By Gene Arensberg
04 May 2008 at 08:52 PM GMT-04:00

ATLANTA (ResourceInvestor.com) -- It’s probably time to load up the truck in the junior resource sector. Why? Well, call it a hunch. A hunch based on the hard-core contrarian notion that when the many are convinced it is the few who will prosper. That and the fact that small miners and explorers, represented in this chart by the CDNX in Canada, are beginning to outperform their larger cousins, represented by the HUI, even if it is in a falling market.

Especially hard hit have been the small uranium miners and explorers, even the ones that actually do have real, demonstrable resources and promising prospects. Odd, isn’t it, with oil over $100 per bbl, coal and natural gas both historically high, and at least one marquee high-grade uranium discovery having just been announced in Canada?

This report firmly believes the carnage in the small resource sector is directly related to the credit crunch fallout (no pun intended) from last year and early this year. The great uncertainty that arose during it created a vacuum of liquidity from the more risky stocks in our investing universe, no matter what they did or mined.

This report also firmly believes that liquidity will return to these former high flyers in a very big way in the not-too-distant future. There are already indications that liquidity is returning. A good thing, because some of the more speculative, but promising issues this report tracks have already been so beaten up in the downdraft that they are actually trading under their 2003 lows.

Signs of Life?

Here are just a few signs that, while some are difficult to measure, are nevertheless quite evident for those of us who follow the resource sector just about every waking moment.

Gold and silver have sold off strongly and are once again approaching their respective popular technical moving averages from above. The closer they get to those moving averages the higher the probability they are about to reverse course. See more about that in graphs linked in the Gold Charts section below.

The current correction in gold is already the second largest in percentage terms since the Great Gold Bull began in 2001-2002 as shown in this chart.

As profiled in a supplemental report last weekend, massive outflow of wealth from the world’s gold ETFs (primarily GLD) surfaced last week. It has since slowed and instead of outflow we see the opposite, we see positive money flow or dip buying into the U.S. silver ETF. More about that in the Gold ETF and Silver ETF sections below.

Although the U.S. dollar has gotten a bit of a bid relative to the other members of the global fiat currency leper colony, curiously commercial traders on the NYBOT don’t seem to think it has all that much upside if their net long positioning in U.S. dollar index futures is any indication. See comments about that in graphs linked in the U.S. Dollar Index section.

Sentiment among the popular resource newsletter writers has taken a decidedly bearish tone over the past six months and especially over the last two. Generally, and there are notable exceptions, they have gone from quite bullish (legendary gains ahead), to cautiously bullish (buy on weakness), to defensively bullish (stink bids only), to, and this one hurts, “retreat and regroup” or “focus only on winners,” which is about the about the same thing as fully bearish in that matrix.

It is as if Col. William Barret Travis just drew a line in the sand with his sword at the Alamo in 1836 and, metaphorically speaking, along with James Bowie and David Crockett we 160 or so resource investors still hanging around the resource stock Alamo sanctuary have stepped across to take on 3,500 Mexican regulars “for the cause.”

Supposed financial genius stock picking gurus are abandoning their former resource exploration darlings in wads just when they are hitting 4 and 5-year lows. That just might be the opportunity of the year as it comes at a time when there is still extremely sparse liquidity in the small resources sector.

If any of the financial genius guru’s sizable flock takes the plunge off the cliff with the other lemmings on the already badly beaten up issues they once so lovingly recommended … when they have already been run over by credit market tightness and unusually tight liquidity on the resource sector highway … we bargain loving stock vultures ought to be sitting on the power line just above that scene.

Pass the salt and pepper please. Financial genius guru road kill for breakfast!

So the stocks they loved and enthusiastically recommended at $2.00 are now chopped liver at $0.30 and should now be dumped? Really?

Of course these guru’s have already given the early word to their very close “friends,” the people who pay the higher “preferred member” premiums for their guru advice, and they have already sold. That’s one reason that some of these stocks are so beaten up already before the “regulars,” the lowly subscribers that only fork over a tenth of what the “friends” do, get the word from on high to sell and move on.

As the gurus abandon their former “best buys” at the bottom, with so few buyers around to take on an avalanche of disgusted regular follower sellers, some issues will get hit very, very hard just on that extraordinarily bad timing selling pressure alone. Even though, except for the unlucky firms hit with devastating political insanity like just occurred in Venezuela, Ghana and Ecuador, nothing has really changed for the company, its management (which the gurus loved when they recommended it), or its prospects.

Watch for just that kind of opportunity if you have the strong-stomached, long-term-minded, thick-skinned resolve to go bargain hunting for guru-dumped resource sector road kill.

It probably won’t be all that long before they are picked up, dusted off, and repackaged by the next financial genius guru, once they have alerted their higher paying customers, of course.

The irony was, for Col. Travis, he was on the right side of the argument. Gen. Houston and 680 “Texians” changed the course of history a month later at San Jacinto and the Republic of Texas was born.

Travis was right; he was a bona fide hero, but unfortunately for him, just a little early. The help he expected to arrive never did, but he and those who stood with him managed to hang on for 12 bloody days against a foe with superior strength, giving Houston more time to develop and implement his strategy for victory.

We resource stock vultures don’t have to die for the cause if we are early, but our portfolios might sting a bit more before our San Jacinto Day. We’ll see. Got spec mining shares?

Why Pay More Premium for Silver?

Some physical silver products such as small rounds, U.S. silver eagles, and all bar silver smaller than the very large 1,000 ounce heavies remain difficult to locate in quantity at anything close to a reasonable premium with silver trading in the $16.40s. That is probably one reason that we are seeing significant positive money flow into the U.S. silver ETF. More buying than selling pressure required iShares Silver Trust to increase its trading float and add over 150 tonnes of new silver for the week. That’s obvious dip buying in a pretty convincing measure. Read more about that, including suggestions for lower premium alternatives in the Silver ETF and Silver COT sections below.

Bottom Line

The bottom line for this report is that as both gold and silver are approaching their popular moving averages from above, with this gold correction already the second largest of the Great Gold Bull in percentage terms (although only 7 weeks old), with the most popular physical silver still in short supply in the U.S., positive money flow into the silver ETF, negative money flow from the gold ETFs slowing, mining stocks acting more firmly than they have been and small resource companies now outperforming their larger cousins, there is reason for optimism for those who are still holding positions or are now scaling in. If the indications this report follows closely are correct, both gold and silver are within 6% to 10% of their potential 2008 lows and it would not be at all surprising to see both find overwhelming support near their Friday lows.

Of course that could be wrong. We’ll see. Got gold? Got silver?

On to some of the indicators.

COT Changes. In the Tuesday 4/29 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) fell 14,117 contracts or 7.07% from 199,599 to 185,482 contracts net short Tuesday to Tuesday as gold dove $44.16 or 4.83% from $914.16 to $870.00.

Since Tuesday gold only managed to retest the low $880s to the upside and found support in the $850s. Cash gold even took a very brief shot at a break of the former-resistance-turned-possible-su... $850 level Friday following the release of better than expected non-farm payroll numbers in the U.S.

The reaction-spike lower (to as low as $846.27 on the cash market) found no downside momentum, with determined large-scale buying from multiple sources below $850, then the action reversed course upward on probable pre-weekend short covering to a Friday last trade of $856.48.

For the calendar week gold turned in a net $29.78 decline or about 3.4% on the cash market.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest rose a modest 5,452 to 429,670 contracts open, each covering the future delivery of 100 ounces of gold metal.

Long-term June 2009 and beyond COMEX forwards unsurprisingly added 2,942 contracts to show 51,790 lots open, or a low 12.05% of total open contracts. More than half of the total open interest increase were contracts the longer-term variety in other words, but the nominal amount of the increase is not at all unusual and the long-term contract to total open interest percentage is historically still quite low.

As gold has sold down the nominal amount of commercial net short positioning has also declined, but it is the pace of the LCNS decline that is disappointing so far for those long the metal. From its March 17 speculator-assisted intraday high of $1,032.80 to Friday’s fund-exodus influenced intraday low of $846.27, gold has seen a peak to trough correction so far of $186.53 the ounce, or about 18%.

The commercial net short position actually peaked a little earlier on February 19 at a record 252,740 contracts net short. If we use that figure as the peak, as of Tuesday, 4/29, the LCNS had been reduced by 67,258 contracts or about 26.6%.

The LCNS has not been this low nominally since the September 18, 2007 COT report when the LCs were net short 175,264 COMEX contracts against a total open interest of 392,748 with gold in the $720s, but it still has to be regarded as a high net short position historically speaking, especially when compared to the August 21, 2007 COT report, the last major bottom for this indicator which showed an LCNS of just 91,994 contracts against a total open interest then of 330,204 with gold in the $650s.

Clearly as of Tuesday, although the LCNS is considerably less than it was in February nominally, the large, well funded and presumably well informed traders classed by the CFTC as commercial were still well positioned for further gold weakness even after gold had blown off its speculative top to the tune of 18%.

The other side of that statement is that since February 19, COMEX commercial traders are less net short contracts covering about 209 tonnes of gold metal. Now they are “only” net sort about 577 tonnes with gold at $870 instead of 786 tonnes when gold was in the $920s.

It would not be very surprising to learn that they are considerably less net short in the next COT report provided gold stays fairly close to current prices through the Tuesday COT reporting cutoff.

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. As of Tuesday, 4/29, the LCNS percent to total open interest was still fairly high in historic terms, but the trend over the past ten weeks has the short positioning of the largest gold futures traders, the bullion banks and hedgers, taking less a part of the total New York paper gold pie, not more.

That trend may be escalating with gold having now retested historic resistance-turned-possible support in the $850 region, if the graph is any guide.

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

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], fell 10.74 to 580.45 tonnes, following the much larger 50.63-tonne reduction recorded the week prior. As of Friday’s figures that’s equal to $18.7 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, edged 1.83 tonnes lower to 114.02 tonnes of gold held (as of Friday). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings fell 1.25 to 62.79 tonnes of gold held for its investors.

For the week ending Friday, 5/2, all of the gold ETFs sponsored by the World Gold Council showed a collective decrease of 10.75 tonnes to their gold holdings to 742.37 tonnes worth $20.4 billion.

In the two weeks since the last full Got Gold Report we have witnessed the largest surge of negative money flow for GLD since its November, 2004 inception as apparently aggressive selling pressure induced the authorized market participants of the trust to reduce the trading float and to redeem (sell) 61.37 tonnes, or about 9.6% of its gold holdings.

Now that gold has challenged the $850 level, has become short-term oversold and is within a few percentage points of its popular 200-day moving average it will be very interesting to see if the negative money flow from GLD continues or reverses. It has apparently already slowed.

Source for data streetTRACKS Gold Trust.

Silver ETF: In stark contrast to gold ETFs, metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, showed a substantial increase of 151.48 to 5,927.99 tonnes of silver metal held for its investors over the past week.

Silver turned in a net $0.44 or 2.6% dip on the cash market for the calendar week with a Friday last trade of $16.417.

Not only are we NOT seeing negative money flow from the silver ETF as the cash market price has fallen, we are seeing quite the opposite. That’s probably a sign of aggressive dip buying for the silver ETF and it reflects the growing understanding of the market that physical silver, the real, precious shiny stuff, (as opposed to paper futures contracts which promise to deliver some of it in the future) … real physical silver in many forms is getting even more scarce as the price declines and demand for it increases.

Because of the injuriously high premiums dealers are forced to charge in order to deliver physical silver in either coin, round or bar form, some traders and investors are apparently supplementing or replacing their demand for real silver by buying SLV. A pretty good idea too, discussed in more detail elsewhere in this report.

Source for data Barclay’s iShares Silver Trust.

The shortage of physical silver on the street in the U.S. was discussed in more detail in previous reports, so we won’t repeat it here, but the fact that high premiums for most small-sized silver physical products persist is proof of the scarcity of the metal in the popular silver market.

While we have seen considerable negative money flow from the largest gold ETF as gold prices fell, we see the opposite in the U.S. silver ETF. That means that people are buying this dip in silver. At least so far. It also probably means that the continued existence of the current paper-silver-market-influenced pullback for the white metal may already be in jeopardy. We’ll see.

Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.

Silver COT: As silver plunged a whopping $1.17 or a staggering 6.63% COT reporting Tuesday to Tuesday (from $17.65 to $16.48 on the cash market) the large commercial COMEX silver traders (LCs) increased, that’s right, INCREASED their collective net short positioning (LCNS) by 532 (0.89%) to 60,207 contracts of net short exposure, as the total open interest on the COMEX dropped a huge 26,730 (17.4%) to just 126,730 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. As of COT cutoff Tuesday 4-29-2008.

Since its peak on February 19, the total number of open silver contracts has fallen by 33.12%. Cash market silver has seen a correction of about 25% peak to trough.

As the total open interest for silver fell the largest one-week amount nominally since at least January of 2005 (and probably ever) and the net short positioning of the largest silver futures traders actually increased a little over the same period, the collective combined commercial net short percentage to the total open interest spiked up from 38.94% to 47.59%. So it looks like those paper-trading veterans, who are used to silver really leveraging gold price falls, were apparently looking for silver to fall harder than it did.

Who is right, the buyers of physical silver and the buyers of SLV, who want to own silver at these prices, or the COMEX commercial traders who apparently think it should be even lower? We shouldn’t have very long to wait before we find out.

If Buying, Why Pay Higher Premiums Than Necessary?

It’s like something out of the Twilight Zone when we see the cash market price of silver falling during a period when small physical silver is so scarce that 100-ounce name brand bars easily fetch $1.50 to $2.00 the ounce over spot to the buyer, if you can locate any in quantity. (Caution, many of the quotes seen online do not include up to 5% shipping, handling, insurance and dealer up charges which are tacked onto every trade delivered. But even with those charges excluded the premiums remain high and availability is spotty for all small bar silver.)

Sonny Toupard, who runs Royal Coin in Houston and is one of the classiest guys in the bullion business, reported Saturday that there are opportunities for physical silver investment at reasonable premiums in this market, but they just aren’t what the public prefers. For example, while 100-ounce name brand bars are very popular, they can’t be had today at any reasonable premium with silver trading in the $16.40s. Instead, Toupard tries to steer buying customers toward more plentiful silver products, relatively speaking, which trade at substantially lower premiums.

U.S. silver coins in $500 and $1,000 face value lots top his personal list (and mine) because they are trading very close to their “melt” value, or the value of the silver metal contained in the coins. Why pay a high premium for silver when it isn’t necessary?

A cloth bag with $1,000 face value of pre-1965 U.S. silver dimes, quarters or half dollars is deemed to contain 715 ounces of silver (they each probably contain very slightly more silver plus the copper alloyed into the metal) and as of Saturday 5/3, with cash market silver at $16.41, multiple online sources had so-called “90% bags” available (offered) in quantity at prices ranging from $11,700 to $12,000 exclusive of fees ($16.36 to $16.78 the silver ounce). That means that customers could buy silver from -$.05 to +$0.37 the ounce that way, before adding the particular website’s fees.

Of course, if the customer just bought them in person at a reputable dealer (assuming the dealers are competitive in price) he could avoid the web fees. By any measure those are reasonable premiums for a quality silver investment product.

But, the relatively plentiful availability of 90% bags today may be temporary as more and more of the investing public becomes better educated in the market and decide that they want as much silver for their investment dollar as they can buy rather than what is popular today.

When asked why anyone would want to buy U.S. silver eagles at a $2.00 premium over spot instead of 90% bags which can be had at or near par, Toupard replied: “It may have something to do with the 1099-B reporting requirements. Silver eagles are exempt from 1099-B reporting. And they are very popular for small investors who don’t want a lot of silver at a time. … But anyone that wants to buy larger amounts should look at lower premium silver.” That is in order to get more physical silver for the investing dollar.

Apparently customers can purchase all the silver they want to without triggering a reportable event under the Patriot Act, but selling $1,000 face value or more in U.S. silver coin back to a reporting dealer requires the dealer to file a form 1099-B with the government. If $999.90 face value and less – no 1099-B is required, unless the customer makes the mistake of selling more than that to the same dealer in a short amount of time. When that occurs the precious metals dealer is supposed to become a policeman and “know” that the customer is making a so-called “structured-trade” to avoid reporting requirements.

We’ll have more about this wrinkle in the physical silver market in future reports, and it is yet another reason that the silver ETF is gaining in popularity fast, but for now the best bang for the physical silver buck if one is on the buy side of the table still seems to be in 90% bags. While they last.

Buy SLV to Trade Up

An interesting alternative to paying the high premiums which occur when silver prices have come down on the paper futures-influenced cash market, is to purchase shares of iShares Silver Trust [AMEX:SLV] which track very closely with the price of silver. Each share of SLV represents the action of about 10 ounces of silver so 100 shares represents the action of 1,000 ounces of metal.

Some bargain-minded traders have figured out that when silver plunges in price, premiums for the popular silver they want to own go up considerably, but those premiums become much more reasonable when silver shoots higher quickly. By buying SLV when the cash market price goes lower and premiums for scarce physical silver go higher, they can “lock-in” however much silver they want at or near spot with the idea that when silver goes much higher and the premiums for physical decline or even go to a discount they can sell their SLV and convert to even more physical silver on the same investment with their SLV gains. Less the insignificant commissions charged by online brokerages such as Etrade.

Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.

Nearing oversold and nearing popular technical moving averages.

Gold Indexes. Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.

What’s this? Gold is off about 3.4% but the HUI is (only) off 2.75% for the week? What happened to the downside leverage? Could it be because so many of the large gold companies are about to report earnings next week?

HUI:Gold Ratio. Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.

U.S. Dollar. Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.

That’s it for this offering of the Got Gold Report. Due to travel conflicts the next report is scheduled for three weeks from now, the weekend of May 24-25. Until then, as always, MIND YOUR STOPS.