"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


Sunday, September 9, 2012

Are Commodities coming Back in Vogue?

The following chart of the Continuous Commodity Index ( CCI ) shows a sector that apparently is catching the attention of the hedge fund community once again as risk trades come back into favor courtesy of what seems to be another wave of money printing/bond buying about to launch.

Notice that the price rally from the late spring low down near 503 first cleared the 25% Fibonacci Retracement level off the drop from the 2011 peak near 692. Instead of falling back through that level and making another fresh leg lower, the market bounced right off that same 25% retracement level and then spiked higher taking out the 38.2% retracement level where it now sits.

It has also broken the downtrend whether that be the shorter term one drawn off the August 2011 high or the longer term one drawn off the 692 peak.

What this tells us is that investor sentiment has now firmly shifted away from the deflationary viewpoint and is moving more firmly towards anticipating an inflationary period from all this Central Bank monetary activity. Also aiding the case is the newly announced round of government works projects in China which will keep building material prices from falling any further as China's appetite can be voracious.

Whether any of this is enough to fix what ails the global economy is uncertain ( I view it as accomplishing nothing in the long term but serving only as a bandaid which will have a short term impact) but one thing that is certain is speculators' responses to all this.

This is the reason that silver in particular is moving higher. It will always outperform gold during episodes in which inflation fears dominate as opposed to periods of deflationary fears. Note the recent strong performance of the copper chart, aka, Dr. Copper, as it has broken out of a four month long consolidation period after being unable to take out the $3.50 level. COT reports detail the influx of fresh speculative money flows into the red metal. This is also a good sign for silver which as a general rule of thumb, seems to have a tendency to move in a similar direction as copper.

Incidentally, I want to again refer you to a previous post below detailing the hedge fund long and short positions in both gold and silver. A simple question - does the long position of the hedge funds long anywhere near the previous peaks shown on that chart? The answer is "NO", it does not.

I want to repeat what I have been saying and writing about this gold and silver market for the last 8 years or so that I have been writing publicly about this topic - speculative money is what drives the markets. Commercial activity does not. As long as speculators are buying, prices will rise regardless of what the commercials are doing. Only when that buying abates and upward momentum stalls out, will a market reverse course. IF the fundamentals remain strong however, the dips in price will attract new buying once the initial wave of long liquidation from the day traders and other shorter-term oriented traders is finished.

Beware of those who tell you that prices cannot rise further because there is "X" amount of speculators in a market. Who is to say that these same speculators cannot buy more? How high can prices rise before upward momentum stalls out? Anyone who claims that they can predict such things is more full of crap than a Christmas goose. The markets will tell you when they are turning; ignore everyone else and I mean everyone and listen only to the voice of the market. After all, it is the only accurate voice out there when all is said and done.


  1. Many thanks Dan, for answering my previous question within your new pst, especially on a sunday.
    I'll stay on my longs and wait...I humbly think I see a possible flag on the long term on gold, if you don't include the 2 highest spikes at 1920. I can't post a chart on your website, but one can find the flag (nearly horizontal, very slightly down)linking most of the tops and downs of last year (except the excesses above 1900), and whose resistance is at now 1770 $ . If we break this, the long term potential would be 1530 + (1940-740) = 2730 $ :)
    I'm not as ambitious as Petunia, who still looks forward to seeing and getting through 3500 $, but still...I'm optimistic.
    Thanks a lot for your blog and advices!!

  2. Dan....

    thanks again on you passing around the best advise , and always very simple, and basic for me, as i sometimes read to much stuff, and get an overload of junk in my brain , and you in one post, can clear away the fog..
    like you said ''listen to the markets'' not the talking heads, because they speculate in words, not money, so they can say anything that makes them feel smart... when ever i read your post, and then listen to real and i mean real clowns in the MSM,, i have to laugh, thanks for clearing a over load of info from my brain....that is very important..from grateful dave/ goldmelter...

  3. Dan,

    Do you ever get the feeling the powers that be are running out their cheerleaders, rallying us high schoolers, through the proverbial turnstile? I admit I am very libertarian biased. The truth is most of the developed nations are all highly indebt and at the identical time, broke from a reserves standpoint. The US is operating completely hopeful of their #1 asset; the dollar is the accepted world currency currently being accepted. No canary yet, but, it is out there. The magnificent and huge bond market. When she blows Dan, I just hope to make it to the mountains. Ben stays put for his last market observation. $ explodes one more time, commodities might blink a bit. Still operating in the zone. The great helicopter drop still dead ahead..just maybe another 30 days.

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  5. Dan,

    Just wanted to get your take on why silver would drop over $1.25 in a few minutes for no reason. Looks like paper selling to me.

  6. Good comments, especially the latter portion about the market being driven by speculators. Thanks. Keep the legendary comments comin!


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