Silver - Commitment of Traders

This week's release of the Commitment of Traders report by the CFTC contained some noteworthy developments in regards to the silver market. I discussed this with Eric King so make sure to listen in to the KWN Weekly Metals Wrap where we cover this.

If you want to have a visual to go along with that discussion, I am providing it here in the form of this chart.

First of all, the hedge fund category (Managed Money), has been steadily liquidating their long positions in silver for some time now and that continued this past week. The result is that their overall net long position is now at levels last seen in this category dating back to the late February- March 2010 time frame. At that time, the price of silver was trading between $16.50 and $17.30!  Yet here we are with silver sitting closer to $35. In other words, the price of silver has doubled since then while the hedge fund position is at the same level as it was when price was half of what it is today.

What this tells us is that once silver falls back into favor with the speculative crowd, it will launch its next leg higher from a substantially higher price level. Let's assume for the moment  that the interest to be on the long side reaches levels commensurate with what we have seen recently. It is easily conceivable that the price could effectively double from the point at which that next leg higher commences. I do not know from what level that will occur or the time frame, but with the large specs having been greatly cleaned out of the silver market, there will be enormous upside potential in this market when conditions are ripe.

The flip side of this and the second point worth noting is that the big commercial net short position is shrinking quite rapidly. As you can see on the chart by following the horizontal line across the chart, their net short position is now the smallest it has been since May 2009, a full two years ago! Silver was trading between $12 - $14 back then.

Also related to this is that the Swap Dealers are now net longs. They have not been on this side of the market since late November of last year.

What I am atttempting to say that this consolidation period for the metal is extremely healthy for the long term. It continues to see more and more speculative long side liquidation but that is being met by a very large amount of short covering from the biggest shorts in the silver market. The result of this has been to lock silver into a range trade which is keeping the metal from breaking down substantially further and producing the curent trading range that we see on the price charts.

We therefore would have to see a sharp pullback in commercial short covering activity for the market to collapse in price. They are steadily buying and their buying is of sufficient size that it is absorbing the hedge fund liquidation-related selling. Quite frankly, as long as the bullion banks keep buying I do not see where we will get the firepower of selling that would be necessary to cause silver to fall apart. One would almost have to see the hedge funds actively take to the short side of the market to generate enough force to press silver down through the kind of buying that the commercials are now providing.

The more the hedge fund long side exposure keeps dropping, the better as far as I am concerned provided that this trading range continues with the market holding above the recent lows in price. The ideal setup for silver would be for it to build a rock, solid base of support at a new and higher price level, let's say somewhere near and around $30 or so, from which it can then make the next leg higher in this now decade long+ bull market.

Trader Dan on King World News Weekly Metals Wrap

Click here to listen to my regular weekly radio interview with Eric King at King World News on the KWN Weekly Metals Wrap.


http://www.kingworldnews.com/kingworldnews/Broadcast/Broadcast.html

Gold very firm in terms of European Major Currencies

While US Dollar priced gold has been holding relatively firm lately, it remains well off its recent record high near $1580. That has not been the case with gold priced in terms of the major European currencies. Take a look at the following charts and note that gold is trading very close up against its record price in terms of two out of three European majors.

What this tells us is that the metal is attracting significant safe haven buying by investors out of Europe who are increasingly concerned over the unstable financial picture of some of the member nations of the EU. These sovereign debt woes continue to unnerve investors who are attracted to gold as a place to park their wealth.

I believe that this is one of the reasons that gold in US Dollar terms will not break down technically but continues to find substantial buying on dips into the lower part of its trading range. If gold does forge ahead into new highs in terms of any of these European currencies, look for US Dollar priced gold to break out of its range trade and make a run towards $1550.

While gold priced in terms of the Swiss Franc is not as strong on its chart as the two currency-priced charts above, it is still holding very firm. The Swiss Franc is still retaining some of its historical safe haven status and its relative strength against both the Euro and the Pound, and of course the Dollar, is working to keep the price of gold a bit weaker.

Bonds rescued right on schedule once again (It's a miracle!)

The Long Bond, after putting in a bearish engulfing pattern in Wednesday's session saw solid followthrough selling in the overnight session and into early Thursday morning. About mid morning Thursday they began to recover after being down nearly a full point at one time. By the time the session closed, they had managed to come all the way back and ended up closing only 3 ticks lower. Once again they were rescued just as they were breaking down technically on the price charts (don't you love our free markets here in the US).

The Fed has to love the hedge funds rushing out of risk trades and stuffing money into the bond market. What QE-related purchases of Treasuries could not accomplish (lower longer term interest rates), the risk off trades have performed. With the Fed supposedly going out of the bond buying business at the end of next month, someone has to buy these paper IOU's.

Look for more bond selling if the equity markets can mount any sort of strong rally. If the equities give up the ghost and begin fading, the bond bears will receive the usual ignominious treatment that they are getting accustomed to receiving from this market.

Either the stock market rallies or the bond market rallies; both are not going to go up together. Let's see which poison the Fed chooses to administer to the public.

4 Hour Gold Chart

Not much going on today (Thursday). A slow day with nothing having changed for gold which remains in its recent range.

Ditto for Silver which is also working in a range with $36 or so on the top side and $33 down on the bottom.

The Continuous Commodity Index was lower today surrending a large portion of its gains from yesterday but is attempting to hold above the broken support line on its weekly chart. We would want to see it be able to do so tomorrow (Friday) as a strong finish to end the week would bode well for gold and silver next week. The flip side is a weak finish would see pressure on the metals to start off next week barring any unforeseen geopolitical events over the weekend.

Continuous Commodity Index back above its recently broken support level

Some of the readers might recall seeing the chart of the CCI that I posted not long ago detailing my concerns as to whether a deflationary mindset was creeping back into the markets. That was based on the pattern of the weekly CCI chart which showed a breakdown of the support level thereby forming a double top in the process.

Today, the risk trades were back in force with the US equity markets roaring higher once again. That had most commodity markets seeing hedge fund money flowing in after it all flowed out for the past two weeks.

In the process, the CCI was able to move back above the broken support level shown on the chart which set off the double top alarm bells. This is a significant development as it shows that the bulls are not yet ready to throw in the towel on the commodity sector as a viable asset class. Here is the key however - today's move was impressive but there are still two days remaining in the trading week.

How this index closes Friday afternoon will be a very big deal. If it can hold this level which comes in near 640 and stay above that, preferably moving above the previous week's high at 650 while so doing, it would give us the very real possibility that a bear trap was sprung and this index is going to try pushing back towards 660 for starters. That would immensely benefit both gold and silver bulls.

Should the index fail and drop back below 640 for the week on the close, the bears would have dodged a bullet and the bulls will be back on defense.

Obviously we are all back to trading risk or not risk. "Wax on Daniel San; Wax off Daniel San". If Risk is back on, then the index will move higher. If not, it will move below support once again.

By the way, the long bond chart shows the return of risk trades in today's session with a huge downside move forming a bearish engulfing pattern on the daily chart. Whether that holds is anyone's guess. As manic as the hedge funds are, they could stage an outside day reversal to the upside tomorrow. However, after having moved nearly vertical for the past 5 weeks, the bonds are overbought technically giving traders a reason to book profits based off the bearish chart signal today.

I would feel a bit more confident about a breakdown in the bonds if we get some followthrough selling in tomorrow's (Thursday) session. They are still above the 10 day moving average and need to at least take that out to get the bulls wavering a bit further. Also note that the bonds have completed a move to the 50% Fibonacci retracement level from the decline off the late October high where they promptly failed. The bulls will need some ammunition to prevent some bears from getting a bit more confident.

4 Hour Gold Chart

Gold continues its range trade and has now moved to the top of that range between $1500 and $1480 - $1470. A strong push past $1500 would be a psychological boost to the gold bulls and would unnerve a few of the weaker shorts as well. We could expect to see their short covering provide enough fuel to take it to $1510 should that occur.

It will take a close through $1520 to let it challenge $1530 and give it the potential to then attack $1550.

Downside moves towards $1480 - $1470 continue to attract buying and with the Dollar fading from near the 76 level again, that buying should continue. I would not expect $1470 to give way unless the USDX were to be able to push towards 76.50.

Must be a Slow Day at the FDA

Apparently the Food and Drug Administration has nothing better to do with their time than hunt down those crafty food terrorists also known as the Amish.

I am shocked, simply shocked, that raw, unpasteurized milk was being sold to willing buyers. It is just a matter of time before the names of these devious dairy farmers appear on the no-fly list. Then again, maybe the feds will come up with a "no horse buggy ride" list instead.

Feds sting Amish farmer selling raw milk locally

A yearlong sting operation, including aliases, a 5 a.m. surprise inspection and surreptitious purchases from an Amish farm in Pennsylvania, culminated in the federal government announcing this week that it has gone to court to stop Rainbow Acres Farm from selling its contraband to willing customers in the Washington area.

You can read the entire story here:

http://www.washingtontimes.com/news/2011/apr/28/feds-sting-amish-farmer-selling-raw-milk-locally/