Natural gas bull-bear “gunfight” highlighted

Whenver destroyers appear among men, they start by destroying money, for money is mens protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. Ayn Rand, Atlas Shrugged

ATLANTA — As expected both gold and silver came under pressure as the dollar firmed late week. All the linked charts in the full Got Gold Report have been updated. Some links are reproduced below near the end of this report.

As both gold and silver flirted with going nuclear that is, blowing through their obvious technical resistance levels both met with resistance of another kind, but one more than the other.

The COMEX commercial traders have taken very strongly bearish positions in gold, not quite so bearish in silver. Its clear they intend to put the brakes on gold if they can. At the same time we sense even the COMEX commercial traders are reluctant to over-sell silver.

Well have much more about that in a moment, but meanwhile, below is something that figuratively jumped out at this analyst while updating the charts this weekend.

Market already pricing in much higher NatGas

If a normal picture is worth a thousand words, the one below is worth at least two thousand.

How to read this ratio: The ratio is the $XNG index, the index of natural gas producers, divided by the price of natural gas. When rising, the producers of natural gas are outperforming the commodity of natural gas as measured by the NYMEX near contract price. Simply stated, at present the NatGas producers are way, way outperforming the stuff they produce and sell as of June, 2009.

That’s a 15-year chart, friends. What the chart says is very simple. The chart reveals that the market is already pricing in higher natural gas prices in the companies that produce it. Look carefully at the chart and own it! You probably wont see it anywhere else.

Notice, please, that the market is not pricing in higher NatGas prices timidly or tentatively; this is no modest outperformance by the producers relative to the commodity. The chart is not whispering to us, it is yelling at the top of its ample lungs. This is something we have not seen in at least 15 years, if ever.

As anyone can see, it is rare for this ratio to move up to about 80 and when it has it wasnt very long before the ratio was repelled back lower. Not once in the last 15 years has this ratio ever reached 90 on a monthly closing basis, much less the amazing 115 recorded Friday, June 5. Therefore, we can conclude that the collective wisdom of all the Big Market money managers and portfolio managers; all the actions of so many market players, large and small, all acting in their own self-interest, have concluded that natural gas is closer to ending its historic plunge in price. The collective market is anticipating that NatGas is about to go higher. From the looks of the chart above, the collective expectation is that NatGas is about to go a lot higher.

What is the takeaway?

NatGas is cheap energy — right now. It is ridiculously cheap relative to gold and it is obscenely cheap relative to the valuation the collective market is assigning the best companies that produce it as of the first week of June 2009.

But hasnt the market been very bearish on natural gas?

Yes, the contango for NG is very wide, for example. way too wide. As of Friday the spread between the near active July ($3.835) and the December 2009 contract ($5.596) was a jaw-dropping $1.761 or 46%! That’s WAY TOO WIDE. Which, of course, means that the market has become out of balance and the propensity should be for the contango to contract more than not over the summer. (Believe it or not, as amazingly wide as that spread sounds, it is about 23 cents tighter than one week ago.)

The Big Gas Bears (if you say that right it sounds like something else) have had their way with the natural gas market for an exceedingly long time as energy market trends go. And, they still have just as many if not more selling points to make their negative case for the best, the greenest, the most logical fuel for electricity we have going right now.

Yes, the amount of natural gas currently in storage is well above the five-year average range for this time of year. Yes, the amount of NatGas added to storage last Thursday was well above expectations at 124 bcf. Yes, there were too many wells brought on line over the past three years and the production profile has yet to show material declines. Yes, there will be a significant increase in the amount of foreign, imported LNG added to the system later this year and next year. Yes, it is easier now with horizontal drilling to complete a gas well. Yes, producers can complete wells today in rocks with the porosity a little less than hardened concrete (a slight exaggeration). Yes there have been fantastic discoveries in the various shale deposits in the Mid-Continent and in Louisiana. Yes, yes, yes to all that, and all the other bearish bullet points the talking heads on CNBC (the bearish-positioned spokesmen) have reminded us of the past couple months as they now feel the need to sell their bearish trading books.

Markets look forward

But you know what? The market, which is forward looking and often ahead of the game, is already pricing in a material advance in the price of NatGas. That’s what the above chart says. The price of NatGas is extraordinarily low as measured by just about any metric one wishes to use.

We at Got Gold Report believe the market has evidently seen something on the horizon and is discounting that something right now.

Whatever the reasons, no one can argue that at least as of the first week of June, the market is assuming that natural gas producers are about to be living in a better price environment for their commodity. Investors are bidding up natural gas companies even as NatGas itself bounces along near its bottom.

With that said, the NatGas market is apparently a market waiting for a catalyst. Given the action we note above, it doesnt really look like it will take all that much of one to do it.

No human can know the timing of a market move in advance for certain, and it is certainly possible that we could see NatGas make another new low before it answers the same forces that have propelled the NatGas companies so much higher.

We will go on record saying that should we be given even lower prices on UNG, lower than the $12.69 recorded April 29 with July NatGas near $3.30, we will be adding to our long positioning in incremental units. If the Trading Gods will let us, that is.

As far as we are concerned, this is the cat bird seat. Should NatGas bolt higher from here, great, were happy, we have a good, respectable several unit net long position. Should it actually fool the collective market and trade lower still, even better, because we can add to that position in measured, incremental units in a buy-down ladder before the inevitable NatGas high-percentage rocket launch to come.

Please note this is an excerpt of portions of the full Got Gold Report (GGR). Gold Newsletter subscribers enjoy access to the full GGR as well as Brien Lundins timely and actionable analysis of specific resource companies. For more information visit GoldNewsletter.com or New Orleans Investment Conferences .

It feels like gold has put in a reversal, but gold actually turned in a higher high and low for the week. The high of $989.77 actually occurred Wednesday morning in the U.S. but it was downhill and fast from there to $952.80 shortly before the Friday $954.65 close. The buck got a bid following the non-farm payroll figures better-than-expected job losses of 345,000 and that was all the Big Dogs needed to help them sell the market down Friday. Good thing for them too, because gold was witchingly close to a major breakout at the time. (See the gold charts linked below for more technical commentary.)

SPDR Gold Shares, [GLD ], the largest gold ETF, saw a net 13.39 tonne increase of allocated gold bars over the past week to show 1,132.15 tonnes of gold bars held for its investors by a custodian in London. As of the Friday 6/5 close the metal held by the trust was worth $35 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.

Barclays sponsored (for now) iShares COMEX Gold Trust [IAU ] gold holdings increased 0.89 tonnes to show 69.85 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added 4.49 tonnes over the past week, to show 139.05 tonnes of gold held.

All of the gold ETFs sponsored by the World Gold Council (WGC) added a collective 19.94 tonnes of gold metal, to 1,318.90 tonnes worth $39.7 billion as of the Thursday, 6/5 cash market close.

Despite gold being right at its obvious technical resistance, nearly all gold ETFs saw positive money flow for the week, suggesting still more buying pressure than selling pressure.

SLV metal holdings

Silver actually recoded a 46-cent net loss on the week, but not before it jumped up to challenge resistance Wednesday in the $16.20s. Believe it or not, the always volatile silver market recorded its weekly high and low one day apart, as the $15.06 low came on the open Thursday. The last trade on Friday 6/5 printed $15.27 on the cash market (See the silver charts linked below for more technical commentary).

For the week metal holdings at Barclays-sponsored iShares Silver Trust [SLV ], the U.S. silver ETF, jumped higher by a sizable 257.25 tonnes to show 8,605.43 tonnes of silver metal held for its investors by custodians in London.

Source for data Barclays iShares Silver Trust .

Like GLD, the authorized market participants (AMPs) for SLV add shares to the float and increase the amount of silver held (in minimum basket amounts of 50,000 shares) to answer imbalances of buying pressure over selling pressure. Thus, we know that when the amount of silver being held increases, buying pressure is prevailing. The opposite is true when selling pressure overwhelms buying pressure.

Still no new custodian for SLV

As of Friday, June 5, SLV still had not filed an amendment with the SEC either naming an additional custodian or increasing the amount of silver storage available under the current custodian agreement with JP Morgan Chase London.

Analysts and investors are becoming more interested in this development, maybe for good reason.

The details are in previous Got Gold Reports, but briefly, SLV reported holding 276,670,924.1 ounces of silver as of June 5. The current custodian agreement was for up to 264,550,265 ounces. So SLV now holds 12,120,659.1 ounces or about 377 tonnes more silver than the current custodian agreement covered.

On April 9, Barclays announced a seller-financed $4.4 billion sale of its iShares division to San Francisco based CVC Capital Partners. Barclays retains an interest in iShares in the deal and stands to participate if CVC resells it in the future for a profit according to news reports.

This report speculated in May that now that Barclays has reached an agreement for the sale of iShares to CVC, perhaps we would see who the new custodian for SLV will be very shortly. More importantly, analysts and investors are interested in how much silver storage (and the silver to put in it) the new custodian will be able to provide. We still await an announcement from the SLV sponsor as to a new custodian agreement.

Until then, as reported earlier, JP Morgan Chase, London has consented to provide more than the amount of silver named in the custodian agreement. So it is still reasonable to conclude that SLV could continue its operations normally for the time being, but not forever. SLV needs a new source of silver and because it hasnt yet named one there is growing speculation in the analyst community that the 276.7 million ounces accumulated and allocated to SLV (for its many fully-paid-in investors) represents a significant percentage of all the static silver inventory available in and around London. Indeed, by some estimates the SLV hoard of silver could represent as much as a quarter or even one-third of all the bar-silver currently in storage there.

The London bullion market includes the largest known private bullion depositories for U.K. and European dealers and their management and storage facilities for commercial physical bullion. This London silver inventory is important to the silver market as the basis for the largest silver market in the world, the over-the-counter (OTC) trade that clears through the London Bullion Market Association (LBMA ) where over 100 million ounces of silver change hands daily.

We are repeating from prior reports here, but if, as some analysts and observers now speculate, the SLV inventory has begun to tighten availability of silver bullion in London for all the other markets that rely on silver stashed there, it may become difficult for SLV to secure a new source of silver with enough size to accommodate a larger expansion of the funds holdings.

We will know more when SLV finally files a now overdue amendment to its custodian agreement or announces a new custodian or sub-custodian. We plan to keep an eye on this going forward, but for now the lack of a new custodian supports the voices which say silver is already in very tight supply worldwide.

If true, any further global tightening of available silver good delivery bars helps explain what has been a very tight contango in forward futures and the much lower level of commercial net short positioning shown in the gold and silver COT sections of the report, normally reserved exclusively for Gold Newsletter subscribers.

Gold COT changes:

Gold and Silver COT changes are normally reserved for GNL subscribers, but are included this one time because they are particularly important in this report. Note the interesting divergence between the gold and silver LCNS:TO in this weeks data.

In the Tuesday 6/2 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) jumped yet another 18,385 contracts, or 8.8%, from an already high 208,136 to an even higher 226,521 contracts net short Tuesday to Tuesday as spot gold rose $29.31, or 3.1%, from $952.14 to $981.45, while the total open interest FELL 5,908 to 391,057 contracts open.

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

The chart above looks at just the nominal amount of commercial net short positioning. The chart below compares the COMEX commercial net short position for gold with the total open interest (LCNS:TO).

When we compare all the collective COMEX commercial gold net short positioning (LCNS) to the total open interest, we find that the largest of the largest hedgers and short sellers are very aggressively net short gold, to the tune of a bone-crushing 57.9% of all open contracts. Taken by itself this is normally bearish for gold very short term.

Without belaboring the point, hopefully, we would point out that over the past six reporting weeks, as gold metal advanced $98.40 ,or 11.1%, from $883.05 to $981.45, the largest of the largest gold hedgers and short sellers on the COMEX have increased their net short positioning by a big 76,913 contracts, or 51.4%. Over the same period the relative positioning of the commercial traders, their net short positioning compared to the total open interest, the LCNS:TO, has moved from 44.1% to an extremely high 57.9% of all contracts open.

Incidentally, the last time the commercial traders were collectively net short more than 57% of all contracts open was back in 2005, when the gold market was first attempting to break through the $450s. At the time the commercials probably thought there was no way that gold should advance more than that and their positioning suggested, arrogantly, they intended to cash in on a big gold plunge. We have to remember that by August of 2005 gold had already advanced more than 10% for the year, which was a lot for the times. As we all know now, gold went on to break out higher than the $450s that fall of 2005. Indeed it advanced another $280 or so, up to the $730s the following May an advance of some 62% at least.

In other words, it is usually exceedingly bearish to see such a high LCNS:TO, but the last time the commercial traders were 57% of all COMEX contracts net short they actually got it wrong.

Right or wrong, the correct trade here for short-term traders is to have very tight, at resistance trailing stops in place and/or, if appropriate to the individual trader, protective long-dated slightly out of the money puts to hedge. Although it is usually the case that a very high LCNS:TO, such as we have right now, is usually bearish, it is also the condition we expect will be in place when the Big Breakout we have been talking about finally arrives. As such, we also caution against outright selling the gold market short at this time, except to hedge.

As silver jumped a whopping $1.36 or fully 9.3% COT reporting Tuesday to Tuesday (from $14.61 to $15.97 on the cash market), the large commercial COMEX silver traders (LCs) only added a teeny 195 contracts, or 0.5%, to their collective net short positioning (LCNS) from 42,779 to 42,974 contracts of net short exposure. The total open interest ROSE a big 6,866 contracts to 104,986 COMEX 5,000-ounce contracts open, after adding 2,041 contracts the week prior.

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 (LCNS:TO). When compared to all the contracts open, the commercial net short positioning in silver futures ACTUALLY FELL 2.7% for the week to a less than fully bearish 40.1%.

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

What in the Sam Hill is going on here? At the same time that the Big Dogs of the futures world are all over the short side of gold, they are not really piling on the short side for silver. At least not nearly to the same extent they are with gold. While the commercial traders are very close to historic highs in LCNS:TO for gold, it is a case of not so much for silver. And, as silver just got through jumping and jumping big price wise, the LCNS:TO fell? Really? That is very interesting and could be a very important signal to us all.

If the biggest hedgers and short sellers are not convinced enough that much lower prices for silver lie ahead; if the big nasty COMEX controlling bullion banks are not piling on the short side for silver after the metal has already advanced as much as 90% off its October lows; if the big commercials are not hammering silver with an avalanche of net short positioning with silver at obvious resistance near $16, then there must be a reason for it.

To this analyst it suggests that the market is beginning to price in the coming, almost certain news of a shortage of commercial physical silver. Either that or it is beginning to worry that such an incendiary news event surfacing in the mainstream media is at least possible. Otherwise we would have expected the relative commercial net short positioning to be much higher, similar to the action in the gold market.

With silver so close to obvious and material implied resistance we need to keep our trading stops in close and tight, with an at resistance strategy. A strategy that allows for reasonable daily and weekly volatility, but gets us out to the sidelines in the event the market turns hard against our long positioning strongly and violently. At the same time, however, we caution that the current lower-than-expected LCNS:TO is a surprise, which warrants we also issue a cautionary breakout watch.

Mentioned now out of an abundance of caution, should silver trade convincingly to and through about $16.10 and stick it, that would very likely trigger both buy stops and a big wad of short trailing stops and the advance for silver could be explosive in both velocity and in amplitude. While we dont really expect it right away, we certainly want to alert our readers to the possibility. And, the positioning of the large commercial traders shown just above shows we are not the only ones looking at that $16 line in the sand.

Moving on, below are the usual Got Gold Report charts, most updated through Friday, June 5.

Got Gold Report Charts

GNL subscribers enjoy access to all the Got Gold Report charts and analysis. Below are samples of some of the most popular GGR graphs.

I have been following this weeks surprise small or micro-cap company since Bob Bishop, the lately retired newsletter writer, first recommended it several years ago. Of interest on the chart are the buys and sells of Canadian financier Mr. Simon Ridgway, who sold out his holdings in the company last year for a tax loss, but has been buying back in the company, in size, this year.

Please read the disclosures below before clicking on the link above to see who this weeks surprise small resource company is.

Until next time, good luck, good trading and as always MIND YOUR STOPS.

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 net long position in iShares Silver Trust, net long natural gas ETF UNG, long Timberline Resources (TLR), long Paragon Minerals (PGR.V), long Forum Uranium (FDC.V), long Natcore, (NXT.V), long Odyssey Resources (ODX.V), long Radius Gold (RDU.V), long SDS as a Big Market hedge and currently holds various other long positions in mining and exploration companies. To contact Gene use LLCCMAN (at) AOL (dotcom).