Are There Any Gold Bulls Left In The U.S.?

Includes: GLD, SLV
by: Tim Iacono

Volatility returned to precious metals markets in recent days after a wicked Sunday night sell-off and more big moves at mid-week when the Federal Reserve sent mixed signals about its money printing effort. The bears remain firmly in control as gold short positions surged to record highs.

Selling of gold and silver ETFs continued as more U.S. money managers rotated out of precious metals and into equities as the economic outlook continues to improve. But, in a possible sign of things to come, gold was one of the few assets to rise from Wednesday morning to Thursday afternoon after bearish developments at the central bank sent the price of nearly every other risk asset lower.

Physical demand for precious metals in Asia remains quite strong despite even more efforts in India to curb demand and there is some potential for a big short-covering rally if equity markets continue to falter, though most analysts seem to think that even lower metals prices are ahead.

For the week, the gold price rose 1.9 percent, from $1,360.20 an ounce to $1,386.30, and silver rose 0.6 percent, from $22.26 an ounce to $22.39. Gold is now 17.2 percent lower for the year, down 27.9 percent from its 2011 record high, and the silver price has fallen 26.2 percent in 2013, down some 54.8 percent from its all-time high reached in April of 2011.

Silver futures plunged more than 9 percent last Sunday night after yet another big sell order was placed in thinly traded markets triggering stop-loss selling and pushing prices sharply lower in what many called a "flash crash". The silver price fell to its lowest level since late-2010 in yet one more example of markets that appear to be manipulated by big traders who have very little fear of regulatory agencies.

Both metals rebounded sharply on Monday, in part due to a new warning on U.S. debt from credit rating agency Moody's, ending with big gains for the day and holding those levels until Wednesday. Fed Chief Ben Bernanke then sent markets on a wild ride by first appearing very dovish on central bank stimulus, but then responding to a question from Congress by saying the Fed could begin slowing their bond buying as soon as next month.

This sent stocks and commodities tumbling.

Precious metals rebounded on Thursday, whereas most other asset classes did not, and this development is worth remembering if equity markets continue to react negatively to the threat of Fed policy changes.

The $1,400 level is now key for the gold price after testing that level on multiple occasions last week, but this is likely to be a difficult task for gold bulls given the record short positions as shown below.

According to the accompanying story at Bloomberg using data from the Commodity Futures Trading Commission, hedge funds and other large speculators held 74,432 short contracts as of May 14th, the highest since they began collecting this data in 2006.

Of course, record short positions also hold the potential for a record short covering rally since, in recent years, high short positions have been followed by big moves higher.

This occurred on at least four occasions between 2007 and 2011, however, given the technical damage that has been done in the last few months, some new major catalyst would likely be required to convince futures traders to change course since, along with record high short positions, net long positions for hedge funds and other large speculators are now at their lowest level since mid-2007.

This same bearish sentiment remains for metal ETFs as institutional investors, hedge funds, and retail investors continue to sell.

As shown below via the World Gold Council's Gold Demand Trends, gold ETF holdings fell by over $9 billion during the first quarter of 2013, the equivalent of 177 tonnes of the metal being sold into the market.

This accelerated in April after the mid-month price plunge and, as of last week, over 450 tonnes of gold are believed to have exited the world's many gold ETF products.

Gold ETF holdings are at their lowest level since July 2011 as U.S. investors continue to sell the SPDR Gold Shares ETF (NYSEARCA:GLD) and buy stocks, a trend that showed only the slightest sign of slowing last week.

Last month, the GLD trust shed 143 tonnes of gold and holdings have declined by 62 tonnes so far in May, including last week's 22 tonne drop, the biggest since mid-April.

After rising during the first four months of the year, silver ETFs are now also seeing large outflows as holdings are now declining at the iShares Silver Trust (NYSEARCA:SLV), down 230 tonnes last week in its biggest decline since January.

This follows outflows of 188 tonnes the week prior, erasing the year-to-date gains and suggesting that retail investors have recently become bearish on precious metals along with institutional investors and hedge funds.

Another possibility is that silver investors are converting their SLV holdings to physical coins and bars as U.S. premiums for these products remains quite high by historical measure.

Also shown in the chart is that demand for gold in jewelry, bar, and coin form rose sharply in the first quarter, offsetting most of the decline from metal ETFs. Gold premiums reached fresh record highs in China just last week as lower prices attracted more buyers and, the second quarter data from the World Gold Council (to be released in August) should be one of the most highly anticipated reports this group has ever published.

Record buying in Asia didn't begin until prices plunged in mid-April and one of the most important questions for precious metals markets in the months ahead is the amount of gold buying that has occurred in India and China over the last month or so, relative to the selling from ETFs in the U.S.

While Asia can't seem to get enough gold (and some shortages persist), you have to wonder just how many gold bulls are left in the West.

To some degree this is understandable since, aside from the small "hard money" crowd, there is no cultural affinity for the metal in the U.S. and, despite once-unimaginable central bank money printing, inflation has (so far) failed to materialize. Physical metal continues to flow from the West to the East as Americans sell gold and silver (mostly in paper form) to buy stocks and real estate where prices are rising.

Someday, precious metals will be relevant again here. When that occurs, those who sold their gold and silver in recent months will regret doing so.

Disclosure: I am long GLD, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also own gold and silver coins and bars