Quick Thoughts on Today's Late Session action in the Metals

I happen to be a buff of the War Between the States (incorrectly termed the Civil War by many - A civil war is when two factions are fighting to gain control over one government - The South was not fighting to take over the Federal Government but to repel an invasion by the North). Anyway, one of the things that I learned from my studies of Robert E. Lee was that he was a brilliant strategist, not only in victory but also in defeat. His Army of Northern Virginia was numerically inferior to the Army of the Potomac but nonetheless he managed to pull off victory after victory against it during the early years of the War.

When he did face defeat, one of the tactics he employed was to mount a rear guard action. What that allowed was for the main body of his army to escape back to safer territory so that it could regroup for another engagement while a smaller contingent of that same army would engage the Federals and tie them up in that skirmish thus preventing it from pursuing and overcoming the fleeing Confederates and attacking them while they were in a weakened condition. This tactic, employed by many other wise generals throughout history, allowed Lee and the Confederacy to fight on far longer than many imagined would have been possible given the numerical advantage of the Union armies, not to mention equipment and other military hardware.

I believe what we saw today was a perfect example of a rear guard action by the perma bears at the Comex. They had been routed and driven out from behind their defensive lines that they had dug and had been able to defend for some time now. In the case of silver that defense had capped the metal below $36 for the last couple of weeks. In the case of gold, the cap near $1440 had held for three weeks or so.

Both silver and gold then mounted renewed assaults on the bear's trenches this week. Silver hit them yesterday and blew through in convincing fashion while gold charged their line today and routed them. In the process both markets mounted impressive technical breakouts of congestion zones and did it on very good volume. From a technical analysis standpoint, the breakout was impressive and served to bring in additional momentum buying which is what one could normally expect to see after any market, which has been working in a sideways trade, stages an impressive upside breakout. Momentum funds will always go with the breakout and so will all technicians in general.

We all then saw what happened - both markets were hit hard in an attempt to drive them back. In the case of gold, the attack was successful - it was driven back below its breakout point and into the upper edge of the recent congestion zone. In the case of silver, the bears tried but as soon as silver dipped back towards the breakout point just below $37, buyers stepped in and prevented it from falling back into the congestion zone.

This is a perfect example of a rear guard action by the perma bears which had been beaten and were retreating to safer or higher ground. They hope to buy themselves a bit of time to lick their recent wounds and regroup and attempt to fight another day.

The interesting thing to note about this is that these enemies of honest money are quite clever much like the old fox Bobby Lee. They time their counterattack or rear guard action to coincide with other factors that tend to increase the effectiveness of the attack.

It just so happens that this week is Rollover week in Gold. Over the last decade of this bull market in gold, rollover periods in the futures markets have been one of the favorite times for the bullion banks to stage a bear raid or a rear guard attack. What happens is that successful longs in the market either will roll forward their existing longs to what will become the next most active month, in our case the June contract, so as to avoid getting assigned for delivery when the current active month (April) enters is delivery period next week. Generally during these rollover periods, many of the bigger specs will decide to go ahead and book profits since the rollover coincides with the end of the month and also in this case, the end of the quarter. By booking profits at this point the funds who are managing client money can report excellent actual gains and thereby continue in the good graces of their clients who are most pleased when they receive their statements for the month and quarter. These same funds then tend to re-establish the original positions near the beginning of the following month but they do that in the near and most active contract, which will in our current example be the June contract.

This rollover and end of month book squaring thus is a period during which many speculators are actively selling and reducing their long side exposure somewhat. As thus, it is the PERFECT time for the bears to counterattack especially if they have any other factors on their side.

In the case of Silver they got just that with today's announcement by the CME that margin requirements for Silver were going up once again at the close of business tomorrow. The old margin to control a single silver contract was $11,138. AS of the close of business tomorrow, it will rise to $11,745. Maintenace margin thus rises from $8,250 to $8,700. In other words, the accounts of those holding silver contracts will need to be able to account for the hike in margin requirements. If not, they will be forced to pony up more money or sell out. When one considers that silver dropped over 100 points from its best levels of the day to its worst level, any new long that bought near the high and whose trading account size is rather small is going to be immediately stuck with a paper loss of nearly $5,000 per contract depending on what level he or she bought in if they are still holding those contracts. A paper loss of that size will immediately put the new long in a situation where they will have to have sufficient money in their account to deal with the maintenance amount and thus will either have to pony up additional cash by bank wires or will have to sell out.

This is the sort of condition that the perma bears love to look for when they stage a rear guard action and it magnifies the effectiveness of their counterattack.

How these markets react tomorrow and early next week will tell us how effective this rear guard action has been or will be. If both gold and silver stabilize above support levels and then work sideways and hold up well, it will indicate that the attempt to beat them back will be very short lived and another leg higher will be seen sooner rather than later. If they violate support levels, then it will take a bit longer for the bulls to regroup so as to mount another charge higher.