish  (February 25th)
Gold – Here Is The Good News  (February 21st)

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