ATLANTA (ResourceInvestor.com) -- Probably the most interesting news in this report is that as gold and silver advanced in the two weeks since the last Got Gold Report, commercial traders on the COMEX gold and silver futures bourse were reducing their collective net short exposure. That’s contrary to their normal habit of taking on more short positions into rising prices and it’s evidence of some modest recent short covering.

For the moment those large, well-funded players who normally profit from a falling commodity price seem content to get out of the way of the gold and silver express. For now at least they do. If there ever was a gold or a silver “cabal” or “cartel” intent on manipulation or suppression of metals prices measured in U.S. dollars, then lately, with silver now up over 90% from its August turning lows and gold up about 50%, they haven’t been “caballing” or “cartelling” very well, have they. Resource investors will find more about the commercial net short positioning reductions in the COT Changes and Silver COT sections below.

It’s Fear Stupid, Not Stupid Fear

Sentiment drives markets. Right now the primary market driver is fear. Fear of inflation. Fear of recession (which is already here). Fear of imploding credit markets. Fear of accelerating foreclosures and a further real estate market gutting. Fear of a domino effect where virtually all markets get decimated by the effects of related markets. Fear of a bond market and bond derivatives market meltdown measured in amounts that start with the letter “T.” And, even though this list could go on and on and include so much more that investors are now fearful of, when boiled down the main reason liquidity continues flee the world’s equity markets is the collective fear that other investors will be fearful and sell even more than they have already, driving markets lower and lower.

At the same time that investors are afraid of other investors fearfully selling, and while they hit the “sell” button on their stock positions, here in the U.S. they are receiving back inflated, watered-down and discounted dollars which have less purchasing power than they did a year ago and those dollars buy considerably less than they would two or three years ago. So even if an investor had broken even on the dollar amount of an investment he made a year ago he’s actually in the hole because U.S. dollars don’t buy as many Wal-Mart widgets as they used to.

More and more investors are realizing that if they had instead invested their wealth in gold and silver metal a year or three ago, then not only would they have seen healthy increases in the amount of paper dollars they could now harvest, but the relative purchasing power of both gold and silver has also improved considerably against those paper promises.

In this abbreviated version of the Got Gold Report, abbreviated due to the primary author’s ongoing 2-week battle with a nasty flu bug and an overly-active travel schedule, we learn that mining shares, especially the smaller, more risky and less liquid lottery ticket-style issues on the Canadian exchanges continue to underperform the metals, but that’s due largely to the abject fear which currently grips all the world’s equity markets causing negative liquidity. When more wealth is leaving a market or a sector than entering the tide falls for all the boats in the sector (and vice versa).

While the larger, index-resident miners, (like Barrick, Newmont, Hecla, Kinross, Goldcorp, and so on) may not be outperforming the metals as a group like many feel they should, they are handily outperforming just about all other equities. Like caviar, or peanut brittle, the big miner market performance is actually better than it appears. If you are the last man standing at a bloody gunfight, isn’t that similar to outperformance?

Negative liquidity is always, by definition, temporary, but it can last much longer than many short-term minded resource investors are prepared for or believe possible. While ironic that even the most promising junior resource miners and explorers can’t seem to catch a bid when metals prices are on a tear, when fear has its tentacles around the throats of investors it is understandable. Speculative stocks are expendable when times look to be getting tougher.

Eventually, however, the pendulum will swing back from the fear side back to the greed side and torrents of new wealth will flood in to capitalize on the red-hot commodities markets. This report continues to believe the time is right to be picking up obvious liquidity-driven downside overreactions in the thinly traded and highly volatile promising juniors and explorers. Right now, while the stink bid is king and fear is the prime motivator.

On to some of the indicators.

COT Changes. In the Tuesday 3/4 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) FELL a big 12,166 contracts or -4.82% from a near record 252,275 to 240,109 contracts net short Tuesday to Tuesday as gold ADDED $15.97 or 1.68% from $948.15 to $964.12. Since Tuesday gold tested as high as the $992 level Thursday before spirited Friday profit taking and a last trade of $973.14 on the cash market.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest dipped slightly, by 8,110 contracts, to 486,992 contracts open.

Long-term April 2009 and beyond COMEX forwards added 1,448 contracts to 50,716 lots open, or a still quite low 10.41% of total open contracts. It may sound like a broken record, but we still find no telltale ultra-bearish spike up in long-term forwards.

With gold now trading in the upper $900s and despite the fairly large reduction in the LCNS over the past week the very large, well-funded and presumably well-informed traders on the COMEX classed by the Commodities Futures Trading Commission (CFTC) as “commercial” remain at near record levels of net short positioning nominally as can be seen in the graph below.

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

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

As of the Tuesday COT cutoff, all of the open contracts on the COMEX covered both sides, long and short, of contractual promises to deliver 48.7 million ounces of gold metal (about 1,514.7 metric tonnes) at some point in the future, most in the near future (less than one year from now). At Tuesday’s closing price of $964.12 the notional value of all the COMEX gold action was about $46.95 billion. Since the futures market is highly leveraged, the actual collective amount at risk is a fraction of that amount, but not insignificant.

As of Tuesday, the COMEX commercial traders had been willing to accept the short side (meaning they do better if gold drops in price) of 24.01 million ounces (about 746.8 tonnes) worth $23.15 billion notionally. Each move of $1 in the price of gold equates to about $24 million of either “fun” or “pain” to the 47 commercial traders with reportable net short positions. Each $10 move means about $240 million in action for them.

In order to get a better understanding of what the near-record high nominal commercial net short positioning means and whether there have been significant changes in the expectations of the largest of the largest gold traders, we can look at their net short positioning relative to the total open interest. The theory being that if the large, well-funded and presumably well-informed commercial traders were very confident that gold prices were about to plunge they would be much more willing to accept the short side of new trades and vice versa.

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

As of Tuesday, with gold in the $960s, we find that the COMEX commercial traders are indeed at a relatively high percentage of the total open interest. Their collective net short positioning represented 49.3% of all the open contracts. Ordinarily such a high percentage of LCNS would seem to suggest that the commercial traders were very confident of lower gold prices.

Interestingly, however, over the past two reporting periods, as gold increased by $36.20 from $927.92 to $964.12 and the total number of open contracts fell by 2,797 contracts, the LCNS fell by 12,631 contracts and LCNS percentage to total open fell from 51.6% to 49.3%. The commercials were therefore a little less confident of lower gold prices. At least short-term.

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], added 8.12 to 647.56 tonnes. As of Friday’s figures that’s equal to $20.8 billion U.S. dollars worth of gold bars held by a custodian in London for the trust. That follows an addition of 8.29 tonnes the week prior.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, rose by a relatively large 4.97 to 112.86 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings also added 2.59 to a reported 62.52 tonnes of gold held for its investors.

All of the gold ETFs sponsored by the World Gold Council showed a collective increase of 13.48 tonnes to their gold holdings to 806.83 tonnes worth $25.2 billion.

As gold traded above $900 the ounce positive money flow (more wealth entering than leaving) had paused for the world’s gold exchange traded funds, but over the past two frightful financial weeks modest positive money flow has apparently resumed.

Source for data streetTRACKS Gold Trust.

An interesting side note to ponder: The amount of actual, cold, hard, yellow gold metal held in trust for gold ETFs sponsored by the WGC, at 806 tonnes, is now larger than all of the gold paper contracts COMEX commercial traders were net short (746 tonnes) as of Tuesday 3/4.

Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, showed a maintenance reduction of 1.76 to 5,363.23 tonnes of silver metal held for its investors over the past week, but that follows another large addition of 215.77 tonnes the week prior.

Silver turned in a net $0.33 gain for the week on the cash market with a Friday last trade of $20.15. That followed a big 10% short-covering spike higher the week prior.

A jump in demand for shares of SLV accompanied the short covering surge for silver the prior week resulting in another period of positive money flow (more wealth entering than exiting) into the exchange traded fund.

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

Source for data Barclay’s iShares Silver Trust. As of Thursday, 3/6.

Silver COT: As silver added $1.01 (5.38%) from COT reporting Tuesday to Tuesday (from $18.76 to $19.77 on the cash market) the large commercial COMEX silver traders (LCs) DECREASED their collective net short positioning (LCNS) by 2,236 (-3.06%) to 70,913 contracts of net short exposure. That was as the total open interest on the COMEX fell 6,715 (-3.9%) to 166,625 COMEX 5,000-ounce contracts.

In nominal terms the LC’s net short positioning is still at relatively high levels compared to years prior as can be seen in the graph below, but that’s not really the whole story.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA. As of COT cutoff Tuesday 3-4-2008.

Note that as silver powered higher over the past two weeks the silver LCNS actually fell and the LCNS percentage of total open interest increased just a little more.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA. As of COT cutoff Tuesday 3-4-2008.

Even though the number of COMEX commercial net short contracts, at over 70,000 seems high, it’s still not all that high a percentage of the total open interest compared to the more aggressive net short positioning seen in 2005, 2006 and to a lesser extent in most of 2007.

Clearly the very large traders classed by the CFTC as commercial have not been confident enough in much lower silver prices to become relatively aggressive on the short side. Not yet. Those that have been taking the short side have not fared well either.

This report looks for large and abrupt changes in the positioning of the largest of the largest traders of silver futures because large changes in their positioning represent an important shift in their near-term expectations. As of Tuesday’s data we can’t really point to anything which indicates that the commercials are preparing for a top in silver prices (such as by piling on the short side). Not yet. On the other hand, we can point to some short covering during the big bump up for the metal over the past two weeks.

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.

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.

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.

HUI:Gold Ratio. The popular HUI:Gold Ratio measures the relative performance of mining shares versus gold. When the ratio is rising mining shares are putting in a stronger performance relative to the metal and vice versa.

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.

That’s it for this shortened version of the Got Gold Report. For those who have the long-term resources to deploy in their favorite promising junior miners and explorers, just about any strong pullback in the metals ought to present outstanding long-term opportunity for well placed stink bids near-term. Until next time, scheduled for two weeks hence, as always, MIND YOUR STOPS.

The Great Gold Bull has a long way to go. It just won’t go straight up. Got gold? Got spec mining shares?