“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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






Friday, June 29, 2012

Hedge Funds Continue to Pummel Silver - Until Today

If you want to talk about how utterly insane our markets have become and how schizophrenic the trading action has mutated into, look no further than the last two days of trading this very week.

On Thursday, silver was mauled by hedge fund selling tied to both long liquidation and brand new fresh short selling. The result? Silver hit a 52 week low! One day later - it rockets to close 5% higher in a single day. This is the type of madness that has been unleashed by Central Bank interference into the market place which is the SOLE CAUSE of this volatility.

I could give example after example of commodity futures markets which had hit multi month lows on Thursday only to come storming back higher on Friday. Gasoline hit a 6 month low and then comes flying back $.15/ gallon on Friday because what changed? Crude oil had just reached an 8 month low on Thursday only to them come back on Friday and rise nearly 10% in price in a single day.

What has been happening is that hedge funds have been liquidating long positions across the entirety of the commodity spectrum and building short positions in anticipation of further declines in the growth of the global economy. The craven capitulation by German Chancellor Merkel to the demands of the beggar nations of Spain and Italy, roiled the markets and scared the hell out of the shorts and enticed a huge wave of fresh buying to boot.

Many of the friends of gold complain about the sharp selloffs in gold and in silver as these hedge funds liquidate their long positions en masse at the end of bull market rallies. Yet, it is these exact same mindless machines that come in on the buy side and cause these enormous rallies on the way back up. If you want them on the way up, just be prepared to deal with them on the way down. They are here to stay, sadly I might add.

I have written about this many times but I think today is a perfect example of how utterly useless these computerized trading programs have rendered the commodity futures markets for the PURPOSE FOR WHICH THEY CAME INTO BEING, namely, as vehicles in which commercial end users and producers could manage risk and lock in profits or costs.

Hedgers, which is what these folks are, cannot hedge anything in this sort of wild market environment. Their hedges get all blown to hell and force margin calls to them just like any other trader has to deal with. With these almost incessant price reversals, both up and down, reading the markets has become nigh an exercise in futility for risk managers. How are they supposed to hedge future production or future costs in an environment in which prices reverse 10% in a single day. Is this a change in the trend? If the market going to reverse? Have the market dynamics of supply and demand changed? What happens if we read this wrong and institute our hedges and then the market totally re-reverses on us again?

More and more commercials are no longer comfortable using futures contracts for risk management. Instead they are entering into private forward contracts innoculating themselves from this new brand of fools known as hedge funds. While the exchanges may pat themselves on the back for opening their doors to the HFT crowd, the hedge fund crowd and the quant crowd, ultimately they will merely watch the backbone of the futures industry slowly begin to exit. That will empty the playing field of the hedgers and leave the casino with only more of these other parasites to prey off of one another.

That being said, take a look at the silver COT chart showing the massive build in the number of OUTRIGHT SHORT positions that occured through the early part of this week. Keep in mind that this chart does not even include the fresh selling that took the price of silver to a 52 week low on Thursday.


Notice that it is the largest short position they have held in more than 5 years. It could be a much longer time frame than that - I merely stopped charting the data after that far back.
Now take a look at the silver chart and behold the downdraft. As you can, except for a brief period at the latter part of May and into early June, the course of this market has been steadily lower.



Now look back at the OUTRIGHT SHORT POSITION chart above. Do you notice that dip on the right hand side of the chart in the otherwise uptrending line showing the huge build in short positions? This dip occured at the exact same time silver was ekeing out an upmove of about $2.50 in that same time frame. In other words, SHORT COVERING by hedge funds, as well as some fresh buying took the metal higher. Once the short covering abated, the rally was sold with ferocity as brand new hedge fund shorting took the metal down to this week's 52 week low.

It has been this selling which has smashed the CCI, the Continuous Commodity Index lower. Interesting enough, the CCI as a whole had actually been faring a bit better than had silver this last week as the weather market that has seized the entirety of the grain complex, has enabled the index to move higher even as silver lingered near its lows this week. Were it not for the strength in the grains and the resultant spillover in the livestock markets, the CCI would have dropped lower as well.




Suffice it to say that the massive short covering rally that took place across the entirety of the commodity complex shoved the CCI sharply higher blowing it throught its 50 day moving average with ease and putting it in the position of challenging resistance at the 550 level. If next week rolls around and we still see these wild eyed hedge funds with an appetite for risk, that should be an easy matter. If that is the case, Silver will follow this index higher and will OUTPERFORM gold in percentage terms once again.

If risk is out the hedge funds turn sellers, then look for this index to drop lower with silver going along for the ride and losing ground against gold.

If silver is going to get anything going to the upside, it will first have to mount a successful challenge of today's high near $28. Above that, resistance lies near $29 and then another dollar higher at $30. If silver can get a handle of "3" on it and keep that, then we will have a chance of seeing some fireworks.

If that is the case, EXPECT bullion bank selling and swap dealer selling to meet this rally. This is when that segment of traders will sell the silver market, on the way up, not on the way down as some of these "blame everything on Morgan" advocates continue to assert. The bullion banks sell rallies - who do you think is on the opposite side of all those hedge fund buys attempting to absorb as many of those bids as they can to try to stem the rise of the metal? Answer - Bullion banks - nearly everyone else is buying!

Moving over to gold - if the metal can clear $1620 - $1630, which it is in position to test early next week, then it will make another run first at $1650 and then $1665 or so. I will be surprised if it can clear $1665 without any clear signs of QE coming from the Fed. The dose of liquidity coming from the Euro zone will be insufficient in itself to launch the gold market higher. It will need another jolt from this side of the Atlantic.

The thumping the US Dollar took today was pretty dramatic - Once again, for whatever the reason, (in Technical Analysis it is not important), it once again failed to manage TWO SUCCESSIVE CLOSES ABOVE the 83 level. That level is now reinforced on the charts as significant resistance. If the Dollar ever does mount those two closes above there, it is going reach for 85.

On the downside, even after today's massacre, it is still trading above the 50 day moving average. The key will be this red support line shown on the chart. If it breaches that line and fails to recover by day's end, it will drop as low as 80.50 initially where it will have a chance to bounce.



20 comments:

  1. "I will be surprised if it can clear $1665 without any clear signs of QE coming from the Fed. The dose of liquidity coming from the Euro zone will be insufficient in itself to launch the gold market higher. It will need another jolt from this side of the Atlantic."

    Why?
    Gold was priced 1900 $ not one year ago.
    Since then, we had more money infusions, more intervention, more bad news. Why would 1665 be a barrier from now on unless QE on both sides of the Atlantic, Dan?

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  2. Henri - very simple - because that $2.5 TRILLION in combined QE1 and QE2 is gone, evaporated, nada, etc.

    Without another dose of massive QE, there is not enough liquidity in the system to engender price rises across the various asset classes of sufficient size to flip traders from a deflationary mindset to an inflationary one. Today was a perfect example of how quickly that can happen but one thing we are short on is the specifics of this Euro zone bailout.

    Additionally, while that takes some of the negative pressure off the economy (temporarily) it does nothing to actually goose the economy here in the US. This economy is limping along and while it is not collapsing, it is definitely showing signs of slowing growth. The jobs numbers will need to be monitored as well as levels of spending.

    The Fed has as much said that they are watching these things before acting. If they do not act, traders are going to be deflationary minded once they start seeing the numbers deteriorate. If the numbers show signs of improvement, then the problem is that traders will think that the Fed will be reluctant to provide any further stimulus.

    In one sense, we need more rotten economic news to convince traders that the next dose of QE is coming. Ironically if the news sours further, gold and silver might actually start moving higher again based on expectations of Fed action sooner rather than later.

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  3. Dan,
    I do understand your reasoning but something seems to be missing.
    Gold is supposed to be a "currency" and is now used as tier 1 collateral by banks and central banks. This by itself should push gold a lot higher because demand should exceed offer. Add the demand by central banks which are buying huge quantities of gold and gold, again, should go a lot higher irrespective of QE 3,4,5 ...

    Are you falling into the hands of the propaganda? Everyone is now talking about the "need" for QE not only from Europe -and this is now a done deal and will continue in the medium term- but also from the FED which is playing down gold (through media manipulation) by saying that we don't need any more stimulus when everyone knows that the US economy has been on life support for the last 4 years and is entering a comatose state where the doctors (FED, central bankers AND the US government) continue to feed the patient's family false hope while continuing infusing the patient with all kind of medication.

    The whole situation is disgusting and will lead to an implosion of the system. 80% of the people I know are already on the side and will not touch the stock market because fundamentals can not be applied anymore and their chance of winning are higher in Vegas!!.

    With or without QE... the price of gold will shoot to the moon when the Chinese decide it is time to finish off the USD and put the renminbi in charge of the world affairs. The operation has been going on for years now with the active participation -or more precisely lack of- of Geithner and Co. It will happen and sooner than we think.

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    Replies
    1. Hubert - all of your points are of course perfectly reasonable. That is why I remain firmly long term bullish in the precious metals. FRankly I see no way out of this mess except through continued liquidity injections, why I personally believe will actually solve nothing.

      The point I am trying to make however is that of a trader. A trader has to be able to read sentiment in a market because sentiment, is what drives markets. If you are trading, then you are trying to be on the correct side of the market in order to make a living.

      One can be bullish long term but can also understand that until the REST OF THE CROWD comes around to your view, and gets on the same side of the market as you are, you are not going to make any money.

      In the immediate term, the hedge funds have decided to ignore everything that we know to be true and play the deflation route over fears of overall economic slowdown. In their minds, and in the minds of many who have now been conditioned to believe the same, Central Banks hold the key to prosperity and the directions of the world economies.

      I happen to disagree with that as I think it comes down to sound fiscal policy and structural reforms with Central Banks (which I believe we would all be better off without anyway) then providing assistance with good monetary policy.

      Right now these guys want the Fed to open up the next round of QE so that they can then pile onto the long side of everything tangible and drive prices to the North Pole. Hedge funds hate volatility - they like trends as do most of us traders. Many of these guys have gone bust the last year and closed their doors as hardly anyone can trade this mess.

      If they can coax the Fed into another dose of QE, it is happy days are here again because they can buy and keep buying and make money.

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  4. Dan is spot on as usual.

    1) we had 1900$ gold on US downgrade and debt ceiling debacle......coming again in late nov.?


    2) i do not think the chinese want to be the reserve currency country....its not all its cracked up to be.

    i also do not think they will crash the dollar, because while they are net sellers of treasuries and buyers of gold, they will need to vacate their large treasury postion without collapsing it.

    the bond bubble and the dollar will fall on their own.

    ReplyDelete
    Replies
    1. Renminbi a world currency that replaces the USD:
      this has already started. You just have to check all the bi-lateral trade agreements using "local" currencies AND the renminbi signed by China with so many countries that the list would be too long to post here. All these agreements have been set-up in order to escape using the declining and volatile USD and to avoid using the SWIFT system that has been hijacked by the Western countries.

      This of course is just my opinion. Time will tell....soon

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  5. Can't complain about the opportunity to buy physical silver for $28 an ounce including shipping.

    My next price target for a purchase is $27 an ounce, which will require silver @ $25.40.

    It's interesting to see the Gold-Silver ratio stretch wider and wider.

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  6. Ben Bernanke, Tim Geithner, and Brian Sack must be out at The Hamptons this weekend whooping it up with the Wall St. executives, lavishing themselves with an ample supply of exotic foreign escorts.

    Despite:

    1) The worst economic news in a generation

    2) The biggest money printing campaign in world history

    3) Debt ceiling being hit every 6 months

    4) Cities like Stockton filing bankruptcy

    5) European financial system on the verge of imploding

    The stock markets march inexorably upwards, with the S & P 500 still up 100% in the last 3 years.

    Bond prices continue to go parabolic, including U.S. corporates, high yield, muni-bonds, and of course, the pillar of safety, soundness and security: U.S. Treasuries

    At the same time, while the Fed Balance Sheet, the amount of outstanding OTC deriviatives are getting hockey sticked into Outer Space:

    - Inflation has been whipped, and expectations now have been reversed to where people are not expecting deflation.

    - Algo/Igor/Robo programs on Wall St. are now preconditioned to sell commodities en masse upon the mere threat of action, via "jawboning" by Bernanke.

    - The CRB Index has been crushed without a single margin increase or threat of price controls. Just jawboning itself has been sufficient to lead the hedge funds towards the short side like leading a pack of greyhounds with a meatball.

    - The outright collapse in gasoline prices, and the crushing of coal and natural gas prices to depression era lows has created the largest "tax cut" ever conceived, providing the "resilient consumer" with even more fuel to go out an spend.

    - And gold and silver prices have been decimated, completely erasing any and all fears of a fiat currency collapse, debasement, or competitive devaluations.

    All I can say is that the miracle of the Bernanke Fed will be studied in awe for the next 75 years in economics textbooks at all the major business schools at the Universities world wide.

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    Replies
    1. Perfect summary. can not do better!

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    2. When gold at 1600 equals "decimated", you know the dollar doesnt have long... Cant wait to read in 2 years "Gold decimated to 2500, Silver falls off a cliff, at a measley 88, Bernake is the genius of brilliant amazing geniuses to ever print piles of paper and digital zeros. Lmao. Ill be stockpiling ounces till someone talks interest rate hikes thank you.

      Delete
  7. Dan,
    Your analysis gets better and better (maybe because you can't trade in this psychopathic market). This is one of the most instructive things I've seen. Gracias! As well, it helps me understand the mechanics behind the smooth slope down / zero variance since Spring of the various juniors/explorers, commodity producers that are not DOW components, etc (I figured it was shorts, but since there is no "real" short interest in any of the stocks, very hard to prove).

    To add to your comment on the broken-ness of markets. It is disgusting that the corruption of short interest has broken the equity market, depriving healthy companies access to capital (e.g. well managed juniors with excellent resource bases, & strong balance sheets) and forcing capital to be mis-allocated. Call it Franken-capital. We have no idea what monster the bankers are unleashing on the world

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  8. Most excellent info of the near future prospects. Dan, what of Greece and its obvious impossibility of continuing with-in the EU and the probability of getting kicked out by Germany, Surely this event will be the black swan event to produce the desired QE3?

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  9. Dan, for all your time to answer and post your point of view as a trader, thank you.

    Its a crazy world.

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  10. Dan, thanks for the great insights into the Silver market.

    Would you be willing to address a couple of questions for a beginner?

    (1) What would you expect to happen to the silver market after Jan 1, 2013 if the US does NOT properly deal with the pending fiscal cliffs?

    (2) If the hedge fund managers think of silver only as a hedge against inflation, why are they moving in/out of silver now when there is no immediate danger of inflation?

    Thanks.

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  11. Hi Dan, thanks again for this excellent work on silver etc.
    I am amazed at how large the short positions have become. How low did they think silver would go?
    It seems like it has become harder and harder for investors and traders alike to peg the markets these days with the political and financial landscape the way it is. I think eventually there will come a tipping point when people lose so much trust in our Gov'ts and banks etc. that there will be a huge mass exodus from bonds, currencies and equities into precious metals (the ones that have been used as a store of value and money for thousands of years). I live here in Ontario Canada where I believe we have a more stable financial and gov. system that in most places in the world but we too are swimming in debt! The CFIB calculates total per capita public debt in Canada at $32,711. But in Quebec it's $39,390 and in Ontario $36,635. So a family of four in McGuinty Land (McGuinty is the premier of Ont.)is nearly $150,000 in the government hole. If interest rates hit 5% that family would pay $7,300 in taxes just to service existing debt. At 1981's 20%, they'd pay $29,200. People here are using their houses as ATMs too!
    Maybe a big reset is needed.
    At times it is hard but I am just trying to focus on my faith and my family! .......

    ReplyDelete
  12. Buy physical gold, physical silver and physical platinum and wait for the whole rotten system to blow up.
    bamboo investments

    ReplyDelete
  13. I'll join the chorus and send you a hearty thanks too!

    ReplyDelete
    Replies
    1. I am planning to invest some money in Gold, is this the right time for investment in gold. If you think that its some risky then where should i have to invest my money.

      Intraday Tips

      Delete
  14. S&P index options purchases by the Exchange Stabilization Fund www.sunshineprofits.com

    ReplyDelete