Did the Gold and Silver Plunges Shakeout the Weak?

September brought another interesting month to gold and silver investors.  Despite the large pullback, gold still managed to log in its 11th consecutive quarterly gain.  Meanwhile, silver briefly touched a low of $26, but has since climbed back above $30. Ultimately, this pullback in gold and silver will be positive for precious metals, as weaker leveraged investors are shaken out.

The latest Commitment of Traders report shows a strong bullish picture in silver.  Released on Friday, the latest COT report shows a massive decrease in short positions in the Commercial category from September 20th to 27th.  The Commercials decreased their shorts by a whopping 10,800 contracts.  This signals that the low of $26 we witness last week in silver has a good chance of being the bottom. Furthermore, the weak silver speculative holders were scared out of their positions, and only the strong investors remain. This is shown by the Non-Commercial long category decreasing by 8,800 contracts. Smaller speculators were also shaken out by the pullback in silver.  Non-Reportable long positions experienced a decline of 7,800 contracts.  The situation in gold is similar to silver.  The Commercials decreased their short positions by nearly 26,000 contracts, while weak Non-Commercial longs closed out of 31,000 contracts.  When there is no one left to sell, prices stabilize and eventually regain confidence as the fundamental reasons for investing in precious metals remain.

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Gold and silver remain a safe-haven status for investors.  Although investors rushed into the US dollar on panic in September, gold and silver were liquidated because they were among the few winners of the year.  Furthermore, investors were able to sell gold easily because the market for gold is very liquid, which is a key characteristic of a safe-haven. Director of metals trading at Vision Financial Markets, David Meger said, “People are not going to be easily squeezed out of their investment based on longer-term, positive bias toward gold.  It’s not a mentality among funds and individual investors that’s going to be easily shaken.  We really have to see a dramatic fundamental change here to change the overall investment view that gold is a safe haven. We have seen an aggressive price decline, but fundamentally I don’t believe much has changed.”  Although gold and silver have been positively correlated to equity markets recently, the decrease of speculative positions could return gold and silver to their safe-haven trading ways in October.

Despite the recent pullback in gold and silver, there is plenty of interest in precious metals around the world.  Over the weekend, Qatar Holdings, which manages the wealth of the Middle East state’s royal family, confirmed it would invest nearly $1 billion in European Goldfields, a London-listed miner currently developing the largest gold mining project in Greece.  Gold and silver are both starting the fourth quarter with a pop, as longer-term investors look to scoop up the precious metals at lower prices.  If the Commitment of Traders report is any indication, the rebound in gold and silver could just be starting.

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