"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, February 22, 2013

Silver Specs Reduce Long-side Exposure

This is by request....

The big hedge funds are also exiting from the Silver market as they have been doing in gold but not near to the same extent. The reason is because of silver's industrial use. As a monetary metal it is experiencing selling tied to money flows leaving other sectors and flowing into equites; however, those same money flows, with many looking at the so-called "improving growth" scenario, are finding some of their way into the metal on the way down.

We do need to keep a close eye on the copper market however for if hedgies begin to get bearish on copper, it will be a tough order to keep them bullish on Silver. As of this Friday's COT report, hedge funds remain net long in Copper although they have trimmed that exposure by nearly 12,000 contracts through the reporting period.

Silver bulls do not want to see downside support near $26.25 - $26.00 give way for ANY REASON. It has been a solid base for more than a year and a half and has always attracted very substantial buying near those levels. Value based buyers see the metal as cheap down there. If, and we do not know at this point, if the metal were to test this level and rebound, it would indicate their activity and should bottom the metal. Still, from a momentum based view, it needs to clear $30 to get any excitement going on the part of the bulls.

One last thing - since I caught a lot of flack over my article on Backwardation by some of the uninformed out there who are always ready to swallow the latest nonsense, so long as it confirms their perma-bullish views, I wish to merely state that I hope you have learned something by the experience.

Markets will bottom when they are ready to bottom and not because someone "insists" that they must bottom in order to generate more traffic at a web site and thus reap more money from the Google Ads people. There are way too many in the gold community who seem to have some sort of perverse narcissistic addiction to constantly calling for bottoms (and tops I might also add) no matter what the price action is indicating. It is one thing to have a long term bullish view of gold; it is quite another to dredge up one story after another predicting with each one that a bottom is now imminent in the gold market.  

There is a time when markets go up and a time when they go down. It is really that simple. When the perceptions of market players change (and who among us knows precisely when that will occur?) then the price action will change.

Right now the perception among the majority is that gold's run is over. I am not saying that it is; I am merely telling you what the perception is. This is why gold is seeing so much heavy selling. This is what moves markets. When the conditions change so will the perception. Then those who were rushing to sell gold will be rushing to cover shorts and buy it all back or go long.

The key is in reading the price action on the chart for that is all technical analysis really is; a way to measure changes in perception towards markets.

To summarize - hedge funds are growing very bearish towards gold. They are doing so however now that gold has reached levels commensurate with former levels at which Asian Central Banks were very active as buyers. If the physical market buyers surface in size near current levels, there is fuel for an active short covering rally to squeeze some of them out. However, as long as the equity markets remain the place to be for hedge funds with money to invest, gold is going to struggle to find enough of these momentum based buyers to drive it sharply upwards. For that to occur, we need something in the status quo to change in order to shift perceptions back in favor of gold buying by speculators.

Perhaps Ben Bernanke's testimony in front of Congress next Tuesday and Wednesday will prove to be the Midas touch for gold. We will have to wait and see what he says then. My guess is that he is not going to upset the apple cart as he knows full well what is going to happen to the US equity markets if he even hints at ending this program of QE sooner than the end of this year.

Again, I am not saying that gold cannot rally; it is certainly oversold and due for a bounce; however, rallies are going to be sold until we get some sort of technical chart confirmation that indicates a change in the near term trend has occured. Currently that trend is lower.

Incidentally, in the late afternoon here on Friday, news hit the wire that Moody's had stripped the UK of its AAA rating. That was enough to send the British Pound sharply lower in very thin trade but it also saw gold goosed up into positive territory. We will want to see how the market reacts Sunday evening and early MOnday morning after a weekend to digest the news. Gold priced in terms of British Pounds moved up rather strongly on the news.

here is the British Pound priced gold chart with some notes.

Speculators Exit from Gold Market Continues

This week's Commitment of Traders report indicates a continuation of the trend that has been in place for some time now when it comes to gold, namely, the mass exodus of speculators from the gold market. Not only that, more and more hedge funds are playing gold from the short side of the market expecting lower prices in the future.

The following chart pretty much says it all. Take a look at the sharp drop in the number of outright long positions hedge funds are holding. Do you see the plummeting line. Is it any wonder that gold is plummeting lower? And what makes it even more noteworthy, is that this report DID NOT PICK UP the plunge through $1600 on Wednesday and the subsequent further pressure down towards $1555 the remainder of the week.

Note also the sharp spike higher in the number of outright shorts among hedge funds. This week alone this group was responsible (through Tuesday) for a total of nearly 28,000 contracts sold when you take into effect both their long positions being liquidated in addition to fresh new short positions. My oh my has sentiment towards gold changed!

By the way, the outright short position in gold being held by hedge funds is the largest that I have in my records going back to the beginning of 2006. I do have further dated records but have not bothered checking them. Let's suffice to say, that it is the most bearish hedge funds have been on gold in SEVEN YEARS! When one considers that the Fed has pumped or will pump nearly $3.5 TRILLION into the economy by the end of this year, increasing the money supply exponentially, this is nothing short of an economic miracle to see gold so comatose. You have to hand it to these masters of the Universe at the Fed - They have suspended the laws of economics with supply and demand no longer meaningful.

Not only have they managed to kill the canary in the coal mine but they have simultaneously made it appear as if the canary, and everything else in the mine, is just fine and dandy. Welcome to the Brave New World of the Modern Day Alchemists. Apparently prosperity in a bottle can indeed be created. Pity the ancient Romans; if they had only had their version of the Federal Reserve. We all might be speaking Latin nowadays and Caesar might still be ruling from the eternal city. 

Copper Woes

Copper began a strong rally into the end of last year, followed by a selloff with a resumption of the rally into a new high for this year in February. Since that time however it has been straight down for this important bellwether metal. Today's selloff in the red metal marks a brand new low for 2013 and the matching of a nearly 2 month low.

A couple of things are at work here. First, traders fear Chinese action to ramp down speculative fever in the housing sector over there. The concern is that any slowdown in Chinese building, no matter what the source, is not good news for Copper.

Secondly, there continues to be a general theme of selling commodities by hedge funds here in the US as evidenced not only by this chart, but by the CCI (Continuous Commodity Index) chart as well.

I believe we will want to keep a close eye on this market. With the US equity market once again moving higher today while copper moves lower, there is a divergence that needs to be monitored. I personally believe copper is a much better indicator of future expected economic activity than is the US stock market, which has become a bubble fueled by investors chasing "it is the only yield game in town". Ultra low interest rates, courtesy of the destroyers at the Fed, have sent high octane money flows into stocks. At some point that game is going to come to an ugly and ignominious end. I am just not sure when. Seeing these guys pouring back into equities in spite of the massive high volume reversal day posted this week is quite extraordinary.

The bullish fever refuses to die. What is particularly worrisome to me is seeing the huge outflows from money market mutual funds. Those funds, which are taking some rather reckless risks to try to obtain some sort of return in this insanely low interest rate environment (can you tell by now that I despise the Fed for what it has done to punish savers and retirees), are watching their investors leaving in droves to go and chase the stock market higher. This sort of herd mentality is precisely what the Fed has wanted but it is also precisely the same sort of foolishness that sets up those latecomers to the stock market for serious losses.

Forget all that claptrap being spewed out of the mouths of the various Federal reserve officials when it comes to their "mandate". The Fed has become nothing more than a serial bubble blower and a manager of the mess inherent in such things.