Got Gold Report – HUI Surges While Canadian Miners Sleep

By Gene Arensberg
14 Dec 2008 at 09:48 AM GMT-05:00

The HUI has recovered 74% from its lows in October, but so far the Canadian miners have yet to awaken from their coma.

ATLANTA (ResourceInvestor.com) -- While premiums for physical gold and silver remain stronger than an acre of garlic (more about premiums at the end of this report); while shares of big U.S. mining companies fared much better and both gold and silver advanced, shares of the smaller, less liquid Canadian miners and explorers remained comatose in the three weeks since the last full Got Gold Report. That may be about to change, however, if the underlying action on quote screens is any guide.

It may just be a case of wishful thinking, but dang if we didn’t see some of the small Canadian resource companies building larger bids underneath and taking a few tentative steps into the offer over the past two weeks.

One wouldn’t know that there was anything happening just by looking at the CDNX, the S&P TSX/Venture Composite Index. The index did manage to turn in a “green” week this past week, but not all that big of one, just up 5.0%, closing at 718.54. By comparison, the HUI surged almost 23% to close at 261.30.

The real action is what has been happening for those of us glued to Level II quote screens following a number of the Canadian miners in more or less real time.

What has been happening with quite a few of them is that very large bids are being put up just underneath the trading. That’s new. “Stink bids,” yes; cheap bids, yes, but we are talking cheap stink bids in size. Not just a few measly thousand shares, but much larger, “I mean business” sized bids of tens of thousands or hundreds of thousands of shares even on the cheaper, more risky issues. The action certainly has changed from a month ago when bids were puny, weak or virtually absent.

What has changed is that now the stink bidders are getting much more serious about taking the shares being thrown out by last minute tax dodging sellers. It shouldn’t be all that long before a little competition breaks out among the bidders. That’s if a wheel doesn’t once again fall off the global financial or geopolitical wagons.

A few of the Canada based companies this report follows closely did see significant breakouts to the upside too. That’s always good to see, no matter what level they are breaking out from.

Just one example (full disclosure, the author is long the company), is Guyana Goldfields which just announced a new resource estimate for their Aurora Property, Guyana. The project now boasts 3.69 million ounces of measured and indicated gold with another 1.72 million ounces in the inferred category. That’s getting up there to a size which matters to the larger gold producers.

GUY.TO has also seen a staggering amount of insider buying over the past few months, and that doesn’t hurt the decision of whether or not to keep it on the watch list or in the portfolio. If management feels good enough about the prospects to add hundreds of thousands of their own shares in the public markets, that at least says their interests are aligned with their shareholders, if nothing else.

We’ll have to see if the tentative bid improvement for Canadian miners accelerates going forward, or even continues, but given the more dramatic advances turned in by their larger U.S. counterparts in the HUI index over the past month, it’s about time we saw some signs of life from the small resource companies that trade in the Great White North.

Speaking of the HUI index, is has now advanced 74% from its October panic lows near 150. Is that surprising? What should be even more surprising is that the CDNX is so close to its own lows at the same time.

With that, let’s take a look at the ETFs and the commitments of traders reports.

Gold ETFs

SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported adding another 4.28 to show 762.17 tonnes of gold bars held for its investors by a custodian in London.

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.

Note please the obvious difference between what happened to GLD gold holdings during the last two large dips for gold metal. Roughly speaking, as gold first sold off from the $970s in July to $739 in September, GLD saw enough selling pressure that the trust had to reduce its trading float and metal holdings by 91 tonnes of gold to a low of 614.35 tonnes on September 11.

Then both the gold price and GLD metal holdings spiked back up in late September. Gold popped back up to the low $900s and GLD metal holdings back up to a new record 770.64 tonnes on October 10.

However, as gold metal sold off from the $930s in early October to the $680s later that month GLD gold holdings barely dipped at all relatively speaking. Indeed, GLD only reported having to reduce metal holdings by 23.58 tonnes to 747.06 tonnes on October 23. Gold has since recovered back into the low $800s and GLD metal holdings have bumped back up 15.11 tonnes. So, this last sell-down for gold was not “confirmed” by significantly more selling pressure than buying pressure for GLD.

Apparently GLD investors were willing to ignore the COMEX-inspired sell-down, preferring to focus on the longer-term fundamentals for gold. Premiums for physical gold remained very strong throughout the period.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, dipped 2.18 tonnes for the week, to 117.00 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [IAU] gold holdings added 0.45 to show 64.93 tonnes of gold held for its investors.

For the week ending Friday, 12/12, all of the gold ETFs sponsored by the World Gold Council showed a collective addition of 2.11 tonnes to their gold holdings to 917.58 tonnes worth $24.4 billion.

SLV Metal Holdings

Metal holdings for Barclay’s iShares Silver Trust [SLV] remained steady for the week, at 6,651.79 tonnes of silver metal held for its investors by custodians in London.

Source for data Barclay’s iShares Silver Trust.

Despite the brutal sell down on the paper silver futures markets, there really has been comparatively little in the way of reductions in silver metal holdings by SLV. What is a little disappointing is that we are not seeing stronger buying pressure on SLV with silver at such low price levels compared to a few months ago.

With large reductions in the stocks of physical metal being reported now from the COMEX warehouses, perhaps we might see more buying pressure than selling pressure for SLV going forward. Especially if a run on physical metal escalates. SLV metal holdings are stored by custodians in London depositories.

Gold COT Changes

In the Tuesday December 9, Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) edged 416 contracts or 0.44% lower from 95,288 to 94,872 contracts net short Tuesday to Tuesday as spot (paper contract) gold fell $6.50 or 0.83% from $783.39 to $776.89.

Gold found support Monday near previous resistance of near $756, then snapped back up smartly to test it is previous turning high near $834 Thursday. With dire news out of the U.S. Congress (no bailout for the auto makers) keeping a pall on things, profit taking and the holidays looming, gold limped into a quiet Friday last trade of $822.06. That’s near enough to the highs of the week to give bears heartburn for next week though. Especially with the U.S. dollar index getting trounced for over 300 basis points last week.

Large COMEX commercial net short positioning remains at relatively low levels nominally.

Gold versus the commercial net short positions as of the Tuesday COT cutoff:

Source for data CFTC for COT, cash market for gold.

The chart below compares the COMEX commercial net short position with the total open interest (LCNS:TO).

Source for data CFTC for COT, cash market for gold

We should note here that the traders classed by the CFTC as commercial have increased their relative net short positioning as a percentage of the total open to 36.35% as of last Tuesday. However, that very well may be because of the low number of contracts open. On Tuesday, December 9, the COMEX reported there were only 261,001 gold contracts open total. That’s the lowest total open interest for the COMEX gold contract since August 1, 2005 (244,488 open then), back when gold changed hands for $432.55 the ounce.

The COMEX, division of New York Mercantile Exchange (NYMEX), and the Commodities Futures Trading Commission (CFTC) have come under increasing fire for allowing a few very large bullion banks to dominate the price action on that bourse with the weight of their own trading. As reported in a previous Got Gold Report, on December 2, just three U.S. banks held over 66% of all the commercial net short positioning in COMEX gold futures and just two U.S. banks held over 98% of all the commercial net short positioning in silver futures.

The very legitimacy of the COMEX is at risk if these overwhelmingly large hedger/short seller positions are allowed to continue to dominate what is supposed to be a price discovery mechanism. It is not price discovery to allow just a couple entities free reign to short sell a market into oblivion. It is certainly not a free market when only one or two traders can dominate that market with the weight of their own trading unchecked. It is price discovery destruction and it undermines confidence in the futures markets.

The very high premiums for real physical metal on the street during the futures market sell-downs certainly argued that the futures pricing was out of kilter. No one could legitimately argue that there was a glut of physical silver sold into the market, for example. Instead worldwide shortages of silver bullion products have been the case since even before July. Only paper contracts for the future delivery of silver were sold down in the futures markets. Not actual physical silver. No wonder physical silver is now fleeing the warehouses of the COMEX members. We’ll have more about the premiums below.

Perhaps that is in part why, as of Thursday, December 11, longer term February 2010 and beyond forward gold futures contracts had plunged to just 20,977 open contracts or a tiny 8.03% of all contracts open on the COMEX. Perhaps that is in part why gold and silver continues to trade in small backwardation, with spot at a premium to the near dated futures. Perhaps it is in part because traders worry that the COMEX could be stripped of its metal holdings before those longer dated futures contracts expire.

Silver COT

As silver rose $0.26 or 2.72% COT reporting Tuesday to Tuesday (from $9.57 to $9.83 on the cash market), the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a teeny 143 or 0.57% to 24,751 contracts of net short exposure, while the total open interest on the COMEX increased 1,042 contracts to a still very low 83,476 COMEX 5,000-ounce contracts.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX. When compared to all the contracts open, the commercial net short positioning in silver futures amounts to a still low 29.65%.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

In general and speaking from a historical perspective, when the LCNS:TO is very low it is usually better to buy significant dips than to sell rallies because it means that commercial traders have greatly reduced their collective net short positioning. They have therefore greatly reduced their expectations for much lower prices.

Odds and Ends

The gold:silver ratio (GSR), which reached a 16-year high in October of 88 ounces of silver to one ounce of gold, remains quite high. As of the Friday close the GSR was just over 80 ounces of silver to one ounce of gold using cash market closing figures.

At a ratio of 80:1 robust conversion of gold into silver is almost certainly underway because it is quite rare to be able to exchange gold for silver at that ratio or higher. However, about the only place one can actually convert gold to silver at that ratio is on the futures markets themselves. Premiums for silver products outside of the heavily distorted futures markets are too high to allow conversion near the spot prices.

Since October 17, the inventory of silver metal of COMEX depositories has fallen considerably, down 6,755,230 to 126,826,996 ounces as of December 12, with 77,756,068 ounces of that amount remaining in the “Registered” category. Silver in the Registered category is actually deliverable for COMEX contracts. As of December 12, there had been 5,936 delivery notices for the December contract, or just under 30 million ounces worth.

Source for data NYMEX.com

Repeating from previous reports: So long as the futures markets continue to grossly under price silver relative to the popular physical markets, we can expect the trend of silver metal exiting the COMEX for the real physical markets to continue and probably to accelerate into December.

Premiums Remain Strong

Premiums for physical gold and silver remained strong, as reported by the Coin Dealer Newsletter (CDN), a very respected and widely used source by the coin and bullion industry on December 5.

U.S. one-ounce gold eagles continued to see dealer to dealer premiums of $46.50 bid over spot gold of $774.60 on December 5.

South African one-ounce gold krugerrands were not far behind in the premium department, fetching $35.00 over spot December 5 according to the CDN.

The quoted premium for U.S. one-ounce silver eagles slipped a little over the past month, down to a reported $3.30 over spot dealer to dealer (but the ask price was quoted $0.85 the ounce higher at $13.50 with silver then at $9.35). Silver eagles in smaller quantities are retailing at $4.00 to $5.00 over spot in most small coin shops with limited availability.

Last, but certainly not least, U.S. 90% silver coins in $1,000 face value bags were quoted by CDN as bid $8,775.00 dealer to dealer December 5 with spot silver at $9.35. That is equivalent to $12.27 the ounce or $2.92 the ounce over spot bid. That’s about a 31.3% premium over spot for the most versatile silver bullion product.

It pays to remember that for all of 2006, 2007 and even into 2008 so-called “junk silver bags” traded at a small discount to spot dealer to dealer. As recently as June of 2008, when cash silver was just under $17.00 the ounce, bags of 90% were available in quantity at a 3% discount to the cash price of silver. With silver now in the $10 arena that is no longer the case.

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 offering of the Got Gold Report. Until next time, hopefully in about three weeks, as always, MIND YOUR STOPS.

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The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.