Hedge Funds Target Silver

The hedge fund community, after pressing the Copper market from the short side to the point that they are now net short in the red metal by nearly a THREE to ONE ratio, are now moving to go after silver from the short side. This is the first time since the history of Disaggregated Commitment of Traders report broke out the hedge fund category (2006) that this group of traders has been NET SHORT the silver market.

Keep in mind that today's report (Friday) does not cover the further drop in silver below the $27 mark that occurred Wednesday and Thursday of this past week. No doubt a large portion of that further plunge was due to additional hedge fund shorting. The report also will not pick up today's short squeeze which caught a few of these newcomers to the short side off guard. However, based on what I can see of the attitude of the hedge fund community towards commodities in general, it is going to take some strongly bullish fundamental factor to drive these guys out of their short positions.

Any sort of sustained and strong rally in stocks might do it but I suspect it is going to take a series of economic reports showing solid growth in the US and global economies to get silver going to the upside along with copper.

Today's strength in silver was a by-product of gold, which pulled the grey metal higher - nothing else....

Gold and Mining Shares Part Way

Once again we are being treated to the sad spectacle of watching the ancient metal of kings soar higher today while the shares of companies that explore or mine it went lower. It is becoming a like a bad play or drama or to quote from Shakespeare:

"A tale told by an Idiot, full of sound and fury, signifying nothing."

Although, in our case, it does signify something, namely, that the mining shares continue to attract selling seemingly no matter what comes their way. First we were told that they were heading lower because miners were unprofitable and had not gotten expenses under control. Then we were told that they were selling off as investors were putting money to work in other sectors and the miners had fallen out of favor as gold saw no immediate threat of inflation. Now we are told that they are falling further out of favor because stocks in general are falling out of favor. Need I say any more? There always seems to be an excuse to see another move lower in the mining sector. Quite frankly, until I see some signs of solid, sustained buying that comes in to take this index through some overhead chart resistance levels, I expect rallies to be sold.

I am not rooting for this; I am merely stating the situation from a technical analysis perspective and attempting to stay as objective as possible. The current situation is that the miners seem to have lost all sponsorship except for the most stubborn of bulls. Value based buying is certainly occurring as the shares are shifting into the possession of strong hands but we need more than value based buying to ignite a fire in the shares. When will that come is the question that we all want to know and the simple truth is that no one, and I mean, no one, knows at this point.

Here we had a day in which gold is up over 1.6% while the HUI is down. This further exacerbates the already way out of whack HUI/Gold ratio which had recovered somewhat in yesterday's blip higher but has now given back most of its gains. At this point I almost shudder to think what might happen were the US equity markets to finally rollover to the downside in earnest.

Remember, it took the announcement of QE1 back in late 2008 to turn the gold shares, as well as gold and the broader equity markets to the upside. We have had 4 bouts of QE already and they are still sinking. What do we need - a new round of QE - the sort of US version of the recent Bank of Japan, "Let's throw everything but the kitchen sink at the problem" and hope that this will work? Will that finally do the trick of getting the mining shares moving higher?

If you look at a chart of the Nikkei you can see that the Bank of Japan has been successful in getting the Nikkei moving higher but at what great cost to their currency and eventually to their bond markets?

The CCI was higher today but that was no thanks to crude oil or to the rest of the commodity complex. Were it not for this nice big up day in gold and some strength in silver, we would have been lower in the CCI also. Crude oil to me continues to defy gravity given the general weakness in the US economy but it has retreated away from $98 and is now well off that mark. I am surprised it is sitting above $90 to be honest especially with the stark weakness in many of the other commodity complexes and today's pathetic payroll's report. Someone is intent on driving that market higher even in spite of the negative news in the economy, not only here but globally. I am not sure who is trying to squeeze the shorts but they are playing with fire in my view, not with clear signs of stagnating growth everywhere one looks with perhaps the exception of the housing market that is being fed an IV containing an abundance of liquidity drugs compliments of the Fed.

Take a look at the Russell 2000, a very broad basket of small cap stocks which has been a good gauge of investor sentiment towards risk. It led the larger cap stocks higher as the liquidity party commenced but now has shown definite signs of becoming "tired". It is trading below its 50 day moving average, something that it has not done since the beginning of December of last year. While the Plunge Protection Team is no doubt out in full force today continuing their meddling in our financial markets, this particular index is revealing a genuine flight away from risk on the part of the investment crowd. Throw in the fact that the bond market is soaring today with the yield on the Ten Year Note sinking below 1.7%, and it is difficult to see whether the market rigging by the authorities is going to be able to shove the US stock markets higher in defiance of gravity. 

Don't worry however - if they do, rest assured you will have the roosters crowing about how resilient this US stock market is and how it shows a vote of confidence by investors... right.... and elephants also roost in trees at night.

Archimedes was once said to have stated" "Give me a place upon which to rest a lever, and I will move the earth". The Fed and the Bank of Japan are apparently putting his Lever Theory to a test because they are attempting to move the entire financial system of the world with their level of QE.

My view on this is that they are destroying capitalism. Remember when former President George W. Bush stated that as much as he was reluctant to employ TARP to bail out the banks that "we had to do it to save capitalism"? HUH? Yep, free market capitalism, meaning markets function smoothly when left to themselves as they are efficient allocators of capital. Apparently that died a long time ago. I do not recall seeing the funeral but I know for sure that it happened.


All that these people manage to do is to blow enormous bubbles and then spend the rest of their days here on the earth managing the disastrous results that result from the bursting thereof.

Payrolls number gives Gold a Jolt Higher; Sinks S&P 500 - Unemployed Resort to Stealing Maple Syrup

It what has to be one of most miserable jobs numbers in some time, we learned today that the number of Americans who are involved in the Labor Force has now shrunk to levels not seen since 1979! Think about this for a minute - we are talking 34 year lows! 

Yesterday we were greeted with the news that the US poverty rate is now back at levels last seen in the 1960's! Remember when Lyndon Johnson declared war on poverty in this nation. Well, it looks like under the Obama administration, the US just lost that war.

We had a market looking for an increase in hirings somewhere in the vicinity of 200,000. Instead we got a paltry 88,000 and one has to wonder how many of those are due to the birth/death model.

Taken together, any idea of a premature end to QE3 and QE4 is certainly off the table based on this recent series of data.

While not trying to make light of the number of our fellow citizens who have completely given up on finding decent employment or have been forced into taking part time work to attempt to make ends meet, I was struck with a story appearing on the Drudge Report this AM detailing an increase in theft of maple syrup up in the state of Maine. It seems like you can get $50/gallon at the retail for this stuff. Maybe some of the unemployed have decided to go into the maple syrup business. They sure as hell cannot find work in this nation.

http://www.myfoxny.com/story/21876578/sticky-fingered-thieves-target-sap-in-maine

It looks as if the bullish euphoria, a euphoria which I have been mocking and will continue to do so, is finally wearing off of the equity bulls. WE noted this week on the S&P 500 chart a "just miss" on a  Bearish downside reversal pattern. After we got news about the Bank of Japan's "all-in" on the liquidity front, the force of the reversal was lessened as risk was back in vogue. Today, that reversal pattern is seeing some further downside confirmation. The day is yet young but the S&P 500 stands a good chance of putting in a WEEKLY DOWNSIDE REVERSAL PATTERN. We have not seen one of these on the S&P 500 chart for a long time (since May 2011). If the market does not stage one of those late-in-the-session miraculous recoveries, it could very well portend that this overbought, overextended stock market is going to finally see a deeper and more protracted retracement in price.

I want to add here that in the battle between Dr. Copper and the broader US equity markets, it appears as if Dr. Copper is being vindicated. The base metals, the grains, some of the softs as well as the broader Continuous Commodity Index were all sinking while the equity world was in its own little La-La land and soaring ever higher into the clouds. Both of these cannot be right. It looks as if those concerned about slowing global growth and deflationary pressures are being vindicated although cackling before laying an egg is not a good idea. Let's see where the dust settles today before getting too dogmatic.

Something else to note here - normally in the past, on a day like this in which risk is being taken off as indicated by soaring bond prices, the US Dollar and the Yen are the recipients of safe haven flows. The Dollar is moving lower today as the Euro and the Pound are seeing inflows while the Yen is dropping sharply on the heels of the policy change by the Bank of Japan.

Just when you think you have the drill figured out, the rules of the game change. Now we will need to see how to interpret all of this in the days and weeks ahead. Is this a  temporary aberration or the start of yet another new trend. It is hard to believe that anyone would consider the Euro a safe haven given the recent events over there. What does that tell you about the mess in the currency markets? This is gold's moment to shine if there ever was one. It had better not disappoint.

At least it is not disappointing in terms of the Yen. Take one look at the following chart and you can see how the Japanese public is seeing their currency debauched. Given this, why anyone would want to own Japanese government bonds outside of the Bank of Japan, I will never understand. When you are getting 0.5% on money for TEN YEARS and the underlying currency is collapsing, you would have to require a frontal lobotomy if you put any money into those things.

HUI - Dead Cat Bounce or Something More?

The mining shares displayed an unusual bit of activity in today's session (Thursday). What was that you ask? They went up! Better check that because it might have been a misprint on the tape. I am not sure what the catalyst was other than some profitable bears ringing the cash register but they at least stopped moving lower for a day.

Here is a longer term chart of the index where you can see that it has entered a support zone surrounding the 61.8% Fibonacci retracement level of the 2008 low and 2011 high. If this index cannot get back above the 375 level, there is a chance it could fall as far as the region marked, "SECONDARY SUPPORT ZONE".

The repercussions of such an occurrence would be a further drop in the price of gold. That or else the HUI/Gold ratio would be reaching levels that would stagger us all.

I would not make too much of today's pop higher in the mining shares unless we see this index move back above this week's high. Even at that, I would prefer to see it clear 375 to indicate this move lower has put in a spike bottom. Bulls will not be able to breathe a sigh of relief until the HUI is sitting with a "4" handle on it again.

Bank of Japan Surprises Market with an Aggressive Campaign to Beat Deflation

Currency traders are reacting to the unexpected aggressive policy action announced by the Bank of Japan this evening by coming back in droves to sell the Yen, which had been steadily moving higher lately due to safe haven flows and disappointment that had set in. The thinking had been that the new BOJ leader would not act as aggressively as some had hoped. That sure went out the window with this news!

They are basically going to be doing Y7 trillion (somewhere near $75 billion) each month of purchases of Japanese government bonds. Currently they were buying Y3.8 trillion each month. Not only that, they are going to also target longer dated bonds, something that they had not done previously with a 3 year maturity rate the longest dated bond that was purchased under their current liquidity measures.

The news also stated that the BOJ would purchase Real Estate REITS as well as exchange traded funds or ETF's in addition to aiming to increase the monetary base annually by Y60-Y70 trillion!

This is quite aggressive. I should note here that gold, in yen terms, or yen-gold as I prefer to call it, shot sharply higher and is currently up nearly 2.5% as I type these comments.

The US equity markets are following the lead of the Japanese Nikkei which ADORED the news. We will have to wait and see how today's downside reversal pattern holds up. Is it going to be yet another one or two day wonder and then back off to the upside race we go or is the S&P going to finally see something of  a deeper and more prolonged setback.

There are plenty of warning signs out there in regards to US stock  prices - the Down Transport are weaker than the actual Dow; the Russell 2000 is losing ground to the larger cap stocks, etc, all of which indicate that traders are leery of risk. This announcement by the BOJ, being as unexpected as it was, may put those fears on the back burner for now.

The key for gold will be how it handles the inception of London trade and particularly New York trade.

Gold, Crude Oil and Copper Break Down

Today's big move lower in gold, coupled with a sharp drop in WTI crude oil and further weakness in the Continuous Commodity Index, could be the beginning of a signal change that the global economy, despite the best efforts of the Central Banks and their unlimited money creation, is entering another period of slowing growth.

Quite frankly, the commodity complex has been signaling deflation for some time now with speculative flows OUT of the base metals and some of the foods. Grain prices are working lower as the high prices brought about by last year's drought have effectively shut off demand while end users wait for much cheaper South American supplies to make their way into the distribution channel.

All the while, against such a backdrop where hard asset prices are falling, the US equity markets have been powering higher and higher. The last report I read stated that they had now reached levels exceeding the height of the Towel of Babel related in the book of Genesis and that it had gotten the attention of the market gods.

It seems as if that disconnect that I spoke to some time back between Dr. Copper and the rest of the CCI, and the US equity markets has been getting even wider; that is, until today. It looks like we might, and I want to emphasize this word "might", be seeing some reality hit these idiotic equity bulls who keep shoving prices upwards no matter what happens in this world.

I was going to post a story on April Fools Day about California experiencing "THE BIG ONE" and subsequently falling into the ocean and disappearing somewhere with Atlantis, and then relate how the "BUY TV" analysts viewed it as wildly bullish because off all the construction work it would create with dirt having to be trucked in to fill in the gaping hole that was left.

Seriously, the way the Cyprus situation was swept under the rug and quickly forgotten about, the complete ignoring of rising tensions involving that nut in North Korea, the manner in which the labor participation rate in this country keeps sinking, (just name some other negative factory) and yet day after day after day seeing a rising stock market to levels that are this preposterous, makes me wonder if the story of the Pied Piper of Hamlin was actually an allegory about today's investor/trader class.

What I find quite noteworthy today is that with all the selling pressure in the commodity complex, along with the  very weak equity markets here in the US and with rising bond prices (falling interest rates), the US Dollar was actually experiencing more selling than buying. That is interesting because even the Japanese Yen is experiencing that same idiotic safe haven buying that we see during these periods when investors get nervous. Normally that pushes the Dollar higher as well since it has been the go to safe haven for some time now. Not today. I do not know what to make of that yet but want to see some further price action the remainder of this week before commenting.  It might be just a one hit wonder.

Also, remember yesterday when I was questioning what crude oil is doing up at these levels given the lack of growth globally and rising stocks at Cushing, not to mention the weakness in the commodity complex as a whole. Well, today it got clocked and is down over 2% as I type these comments. Let's see where it ends the day before drawing too many conclusions however.

The same goes with the S&P 500. Look at this chart...

The S&P just missed putting in a downside reversal because its session high did not exceed the session high from yesterday. Nonetheless, the sell off has been strong and is coming on high volume. We have seen these fake outs before however in this market as we just had one show up on the chart a mere six weeks ago that lasted every bit of a few days before we once again went on to make yet another new high. Maybe this one is for real. We'll see.

Momentum based indicators show a definite loss of upside momentum here but they have been doing that for some time now and yet the market keeps going up. It is almost as if this thing is being shoved higher by some mysterious hand that will not let it fall. If these hedge fund algorithms ever shift into a "SELL" mode in these equities, look out! They are all on one side of the boat in a big way.

As far as gold goes, it either holds here in this support region between $1550 - $1525, or it is going to sink to $1480 for starters. With the gold stocks continuing to stink up the place, gold is losing any help whatsoever from that quarter. Central Bank buys out of Asia and elsewhere have been keeping this floor solid in the gold market so they had better not falter in those purchases or else...

 

 

I am not even going to put up a chart of the HUI at this point as it is simply too ugly. There is a pivot region near 300 and that is more than likely where the pathetic thing is headed unless we see some spark to the gold price.

I will leave you with a ratio chart of the HUI to Gold price. It is now closing in on the 2008 low. Keep in mind, this is AFTER FOUR ENORMOUS QUANTITATIVE EASINGS attempts. What in the world will it take for these stocks to do anything if 4 rounds of QE cannot take them higher? Makes me seriously wonder if some of the gold mining companies are going to survive to be honest.

In the long run such a thing would bring less supply onto the world market which would be supportive for prices moving forward, not to mention allowing those healthy companies which remain to become more profitable. The problem is, how long is the long run going to take to get here......?

U S Dollar Remaining Firm

The strength in the US Dollar had recently been coming mainly at the expense of the Japanese Yen. That is abating somewhat as the Yen is seeing some short covering and fresh buying as traders pare back expectations for AGGRESSIVE Bank of Japan action in the immediate future. It is clear that the Japanese monetary authorities want a lower yen but apparently the recent pressure from the rest of the G20 has caused them to ease back a bit on browbeating their own currency.

What is helping the Dollar more so recently is the weakness in the Euro which has not been able to recover from the blow it received as a result of the Cyprus debacle. That precedent setting raiding of bank deposits has left its mark, a mark which I believe will not ever completely heal.

Throw in the fact that we have a US equity market which has been goosed into the stratosphere, compliments of Ben Bernanke and the rest of the doves over at the FOMC, and you have the ingredients for further strength in the Dollar as by comparison to the rest of the world, the US economy looks decent.

I find it ironic that in this nation we have reached a point where we now define deviancy downward. The same holds true for our financial and economic standards. This abysmal "growth" we are witnessing in the US economy (again, thanks to QE and nothing else) is now heralded as good. There was a time when growth of this nature would have been mocked.

With a Federal debt expected to reach somewhere in the neighborhood of $20 trillion by 2016, with a massive and increasing unfunded entitlement crisis growing ever larger with the passing of each and every month, and with no real plan by the current administration to even remotely deal with these matters, the Dollar's honeymoon on the Foreign exchange markets will come to an abrupt end at some point. When that point occurs is anyone's guess right now but unless we have to rewrite the economic history books, the Dollar is going to eventually go the way of the British Pound.

If you notice on the chart, the Dollar enjoyed an uptrend that began in July 2011 and lasted through July 2012 at which point it transitioned to more of a broad sideways trend below 84. Dips to the 79 level have attracted consistent buying while sellers appeared at the 83 and higher level. That level closely coincides with the 61.8% Fibonacci retracement level noted.

If the Dollar can clear this level convincingly on a weekly basis, there is some light overhead resistance near 85 - $85.50 but beyond that, there does not look like much in its path for a run toward the 89 level.

I should also note here that this consistent strength in the US Dollar is continuing to set the hedge fund algorithms into selling commodities as a general trading strategy.

This is the reason for the continued weakness in silver, and in gold, I might add, although as I have stated in some private emails, I do not understand the strength in the crude oil market. With building stocks here in the US and with no sign of robust demand that I can see, I am honestly baffled as to why hedge funds want to own crude oil, given the fact that the commodity complex continues to reflect a global economy growing at quite a reduced rate.

See the chart below of the CCI to understand why Silver is getting clocked and making fresh seven month lows. Were it not for strength in crude oil, the CCI would have broken that support line shown on the chart near the 540 level and begun retreating down towards the lower part of the downtrending price channel.

Silver Breaks Down

Silver has been struggling to get anything going to the upside for some time now but it has been able to hold above chart support near the $28 level; until today.

It broke down out of the bottom of a 6 week long trading range and in the process made a fresh 7+ month low. That is not bullish action no matter how you look at it.

If you have been listening in to my regular weekly interviews over at King World News on the Metals Wrap, I have been discussing the fact that this market has looked heavy due to the fact that it has been under attack from hedge funds which are playing the base metals such as copper, and silver, increasingly from the short side. That speculative money is selling rallies and working to push these markets lower and it has been having some success. Silver has managed to hold up but now looks to be falling apart.  I want to see another day's price action to learn whether this is just a one day wonder and a bear trap or the start of another leg lower down to the next support zone I have noted on the chart.

For the silver bulls out there - you must keep in mind that the way the speculative community at large looks at this metal, it must have an inflationary environment present if it is going to thrive to the upside. With the global economy showing no signs of inflationary pressures at the moment and with Copper continuing to wilt, it is going to be a near Herculean task to see silver generate enough bullish action to spook this growing contingent of shorts.

Notice the following breakdown of the HEDGE FUND positions in this market. Can you see the steady increase in their short positions and the continued liquidation of existing long positions. That data is only good through last Tuesday so my guess is that the hedge funds are NOW NET SHORT the silver market.

I should also note here that using the data provided by the COT which shows a definite breakout of the hedge fund positioning going back to 2006 as a starting point, the hedge funds have never been short silver since this data collection began! In other words we are looking at something that has not occurred in SEVEN YEARS! The closest the hedge funds came to being net short in the silver market was in September 2007 when their net long position has a mere 168 including futures and options.

For now, until we get some sort of spark or reason for these hedge funds to reverse their bearish leaning, silver looks to be headed lower. I would watch copper for any sign of a reversal to the upside but unless copper can do that, silver is going to get cheaper.