Friday Gold, Silver Breakouts in Pictures

HOUSTON — After trading at the top of the trading range since August 15, the negative gold forward offered rates or GOFO in London; Backwardation in the futures strip on the COMEX in New York; continued reports and rumors of tight gold supplies for immediate delivery and a return of the Specs to the buy side of gold and silver futures apparently found enough “oomph” on the buy side to trigger a Friday breakout, as shown in the one-hour tick charts of the Globex feed for the near active gold and silver futures contracts.

The reported trigger for today’s rally was a poor U.S. new home sales number of 394,000 versus 487,000 expected, but the overly high amount of Spec short positioning in gold on the COMEX, rising fears of higher inflation ahead and a developing new move back to the bullish side of the metals and miners by Spec Funds likely had more to do with today’s breakout attempt on reasonably good volume for a Friday in August. 

Supportive of the bullish case in our view is that silver once again outperformed gold.  The gold/silver ratio, loosely represented in the chart below by the GLD:SLV ratio, fell sharply again in today’s move for the metals. 

As everyone knows by now, our view is that a falling gold/silver ratio is a bullish signal by itself. 

Also “confirming” the bullish vibes we point to the smaller and mid-cap mining shares represented below by the Market Vectors Junior Gold Miners Index ETF or GDXJ in a ratio with gold, represented by the SPDR Gold Trust or GLD; the GDXJ:GLD ratio, which marginally outperformed gold today as well.  

Our view is that a rising GDXJ:GLD ratio is a sign of positive money flow (more money or wealth entering the market than leaving).  

Another “internal” sign we track is the relationship between the smaller miners and their larger cousins.  Below the smaller miners again represented by the GDXJ and the larger miners represented by the AMEX Gold Bugs Index or HUI. 

A rising GDXJ:HUI ratio is one of the more raliable signs that money flow has indeed returned to the positive side for the sector.  Apparenlty investors and gamers are becoming more aggressive and are willing to bet on the smaller, less liquid and more speculative miners at this stage of the recovery for precious metals.  That is a very strong signal of robust positive money flow for the sector, at least as of today, Friday, August 23, 2013.