“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


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Saturday, April 6, 2013

Silver Notes via Chart

I am going to try this one more time in the hope that it helps some of you silver guys out there to understand why the metal is moribund and is having trouble going north. I have been writing about the connection between Silver and the broader commodity complex for more years now than I care to remember and yet it seems as if I am sometimes spitting into the wind in attempting to help some of you understand what it is that moves the metal.

I do not view silver as a pure monetary metal in the same manner in which I view Gold. Yes, it is and has been in the past, a metal used as money. It will continue to do so in the future. But one does not read about Central Banks acquiring silver for their reserves as one does about Gold. When people are concerned about the health of a domestic currency, they generally resort first to the price of Gold in that currency, not silver. These are just simple facts and are in no way meant to disparage silver. It is simply the way things are. Traders/investors, if they are to be successful (and is this not what we all aspire to be?) must come to terms with how the broader world of investors see their particular holdings.

I will give you an example - suppose you find what you believe is a good stock at a good price and just know, I mean really know, that the stock is going to trade considerably higher in the future. So you take your hard earned money and invest it into that particular stock waiting for it to go higher, as you are just absolutely certain it is going to do. However, it just sits there and goes nowhere, day after day, week after week, generating more and more frustration and might I say, anger in your heart that other people can possibly be so stupid not to see what you see. Sound familiar?

The problem is, for any stock, or any commodity, to continue moving higher, more and more people must come around to seeing your choice in the same manner as you do. In other words, the CROWD must come around to your way of thinking. Now, you may mutter and grumble and cuss and swear because the stock is just sitting there and not moving higher, but no amount of that is going to change the opinion of others UNTIL.... get ready for this.... that OPINION changes. Wow, is that profound or what?

Seriously, what it takes for a stock or commodity to move higher is a change in sentiment towards it where a consensus forms among the crowd that the price is too cheap. When that occurs, and who can say with any certainty when opinions of others will change,  then the price will move higher as the perception of VALUE will then change.

I said all that to say this.... Silver is currently trading as more of an industrial metal in an environment in which the MAJORITY are convinced that inflation is non-existent. NOTE WELL - I did not say that I believe this. I am simply telling you what the CROWD believes right now, at this moment. This is also not to say that the CROWD is right. It is to say however that this is all that currently matters when it comes to the metal.

Take a look at the following chart I put together to help you understand this. Note that there are two lines; one in red which is the Continuous Commodity Index or CCI; the other in Black, which is Silver. Can you not clearly seen that these two lines exhibit a near perfect symmetry? I have pointed this out in the past but feel the need to do so again. What is this chart saying?



The answer to that is simple - Silver is tracking the rest of the broader commodity complex and that commodity complex is moving in a sideways to down pattern. Remember when I stated some time back that we more experienced traders used to buy silver when soybeans were going up? I know at that time some of you who read that were perplexed but quite honestly, it is a very simple connection. Rising soybean prices tended to move up alongside of corn and wheat meaning food input costs in general could be expected to rise. This fed into the INFLATIONARY EXPECTATIONS of higher food costs percolating through the broader economy. Yes, the connection was not perfect nor was it meant to be but it did indicate how silver thrived in an inflationary environment.

Now, can any of you out there looking at this chart honestly tell me that you expect silver to shoot sharply higher while the CCI is tracking lower?  I repeat - SILVER thrives in an inflationary environment. It will not perform in a deflationary environment. Now, for whatever reason, and frankly who cares, the hedge funds are pressing many of the individual commodity markets from the short side. The grains, some of the softs, and the base metals are notable examples of this.

 I mentioned copper and will continue to do so to illustrate that as a perfect example of the disconnect between Dr. Copper and the US equity markets. I have said that I believe that Dr. Copper is a better indicator of growth than the equity markets. The latter are being goosed higher by artificial stimulus, much like a drug addict is kept from experiencing withdrawal by having regular doses of the drug injected into his system.

Let me digress here a bit to answer a critic - I made the statement that I do not expect silver to move higher until we get some solid evidence that there is real growth in the US economy, the nature of which will drive stocks higher. The critic said that stocks were going higher while silver was going lower thereby invalidating that claim. What he misses however is the FACT that US economic growth is comatose; what is goosing stocks higher is $85 BILLION a month of QE that is ending up in the Wall Street casino. In other words, it is not solid growth driving stocks to record highs, it is artificial money that is doing that. That is not sustainable.

This is the reason that hedge funds are pounding Dr. Copper lower - their models are telling them that global economic growth is no where near it should be considering the huge sums of money that have been conjured into existence by the Central Banks of the West, including Japan. They are looking at the same thing some of us are looking at, namely, the VELOCITY of MONEY, which is going nowhere. That is what I mean to say when I say that the money being created by the Fed is fueling a bubble on Wall Street. The velocity of money tells me that it ends up not changing hands frequently as is needed to fuel inflation but is rather shoved one direction, into stocks and staying there. Certainly we are not seeing many of these companies, whose stock prices are daily soaring higher and higher embarking on a hiring binge now are we?

As a matter of opinion I believe we are seeing really chinks in the armor of the equity bulls even in spite of this mammoth liquidity injection being orchestrated by the Fed. Consider yesterdays abysmal payrolls number. That stunned observers. I have noted the breakdown in the Russell 2000 which is now below its 50 day moving average. The Dow Transports also are lagging, another sign of deterioration internally of the equity rally.

One way or the other we are going to see which indicator is right - Dr. Copper or the US equity markets. As long as the hedge funds are eager to short copper and pound it lower, I will have to go with that. When this speculative crowd changes their mind and their perception of things, then our task as traders is to recognize this shift and act accordingly. If we can do that, we will profit. If not, then we lose.

I will leave you with a chart of copper indicating the trend which currently is sideways to down. It is closing in on a support zone. If it were to break down through this zone for any reason, it would signal odds of a further slowdown in global economic growth. Given the size of the recent Bank of Japan "anti-deflation" package, along with the rest of the actions by the Western Central Banks, and the actions of the Chinese, it seems to me that the odds of this market breaking that level are not especially high however. If it bounces off of support, I would look for silver to hold support also. If not, silver is going lower.




26 comments:

  1. You're the only person I've been watching over the last couple of years that gives an honest SYNOPSIS of this SILVER market. Everyone else has been trying to get it to break $50 and treating SILVER as if it's GOLD.

    It's a very strange COMMODITY FETISH this silver community has.

    THE NEWS UNIT dot COM

    www.thenewsunit.com

    ReplyDelete
  2. Dan,

    You're a smart guy. Thanks for peeling back the layers of hype and BS with a well-written, informative post.

    Now, for a confirmed "silver-bug" like myself (and I know I'm not the only one out there), how do we get the mainstream investment community to see the truth regarding inflation? (Haha, rhetorical question -- but I for one, could sure benefit from a change in general investor sentiment from the perception of deflation, to that of inflation.)

    Have a great weekend,
    Chris

    ReplyDelete
  3. Thanks a lot Dan,
    I agree about your comments.
    That's why silver is not as strong as gold lately and one can see it in the deteriorating ratio.
    Yet even if silver is linked to CCI, I feel it is somewhat linked to gold's fate as well.
    It's no coincidence if both metals are technically reaching their major support zones at the same time.
    So what I was wondering was : is silver alone capable of breaking down through its support zone of 26-27 $ while gold would hold its own level around 1540 and maybe even rebound well above 1600?
    If (and it's a big "if" as the trend is down, supports are broken while resistances hold) gold's trend improves because of Cyprus & co, and it appears that gold has marked a bottom, can we imagine that silver may anyway break down further through 26 $ and beyond, if CCI and copper show the way?

    Well, maybe, after all : silver, unlike gold, doesn't benefit from the purchase of most central banks of the planet in order to rebuild their reserves...the safety net is quite thin regarding silver.

    ReplyDelete
    Replies
    1. Hubert;

      Yes, gold can have a positive effect on silver as it did this past Friday when it and it alone pulled silver higher. My concern about silver is very simple - I am quite concerned about the US equity markets rolling over to the downside. In such an environment, silver is not going to go anywhere unless it gets all of its help from gold as copper and the rest of the base metals will all break down lower.

      The trend on silver is sideways to down, just like the rest of the commodity complex in general. I say, "in general" because there are individual markets that can defy a broader trend but they have to possess a very strong set of fundamentals to be able to withstand the general selling theme of hedge funds in such an environment.

      All I can tell you about silver is that it will keep going lower as long as the hedge funds are selling it. When they stop selling it, it will go up. Now if we can just figure out when that will be...!

      Delete
  4. >I am simply telling you what the CROWD believes right now, at this moment.

    I would modify that statement to say ...

    I am simply telling you what the CROWD SAYS THEY BELIEVE right now, at this moment.

    It more accurately portrays the situation. There is a spectrum of people. On one end, you have people who lie about what they really think. This is where the more sophisticated operators would be. On the other end, you have sincere people who tell you what they really think. You would be an example. The former have hidden agendas or incentives or motivations. The latter I have no problem with. Some people may be a combination of the two so more complex. They generally go along with the lie but convince themselves the bs is true or go along with the truth but be deceived with bs.

    ReplyDelete
    Replies
    1. Well, like all of us, "the crowd" votes with their dollars. So it really doesn't matter what they say or think, but what they do. And right now, by driving silver down, they are acting in a way that *implies* they believe inflation risk is minimal.

      Delete
  5. Great commentary on the markets as usual Dan. Wish some other precious metals bloggers and their followers would wake up to the reality of the markets.

    ReplyDelete
  6. Dan,
    Thanks for providing us with all of your valuable insight. I'm a bit confused though, as it seems that you interpret the Hedge funds being net short as bearish for silver. Isn't this the "dumb" spec money that always seems to be on the wrong side? Also, what do you think about the Commercials having their lowest Net short ratio on record?

    Thanks again!
    Steve

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  7. Yes thanks Dan for your honest and realistic views. I agree with what you're saying and totally understand, but there is also the anomaly of the commercials who have gone massively long on copper and reduced shorts on gold AND silver to a minimum level. This nearly always marks a bottom, which contradicts the fundamentals (for copper and silver anyway). So I wonder would the commercials bid copper higher soon or are they just positioning themselves for a rally in the future some time? Maybe we read too much into the COT report as it is only an indication not an absolute certainty what will happen.

    ReplyDelete
  8. 1. Concentrated short position. Hedged, or otherwise. Still capable of exerting that which you see in the middle of the night on zero volume.

    2. Investment banks as commercial traders -

    3. Managed money blind trading on technical indicators - universally status quo and almost always wrong

    4. Physical market tightness and surging demand ahead of falling prices = result of policy or price control.

    5. CCI correlation versus causation. Silver is as much the canary as gold, and more so given the precariousness of its COT structure.

    6. CB's no silver buying? Where would they get it? SLV? They already have it. Paper silver trades as if all the silver ever mined is siting in vaults, waiting for a magic fiat price to set it free.

    7. Silver bugs and fundamentalist zealots waiting for a dollar denominated price is an insult to insects.

    No one hates a silver bug more than a gold bug.

    8. Zirp, libor, laundering, MF global, CPI, jobs, etc. But no way they play with metals - no wet paint on inflation sentiment?

    9. Silver loves inflation and the 570% rally from 8.40 to 49 was inflationary and not a mini short covering fed by blind latecomer hedge funds until the middle of the night, reverse Hunt CME margin shellacking.

    In summary 4 influences here.

    1. Outside markets - deflationary until all at once not.

    2. Physical market - surging ahead of and outside of price.

    3. Commercial traders dominance, extension of CB

    4. Tech funds and professional traders - stoic inward focused, and purged of all emotion and sensitivity to all of the above.

    "Nothing will unnerve the paper gold shorts more quickly and do more to undercut
    their confidence than to strip them of the real metal and force them to come up
    with more hard gold bullion to make good on deliveries. "Stand and Deliver or Go
    Home" should be the rallying cry of the gold longs to the paper gold shorts." --Trader
    Dan Norcini

    ReplyDelete
  9. Dan,

    You do have a good point but still I see a clear divergence b/t CMI and Silver on your chart from May to August 2012. If anything Silver traces gold far better than it does CMI. You'd see it if you lay the two charts together. Look at the part b/t May and August 2012. Both gold and silver were left behind while the CMI was rising. That's a fact, not some silver bug fantasy.

    To me longing silver or not is no different from longing any other commodities. You just have to read what the market makers (read commercial banks) are doing and follow. If they build up a short position you better hedge or get out altogether. If they have reduced shorts significantly then it's OK to take some calculated risk. I don't really consider what big hedge does very much. They are the ones losing to the commercials every time.

    ReplyDelete
    Replies
    1. Correction: I meant CCI instead of CMI.

      Delete
    2. RUI;

      Be very careful taking the other side of a hedge fund trade unless you have VERY DEEP POCKETS. Their algorithms are emotionless - they care not one whit about price or value - they only care about whether it is time to keep selling or start buying.

      Following the lead of the commercials is a huge mistake in trading because their positions are mostly hedged. Only when there is an extreme imbalance between the speculative side of a market and the so-called commercial side, is there a chance for a market to sell off if the specs are all loaded on the long side.

      The hedgies do not become successful trading nor do they stay in business very long if they consistently lose money. Again, be very careful taking the other side of a trade against that crowd unless you know exactly what you are doing and are very nimble to exit a trade gone sour.

      Delete
    3. Dan,

      The caution you offered is well appreciated. I can tell you are trying to help others to stay outta the danger of trading on over-bullishness. I definitely have to prepare for everything as the market can always become more irrational than I'd like to see (learned it the hard way). That's why I said it's the 'calculated' risk that I'd take, meaning small positions with stops at measured entry points. Thanks.

      Delete
  10. Dan,
    Thank you for one more interesting post. I read your blog every day for a reason...

    It is my opinion that there is now a tangible disconnection between gold and silver in smart investors minds and therefore I would fully agree with your opinion that silver is closely following the CCI and not gold (even if we do see a correlative reaction between the two when gold is up or down SHARPLY).
    The reason for the disconnect is the fact that gold is now seen (and has been for at least 2 years by the Chinese) as the only way to increase the value of a country currency. I have said before in my blog that China wanted to be the No 1 power of the world and put the US down for good. The only way -except for military conflict that nobody wants because there is no winners with the large nuclear arsenal available- to get to the No 1 spot is through monetary and economic supremacy. China is achieving this goal through multilateral trade agreements where the Yuan is used (and not the USD), reducing the manufacturing power of The States (thanks to the greed of the US elite who went to bed with the Chinese elite in exchange for money (this is called prostitution is my country...)) and now through the accumulation of gold in order to consolidate the Yuan as a strong currency. This has been going on for years and only the blind could not have seen it.

    There is going to be a change in the price of gold (as mentioned by Jim Sinclair) because now the Fed and the arrogant US government (with a president, sorry to say, who has NO CLUE of what is going on being too busy "playing" its role as president) are starting to realize that the only way to get the US back on its feet is by doing the same thing the Chinese are doing: Backing up the USD with gold reserves. When this happens -and it SHOULD happen this year- you will see gold going up with a vengeance.

    The game (higher gold price) will stop when China takes over the No 1 spot. It will then do what the US did (Nixon): trash gold and promote the Yuan as the only trade unit. This should happen before 2020 with gold reaching the $30K/oz. I know this prediction seems crazy but when you take into consideration the accumulated debt of the US AND the size of the China economy (with a yet to be seen huge increase of the GDP due to internal demand of 1.5 Billion Chinese) you realize that this number could just be right.

    Anyway this is just my opinion and even if it has been right for the last 2 years you never know what our elite has in mind... (does the word Cyprus (and Greece before and Argentina, Hungary with confiscation of private pensions ...)means anything to you?

    ReplyDelete
    Replies
    1. Hubert;

      That is very solid analysis and I agree completely with your assessment. I also believe the Chinese have a long term strategic plan in place and it includes a large gold reserve with the Yuan assuming a very significant role in the global monetary system that arises to replace the current one. These deals that they are putting together with various trading partners in which they are having direct trade bypassing the US dollar is as clear a sign as to their intentions as there ever could be one.

      There is a passage in the Scriptures which states:
      "The borrower becomes the lender's slave" and I believe that is exactly where the West is eventually going to be headed. It will lose its economic supremacy and have to get used to sharing that with the rising economic powerhouses around the globe. The sad thing is that the West did it to ourselves by our idiotic embrace of socialistic policies which grow the size and scope of government and sink it ever deeper and deeper into debt.

      I am amazed that this generation seems to regard debt as something insignificant and of small consequence. Perhaps it has to do with the fact to so many have never experienced economic hardship like the generation that came out of the Great Depression who learned to avoid debt like the plague that it is.

      Delete
    2. China as a nation doesn't call the shots for their economy. The New World Order does. China was positioned to be number one manufacturer in this world a long time ago. They couldn't have done it without the cooperation of the United States and Europe. The New World Order decides which nation rises or falls.

      The ruling globalists nation is called Earth. China, Europe and United States just all happen to reside in their nation. There will be a day when they create a world parliament for decoration purposes while they wheel out their world govt to the public. They will have global taxes well before that. They even have a world constitution bestowing all the individual rights you can imagine except one which allows them to cancel them for any reason.

      Delete
  11. Dan, no one can deny the recent price action in Silver, the charts do not lie.

    However, You suggest Yen Gold is a “game changer” but Yen Silver is not? Yen Silver witnessed an equally violent reversal this week. All the Gold/Silver pairs are historically correlated over decades. No mention of this Dan and I’m not sure why.

    And the stocks market has topped out the last 2 X that Silver took off. 2007/8 and 2011. I really find the notion that Silver needs the stock market to go up for it to gain any traction as the most ludicrous statement I heard all year, especially in light of what we have been seeing of late. I can’t understand why Dan has taken this angle. If we go back in history and examine the relationship between Silver and the Stock market we see that periods of divergence like this are ended with snap backs, ie, Stocks fall or topping and Silver rising.

    To deny the correlation between Gold and Silver and take preference for a correlation between Copper and the Stock market is a little disingenuous to be honest. I cannot work out why you have picked a CCI correlation over that of Gold, which has a much more correlated chart and is fundamentally linked also.

    It will be funny to read the comments of all the traders in the world when the US stock Market and USD begin to decline in unison, which WILL happen this year.. and Copper and Silver heads north rapidly. The process has already begun.

    I await the rational to be offered to all readers as to why the falling stock market is not dragging down Silver.

    ReplyDelete
    Replies
    1. Ilya;

      Spoken live a true silver bug...

      I will let the charts speak for themselves. You may call it "disingenuous" but Silver is more in sync currently with the CCI than it is with gold. When that changes and it does begin to more closely follow gold than it has been following copper, I will note that. Until it does, anything else is wishful thinking and not solid and OBJECTIVE technical analysis.

      Traders who learn to read markets will make money. Those who insist on being right lose money. It is really that simple. When the hedge funds reverse and begin to cover, then silver will rise. Until they do, it will fall. As to when that will happen, it is anyone's guess. It could happen next week or next month or 6 months from now. No one, including you oh Wise One knows with any certainty. Any claims to the contrary is just foolish pride speaking.

      Good luck to you in your endeavours.

      Delete
    2. No need for the "oh wise one" Dan, rather childish really.

      I agree with you. Silver looks bearish. But when i read your comments that suggested Silver needed positve US data and a higher stockmarket to make a move, i just thought it a little silly and totaly unprpoven. Godd US data results in a Silver sell off.

      however. Here is some dadtes for you "oh wise one"

      8-11 April

      18-25 April

      Major Rally In may.

      Ok Bye

      Delete
    3. and dont get me wrong. In general i enjoy your analysis.. And As for the Silver bug accusation, alas i am guilty, as i see it as money.

      I buy Silver and dont sell, i TRADE spot whichever way.

      i will have to come back when the stock market falls and Silver goes higher.

      Untill then

      All the best

      Delete
    4. Ilya;

      I responded in kind to your use of the word "disingenuous" in remarking about my analysis. There was nothing deceitful or disingenuous about my commentary. It is an honest assessment of how I see this market.

      Now you may not agree with that assessment, and you are perfectly free to do so, but once you move into the realm of falsely accusing me of something, I am going to respond in kind.

      Keep that in mind in any of your future posts.

      Also keep in mind my comments to dfly - I am a commodity futures trader - I do not have the luxury of placing my bets on markets based on where I EXPECT things to go down the road at some point. The leverage is too great and the kind of financial damage that can occur to one's trading account is too significant to buy based on where I think a market might be at some point in the future. That is the realm of the physical market buyers and as I stated, I would expect those who are bullish the metal for the long term to by acquiring the metal on any dips in price.

      I deal with what the market is telling me it is thinking at the present time and wait for it to tell me that it is changing that perception. That is when I will move; no sooner.

      Remember that when you read my analysis.

      Good fortune to you.

      Dan

      Delete
    5. Duly noted Sir.

      the very best wishes to you also

      Delete
  12. I emailed Jim Sinclair this weekend asking him if silver has bottomed. He said yes it has and silver will not give up the $26 price level.

    ReplyDelete
    Replies
    1. dfly;

      that is what makes markets. There are always two sides. Sometimes one is right; sometimes one is not.

      I prefer to let the charts tell me when bottoms are in as I wait for confirmation. All I will tell you is this - hedge funds are selling the base metals along with selling. When they cease selling the price of silver will rise. When they sell, it will fall.

      If copper and the rest of the commodity complex move lower; so too will silver.

      So far Silver has found solid buying on approaches to the $26 level. That has held. If it violates that level, it is going to $24 for starters. A lot will depend on what the US Dollar does as we move ahead as well as the US equity markets.

      No one, including my dear friend Jim, knows whether or not it will continue to hold. Keep in mind dfly that I am a commodity futures trader. I am not speaking to physical market buyers. One can buy 100, 200, 500, 1000 ounces of silver and who cares if it falls another couple of dollars. That is a totally different thing from the world in which I live where a single contract of silver of 5000 ounces. A mere $1.00 drop in the price of silver is an immediate $5,000 loss for a futures trader like myself. Now consider I am speaking of a SINGLE CONTRACT. Put on 20 or more of those and then add the money up. Would you like to drop a quick $100K on a trade gone wrong? I have been doing this for more than 24 years now and the reason I am still here and still in this arena is because I do not take reckless chances with my trading capital.

      AS I stated in this piece about silver, if copper cannot hold its support down near the $3.25 level as I demonstrated on its chart, neither will silver hold. If copper bounces, and I would expect it to bounce from that level, then silver will bounce.

      If copper loses that support level, look out, because it will signify that the current QE 3 and QE4 is not longer sufficient to stem the deflationary tide but will require an even greater outlay.

      For all of our sakes, I hope that does not happen because things will get very ugly here in this nation of ours.

      Those of us who would like to see higher gold and silver prices need to realize the terrible consequences of what that will mean to our society at large. Social unrest? You ain't seen nothin' yet! Just keep that in mind. Sometimes getting what we wished for is the worst that can happen to us.

      I would much prefer to see this situation resolve itself but I fear it is too far gone at this point to expect anything other than horribly terrific results. I have children that I do not want to have to undergo what is coming our way and it angers me to see that every single bit of this was preventable but greed, avarice and sheer stupidity, along with a massive dose of hubris is what set it all in motion.

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    2. Conspiracy theory or not, I find this hard to ignore (note the credentials) -

      http://www.paulcraigroberts.org/2013/04/04/the-assault-on-gold-paul-craig-roberts/

      Delete

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