"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Wednesday, December 28, 2011

Silver unable to sustain price rallies

Silver has become the victim of the deflationary mindset trade with RISK AVERSION leading to a significant outflow of speculative money from the grey metal. I have said repeatedly that Silver will not go anywhere as long as INFLATIONARY FEARS are NOT foremost in traders' minds.

Note the following Gold/Silver ratio chart which details this exact thing. This ratio began moving in favor of Silver only after the Federal Reserve first announced and then began its Quantitative Easing programs back in late 2008. You can see the line beginning a steady decline as Silver appreciated at a faster rate than Gold during rallies as well as holding its losses to a minimum compared to the Yellow Metal during any setbacks in prices for both metals.

Not until the Fed confirmed the ending of the QE2 program and traders began worrying about a slowdown in the amount of liquidity being supplied to the markets did this ratio begin to reverse and move in favor of gold. Another way of saying this is that during any sort of DEFLATIONARY mindset, gold will hold its value much better than silver, which is still being viewed as a risk asset instead of as a monetary metal by the bigger players.

As the line of the ratio now advances, one can see that as long as traders are concerned over a slowdown in overall economic growth, whether from conditions in Europe or even from a slowdown in Chinese growth to a lesser degree, the trend is higher for this ratio.

Not until or unless the trading community becomes convinced that concerted CEntral Bank activity to supply further additional liquidity is imminent, will this ratio reverse and Silver begin to outperform gold to the upside once again.

HUI on Target for a Losing Year

The mining stocks are on course for a losing year, one which has been extremely disappointing for those who bought the shares in anticipation of higher gold and silver prices, only to see that take place but then having to witness the spectacle of the shares themselves lagging poorly over the last 12 months. Between Hedge funds playing that infernal Spread trade and "Risk Aversion" related selling, they could not get anything going.

Toss in the fact that more and more those looking for leveraged exposure to gold and/or silver, can buy the ETF's directly, thereby eliminating exposure to such variables as poor management, strikes, nationalization fears, environmentally-related litigation issues, risking input costs, and it seems that the shares are falling out of favor with the hot money crowd. Something will have to change on this front next year to see this sector attract consistent buying. Dividends might help somewhat but whatever it is, management is going to have to get creative to engender "value" in the eye of the big-monied investment crowd. Either that or sit there and watch the money flow into the ETF's and away from their companies.

Taking a look at the weekly chart, one can see where the HUI ended the year of 2010 and where it is currently trading. It is now down 15.4% for the year.

Quite frankly the chart looks extremely heavy right now as the buying that has been appearing for more than a year down near the 500 level and just below has seemingly evaporated. It could be a case where those buyers are simply unwilling to add to losing positions before the year end for the sake of dressing their books as much as possible and are waiting for the start of trading next Tuesday in the New Year to start accumulating again. Let us hope so because if they do not, and the HUI cannot get back inside that more than year long trading range, the gold shares are going to drop where we could potentially see this index down near 440 before any buying emerges.

You will notice that for the entirety of this year, any dips in this index below 500 have been of the nature that they are SPIKE LOWS. That means the shares sell off sharply but then rally back during the course of the week to end the week well off the low that was just made. We still have TWO TRADING DAYS left for the mining shares to climb higher and thus negate some of the ensuing technical damage that is going to take place is they do not, but the bulls had better perform HERE and NOW.

While volume is very, very low and trading is thin, it tends to exaggerate movements in price. Still, the price action is horrible as the index is now 56 POINTS above the level at which it ended the year 2009! If it cannot get back up inside that trading range between 500 and 600 right away, I see no chart support until near the 460 level initially followed by 430.

Long term holders of these shares need to be very vigilant to monitor developments down here.