First published on Sun Aug 20 for members:  With the metals providing us with the pullback we were expecting in our report last weekend (Aug 12-13), they continued to push higher from that pullback.  Moreover, the structure continues to look quite bullish.  However, the only question the market has yet to answer is if we see one more drop before the parabolic rally commences, or if we simply begin to rally strongly from here.

Since the market has not done anything unexpected this past week, I have to note that my overall perspective has not changed.  My main expectation is still looking for a bit more pullback before we are ready to rally through resistance.  Moreover, there is really not much more I am able to provide by way of further analysis to what I have been saying all week:

When dealing with fireworks, all it takes is one spark, and the entire box can be ignited.  The metals market is in no different position right now.  It does have the potential for a direct break out, and if we should see silver take out its blue box overhead with strong buying volume, do not stand in its way, since it means someone has lit the match, and it will likely have begun the heart of its 3rd wave higher.   

As far as GDX is concerned, as I have been saying for the last several weeks, the micro structure is truly messy on this rise.  While GLD and silver have been displaying truly ideal Elliott Wave structures, GDX has been an overlapping mess.  So, the question of how to count the micro structure has become a bit of a challenge.  Rather than provide you with multiple count potentials, I am going to provide resistance and support levels.   Currently, the resistance for GDX resides between 23.60-23.96.  As long as we remain below that resistance region, I am expecting another pullback in the complex.  However, should we see a direct break out of that region, then you should set your stops just below the 22.83 region, for if it is a true 3rd wave break out from that point, we should not see the 22.80 region again.

In summary, I remain bullish the complex, but am on alert for one more pullback before the market finally breaks out for a rally into the fall of 2017.

The one difference that I can add to this weekend’s analysis is that I am now just a little less confident that GLD can drop down as deeply as the 117-118 region, and it may hold over 118 on the next pullback.  It has provided us with a much stronger bullish count in this rally off the July lows, and the pullbacks may no longer be as deep as we have seen in the past.  Should this occur, rather than seeing the deeper pullback in the coming week or two, it is a first sign that GLD has changed its “nature,” and shallow pullbacks may now be the order of the day, which is often what we see when this chart begins to act extraordinarily bullish. 

Lastly, I have warned many times about analysis that follows simple trend lines, as they have been the most whipsawed type of analysis in the metals market for years.  You see, metals usually move towards extreme positions.  This means that we have often seen the metals move just outside of trend lines to get those following them either overly bullish on a break out or overly bearish on a break down.  At that point, they have then reversed strongly in the opposite direction.  We have seen this occur more times than I can count over the last several years.  This is likely why you see some of the most bullish analysis on the internet on a break out and the most bearish on a break down, which explains why these folks have been terribly whipsawed at each high and low. 

At this point in time, the three charts we follow – GLD, GDX and silver – have all broken out of downtrend channels.  And, yes, many of the same people have again turned uber-bullish. And, while GLD has been grinding just beyond the resistance we noted weeks ago, both GDX and silver are still below their respective resistance regions.  This is why using Fibonacci Pinball is a much more accurate measure of market movements as compared to any analysis that primarily uses trend lines and channels. 

In fact, my resistance on GDX was 23.60-23.96, whereas it seems to have topped this past week within 12 cents of that resistance.  Silver still has not been able to move through the bottom of our resistance, which begins at 17.26, with the high in silver being struck at 17.30 this past week with a spike and reversal on Friday.  It has not been able to sustain any move through our resistance level.

So, for now, I am on high alert for another pullback in the complex before the real break out is seen.   But, again, if the market is able to overcome these resistance regions noted above, then do not stand in its way, as a 3^rd wave is likely in progress.

See charts illustrating the wave counts on the GDX, GLD, and Silver Futures (YI).

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

According to the most recent report on the U.S. Financial Institutions Derivatives trading activity, the U.S. banks held a record amount of precious metals contracts in the first quarter of 2017.  Not only did the U.S. banks report a record amount of precious metals contracts, they also held a record amount in notional value of commodity and equity derivative contracts.

There just seems to be a lot of paper floating around in our highly inflated stock, bond and Forex markets.  And… there needs to be.  Without an ever increasing amount of leverage via their derivative bets and hedging, these markets would be in serious trouble.  Furthermore, the practice of using contracts to hedge bets upon on other derivative bets has put the financial market in a highly fragile state.

The Office of the Comptroller of the Currency (OCC) put out their First Quarter 2017 Quarterly Report on Bank Trading and Derivative Activities.  In that report, they published the following chart on the U.S. Banks notional value in precious metals contracts:

As we can see in the chart, the overall trend has continued higher since 2000.  What is interesting is that the notional value of precious metals contracts held by the U.S. banks is even higher in the first quarter of 2017 versus Q4 2012 when the prices of the precious metals were much higher.

In looking at previous data, there were some quarters that had a higher notional amount of precious metals contracts.  This was due to the banks adding short contracts as the price of precious metals increased.  However, Q1 2017 of $43.6 billion was up considerably versus the $28.3 billion in Q1 2016. 

For example, in Q3 2016, U.S. banks also held $43.6 billion in precious metals contracts.  Again, this was due to a lot of short contracts held by the U.S. banks when the gold price surged to a high of $1,366 in the third quarter of 2016.  As the gold price sold off over the next several months, the precious metals contracts declined in the fourth quarter of 2016:

We can see this in the last bar on the chart on the right.  But what is quite interesting is the big increase in U.S. banks precious metals exposure in the first quarter of 2017, shown in the first chart above, when the amount of short gold contracts the large U.S. banks held declined significantly in the chart below:

Now, this is only showing the U.S. banks gold contracts.  This does not include other precious metals, such as silver, platinum and palladium.  However, gold is by far the largest market.  If we include the FX contracts (forward exchange contracts), the total notional amount is enormous:

The total notional amount of U.S. banks FX & Gold Contracts was a stunning $34.5 trillion in the first quarter of 2017, up from $30.7 trillion at the end of 2016.  Here is the definition of a Forward Exchange Contract by Investopedia:

Forward Exchange Contract: A forward exchange contract is a special type of foreign currency transaction. Forward contracts are agreements between two parties.

Forward contracts are not traded on exchanges, and standard amounts of currency are not traded in these agreements. They cannot be canceled except by the mutual agreement of both parties involved. The parties involved in the contract are generally interested in hedging a foreign exchange position or taking a speculative position.

The nature of forward exchange contracts protects both parties from unexpected or adverse movements in the currencies’ future spot rates.

So, these FX Contracts are hedges on different fiat currencies spot price movements.  We don’t know what percentage is hedged in Gold or FX contracts.  However, I would imagine the majority being in the FX Contracts that are hedging the different fiat currencies.

Now, what is also quite interesting about the huge increase in the FX & Gold contracts notional values, is that global GDP hasn’t really increased that much since 2013.  According to the World Bank, here are the global GDP figures over the past four years:

Global GDP (current U.S. Dollars)

2013 = $76.9 trillion

2014 = $78.9 trillion

2015 = $74.5 trillion

2016 = $75.5 trillion

If we divide the notional amount of FX & Gold Contracts by the global GDP, we can see a very interesting trend:

FX & Gold Contracts Notional Amount Divided By Global GDP

2013 = 28%

2014 = 32%

2015 = 40%

2016 = 41%

What we have here is a great deal more FX & Gold paper amounts trading versus the global GDP.  In 2013, the FX & Gold notional amount by the U.S. banks accounted for only 28% of global GDP, however it jumped to 41% in 2016.  I would imagine in 2017, it will be even higher.

While the notional amount of FX & Gold contracts has hit a record high, take a look at the next chart:

These two charts display the amount of “Commodity” and “Equity” contracts in notional dollar figures held by U.S. banks.  While there was a temporary blip in 2005 (mostly longer dated contracts – in BLUE), there was a pronounced increase in 2015, 2016, and 2017 in both of these derivative asset classes.

According to the data by the OCC, the U.S. banks held $1 trillion in commodity contracts and $3 trillion in equity contracts in the first quarter of 2017.  While these figures are much less than the FX & Gold contracts, they have still increased substantially over the past three years.

For example, in 2014, the U.S. banks held $431 billion in commodity contracts and $745 billion in equity contracts.  In just three years, the U.S. banks exposure to commodity contracts has more than doubled to $1 trillion and their notional amount of equity derivatives has quadrupled to over $3 trillion.

Again…. the U.S. banks are holding onto a record amount of paper derivative contracts in these different asset classes.  Yes, it makes some sense that the U.S. banks equity contracts are increasing right along with the rising highly-inflated stock market, but to see the commodity exposure double when the prices of most commodities are much lower than what they were before 2014, is quite interesting:

As the commodity index above fell from over 300 in 2014, to 176 currently, the amount of U.S. banks exposure to the commodity market has more than doubled to $1 trillion. Unfortunately, I don’t know all the particulars as to why the U.S. banks have increased their exposure to such a large degree in these different asset classes.  However, to see a record amount of paper trading in a market that is already highly leveraged… points to big trouble ahead.

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