Got Gold Report – Gold, Silver ETFs Add Metal on Strong Buying

By Gene Arensberg
20 Sep 2008 at 09:04 PM GMT-04:00

Investors flooded back into gold exchange traded funds and continued adding silver ETFs over the past week on heightened fears about the banking sector and inflationary government actions to save it.

ATLANTA (ResourceInvestor.com) -- Investors stampeded into gold and silver exchange traded funds over the past week as the U.S. government was forced to take extraordinary steps to avoid an almost certain systemic loss-of-confidence financial meltdown.

A repeat of 1930s bank closures, long lines of angry, empty handed depositors and the social chaos that would accompany such a disaster has apparently been averted at about as close to the last minute before reaching critical mass as such things can be.

Although we have yet to actually see the Treasury Department proposal put together to save the financial system, many analysts and economists already view the drastic measures which the government has already taken and will be forced to take now as very strongly inflationary. Generally, higher inflation expectations have been historically good for monetary precious metals such as gold and silver.

We’ll leave the chronicling of all the many unusually ominous events in the financial sector to other writers and concentrate this report on the furious action in gold and silver ETFs, but suffice it to say that it is probably a very good thing that the average U.S. citizen was unaware of just how close the entire overly-leveraged global financial system came to banking Armageddon this past week.

Funds Flood Back Into Gold, Silver ETFs

At least some investors sought safe haven in precious metals this past extremely gut wrenching week. Gold for immediate delivery on the cash market spiked to as high as $910.45 Thursday before settling for a last trade of $873.44 Friday. That’s up $107.25 or 14% from the ‘artificially’ low $766.19 close the previous Friday.

Silver followed suit for the week, rebounding $1.74 or 16% from its artificially low $10.87 a week prior to a last trade of $12.61 Friday 9/19.

What made the previous drop in gold and silver prices “artificial?” This report is convinced that was the result of an all-out commodity futures assault by the U.S. federal government through a few U.S. banks to crush gold, silver and oil in an attempt to rally confidence in the U.S. dollar and bring down commodity prices in July and August.

If true, while the Fed-Treasury intervention accomplished its primary mission of putting a bid under the buck relative to the rest of the other members of the fiat currency leper colony, the damage it caused no doubt further weakened already struggling investment banks such as Lehman, Morgan Stanley and Merrill. It also confused the largest market actors, catapulting all kinds of counter-party risk holders into panic as derivative, swap and insurance contracts (and the funds that trade them) got blown out in wicked chain reaction fashion. The resultant freezing up of liquidity across multiple unrelated markets ignited a full-blown panic rush to cash.

The artificially low prices for metals resulted from panic selling and massive blowups of overly leveraged funds to meet margin and mushrooming redemptions from terrified investors. That meant sell anything and everything at any price for some funds that will no longer be trading anything for anyone.

The last Got Gold Report covered the attempted government intervention in commodities. Even though we are still suffering lasting effects from it, especially in all mining shares and most especially in the smallest, but most promising junior miners, we’ll focus on the ETF story this week. However, just one more comment about that issue for now. As with all artificial government intervention, no matter how well intentioned, there are always unintended consequences and no matter how ‘successful’ an intervention might be in the short run, the effects are and will always be temporary.

Over time no manipulation of global markets will overwhelm the supply/demand/liquidity equilibrium. That is to say that over time both gold and silver will return to a value dictated by global demand for it versus the available metal to answer that demand – as measured in whatever fiat currency one wishes to use.

For now, the spot price of gold and silver is almost irrelevant because it is getting whipsawed by so much artificial pressure on the one hand and by constant breaking news on the other. Today’s rush back into gold and silver is likely from a much smaller number of investors than we would expect during more normal times, but only because so many investors have chosen to ride out the storm in cash. Now that investors have been reminded that even cash money market funds can become suspect, it’s possible that an avalanche of new wealth will seek safe harbor in precious metals in the near term. We’ll see.

Gold ETFs

More direct evidence of a flight to safety by investors can be seen in the very large additions to metal holdings by gold and silver ETFs over the past week.

SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported a mammoth increase of 65.91 to 679.60 tonnes of gold bars held by a custodian in London for the trust. That more than reversed the 27.83-tonne reduction in metal holdings from the panic-rush-to-liquidity-driven prior week.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased 0.17 to 117.86 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings added 2.15 to show 61.78 tonnes of gold held for its investors.

For the week ending Friday, 9/19, all of the gold ETFs sponsored by the World Gold Council showed a collective increase of 65.41 tonnes to their gold holdings to 834.54 tonnes worth $23.3 billion.

Source for data SPDR Gold Trust.

So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.

Volume for GLD exploded higher for the week to just under 186 million shares, an all time weekly record. GLD ended the week with a last trade of $85.98. From the very large amount of metal added over this past week on record volume, we can conclude that buying pressure very strongly overwhelmed selling pressure for the largest and most liquid gold ETF on the planet.

SLV Metal Holdings Jump Again

Throughout the artificial, but nasty 50% plunge in the paper-contract-dominated spot silver metal price, buying pressure has continued to consistently overwhelm selling pressure on the largest silver metal ETF.

For the week, metal holdings for Barclay’s iShares Silver Trust [SLV], blasted higher a net 202.84 to 6,727.77 tonnes of silver metal held for its investors by custodians in London.

Source for data Barclay’s iShares Silver Trust.

Trading volume for SLV totaled just under 70 million shares for the week. That’s pretty high, but not quite as much as the split-adjusted record levels seen last March.

Investors that would like to put silver away at fire sale prices evidently opted for the ease or necessity of buying SLV in their brokerage accounts. That’s in part because there is little or no silver metal actually available at or near the artificially low paper-contract-dominated spot silver prices with silver showing a $12 handle.

Some Physical Silver Metal Still Difficult to Source

Historically, during large percentage silver price plunges, physical silver has flooded back into the popular silver market which allowed buyers the opportunity to add metal at reasonable premiums as the price descended. Not this time. Not at all.

Premiums for some physical silver products remained at unreasonably high levels over the past week despite a significant uptick for the metal. A check of several dealer to dealer (and public access) electronic bullion bourses revealed exceptionally strong premiums being bid even by dealers. Unusually strong bids in quantity showed for U.S. silver eagles, Canadian silver maples, all 10-ounce bars, name brand and generic 100-ounce bars and for $1,000 face value bags of 90% silver pre-1965 U.S. coins. Even difficult to handle and store 1,000-ounce bars, which are by some accounts still widely available, showed a smallish premium on the bid side dealer to dealer. However, there were few or no offers available in quantity for any size bullion bars on most of the outlets.

As covered in an RI report earlier this week, Kitco, one of the largest and best known bullion dealers, even had to suspend sales in a number of popular silver and gold products this week due to lack of availability, posting a note to clients about it on its website.

Apparently the ability to source 90% bags at discount prices to spot is about over. With each bag containing about 715 ounces of pure silver and the balance of the weight made up of copper, each bag of U.S. obsolete silver coinage is easily divisible, difficult to fake or counterfeit, instantly liquid and up to now has been the least premium way to buy and hold bulk silver metal. As of Saturday, September 20, 2008, 1,000 ounce bars are probably the only silver vehicle left which can be sourced close enough to spot prices to call the premiums reasonable.

Interestingly, if demand heats up now for the big, heavy, 1K bars of silver, they are the same kind of bars which the futures contracts in New York and London trade in 5-bar lots per paper contract.

Small Mining Shares Obliterated

Shares of small mining companies have been decimated. Especially those companies who had the misfortune of being held by one or more of the funds blown out of business by the collapse in metals prices. So many of them have seen their share prices reduced from dollars to pennies that investors have been scared to touch the entire sector. Some may never recover, but some will probably provide spectacular returns from these panic low levels.

Closer examination of their charts reveals a startling, but recurrent theme. Many of these companies have been reduced by half or even more just since July, but on exceedingly thin volume relative to the amount of price reduction. In other words, they collapsed not because of inordinately heavy selling pressure, but because no one was buying them. That’s a shame, but it’s also probably one of the best opportunities we will ever see in this generation.

As just one example of hundreds, Timberline Resources [TLR] dropped as much as 81% from $4.40 to as low as $0.80 in the carnage, but on unremarkable volume. There was not enough volume to justify a 15% drop much less eight-tenths of its value. It’s just a case of a have-to-sell-now seller into little or no bidders. There are many more just like that one out there, most of which should do pretty well if any confidence returns at all.

Got Gold Report Charts

• 1-year daily gold
• 2-year weekly gold
• 1-year daily silver
• 2-year weekly silver
• 3-year weekly HUI
• 2-year weekly Gold:HUI ratio
• 2-year weekly U.S. dollar index

That’s it for this special offering of the Got Gold Report. Until next time, as always, MIND YOUR STOPS.