Silver ends DOWN on the Year

First of all I would like to publicly thank one  of my readers, "Silverwood", for noting that I erroneously reported in an earlier post that silver had ended the year 2010 at the $28.00 level. I mistakenly used the LOW for the month of December 2010 instead of the closing price which on the front month futures contract was $30.93.

Based on that price, Silver is ending DOWN on the year 2011.

Note on the following chart that it has retraced 50% or half of the entire rally made from the lows in 2008 which marked the bottom during the eruption of the credit crisis and the inception of the Federal Reserve's Quantitative Easing program. That rally took it all the way to $50 before it then promptly collapsed.

Bulls would have preferred to see it close the year ABOVE that 50% Fibonacci retracement level near $29.30 but alas, it could not do so after staging a decent bounce off of this week's low near $26.

A period of base-building in a sideways trend would benefit this market as many players are simply too worn out from its wild swings up and down to mess with it right now. Silver is a seductive lover which promises all manner of satisfaction only to then break your heart with its fickleness. If it can settle down some and grind sideways ABOVE $26 for some time, then we should start seeing some confidence towards it on the part of more investors outside of the dedicated silver bulls.

If you note on the chart the line marked "SUPPORT"  in dark red. That line comes in near $26.30 and extends down towards $26.15. THREE times over the last year it has held price and attracted sufficient buying to take the price higher. IT MUST HOLD in order to prevent a drop all the way down towards $22 - $21. If the bulls can take price back above that 50% retracement level near $29.30 and preferably put a handle of "3" in front of the price once again, then I think silver will be okay and attract some new buying as well as minor short covering.

In order to get a sustained uptrend going however, it is going to have to convincingly clear $35.50. If risk trades come back into vogue early next year, then this should be a relatively easy matter for the bulls to accomplish. If however risk aversion is still the order of the day, then this market is going to struggle.

Thankful for Gas Shale

One of these days the politicians are going to wake up and realize that America is sitting on so much natural gas that we could kiss the Mid-East and its problems goodbye if we actually took steps to convert to a larger use of this valuable "home-grown" natural resource.

Wouldn't it be nice to be able to ignore the mullahs in Iran as demand for the only thing they have to sell of any value evaporates up into smoke.

Look at this price chart of natural gas and see what American ingenuity and technology can do when once it is unfettered and allowed to thrive. I for one am thankful that it does not cost a small fortune to heat one's home or generate the electricy produced during the summer when we are running air-conditioners to cool our homes. Imagine what we could do if we had more and more cars, buses, trucks, etc, running on natural gas or LNG.

US Dollar looks to squeak out a Winning Year

The Dollar is being sold down today in the year's last trading session as bulls book profits and window dress their accounts after the nice run higher over the last two months in the greenback.

This is allowing the commodity complex in general to rally and is benefitting both gold and silver.

Reading too much into one day's trading action at this time of the year is generally not wise. Volume is simply too low to validate any moves and with liquidity quite low, it does not take much in the way of order size to move these markets around. Also, some of the pit locals particularly are fond of separating traders from their money in this kind of holiday trade.

That being said, the Dollar has managed to finish the year of 2011 on a positive note, even if barely. It is hardly a ringing endorsement of the greenback however as it was more a "get the hell out of the Euro" trade than anything. Risk aversion and a flight to cash were the main culprits behind the Dollar's rise, especially over the last few months. Fundamentals cannot be said to be strong for the Dollar, not when we are running over $15 trillion in federal debt and are at 100% on the Debt to GDP ratio. If that were not bad enough, the president just asked for ANOTHER $1.2 TRILLION in additional spending limits.

Getting a read on things as we head into the New Year is a bit tricky since the same problems that have plagued Europe still remain and China, while still growing, is slowing down a bit. The US economy is working along a bottom and while recent economic news has shown some signs of stability and extremely modest growth, the idea that the economy is going to expand at a rate fast enough to do much if anything to cure the ailing jobs picture or even put a dent in the federal debt is wild and wishful fantasy. The US economy has bottomed out but that is a far cry from signaling halycon days are ahead.

It does help to put things in perspective however and that is what the long term monthly charts are good for. This chart is hardly a vote of confidence in the US Dollar which has declined 30% over the last ten years as of the end of this year. While recent Dollar bulls may be congratulating themselves for making a wee bit of money this year, try telling one's kids and grandkids that their future looks rosy based on this chart.

As we start the New Year next week, the Dollar has a chance to extend the rally of the last two months if it can better the initial resistance level near 81.40. That would set up a push to 83, which if the Dollar can take this out, would pave the way an eventual run towards 89 - 90. Much depends on the state of mind of traders regarding risk and whether they are willing to commit capital that is sitting on the sidelines or to continue keeping their powder dry and hoping for signs of improvement in the global economy as a whole.

Gold Daily Chart

Gold, as with Silver, managed to bounce right where it needed to in order to prevent a deeper drop. It uncovered buying down near the $1,535 - $1,530 level, an area where we learned after the fact, that Central Banks had been buying back in September.

Bulls are digging in here so one can only hope that their conviction remains firm enough to take the price out of the danger zone and back above the $1,600 level. Such an event would trigger some sizeable shortcovering among the weaker-handed bears.

Failure to hold today's low sends the market almost immediately down towards $1505 - $1,500.

Last see what we get in trading tomorrow to end the day, week, month and year. Currently we are seeing buying coming into the Asian session. No doubt some of this is shorts ringing the cash register to go out on a winning note for the week.

Silver holding at critical $26 level

Silver has been the on the receiving end of the risk aversion trades and as noted in a previous post has been badly lagging gold in terms of performance.

It ended last year (2010) at $28.01. As of this writing, it is currently trading near $27.74, down, but just barely on the year. Compare that to Gold which is currently trading near $1547, and remains up for the year at about 8% or so.

This being said, Silver had held on the charts exactly at the former spike low near the $26 level which it made after plunging from near $45 in late September of this year. This is a key level which needs to hold to prevent deeper losses which could threaten to take the metal down closer to $21 - $20 before it would bottom. Today's performance by the bulls, in bringing the metal sharply off its session low, is an outstanding effort. However, to get out of the woods and move past the danger stage, they now need to take the price ABOVE $30 and hold it there. That would confirm a bottom on the chart. It would not however confirm a bull trend is about to emerge but only that the severe selling has run its course. To get a solid uptrend signal, the grey metal woudl need to take out $35.50 on a weekly closing basis.

We'll see what we get in tomorrow's trading session to end the year. Perhaps the bulls can push the metal into the plus column for the year. That would take a close over $28. Let's see if they are up to the challenge.

Commodity Complex heading for a Losing Year

During the outburst of "Liquidfidous" ( a response induced by overexposure to Central Bank created liquidity), the commodity complex had experienced back to back years of outstanding gains. The years I am referring to of course are 2009 and 2010. Alas, since the watering hole has dried up, the drain has apparently opened beneath the commodity complex as a whole resulting in a losing year for this particular asset class.

It is currently down about 11.3% from its closing levels of 2010 as speculative money flowed out of the complex when traders became convinced that another round of QE was not forthcoming right away. April marked the high water mark for this sector as traders anticipated the end of the QE2 program on time a mere two months later. From that point, the complex has been unable to mount any impressive rallies and has been in a slow grind lower.

You can see on the following chart however that the move lower has brought the index into the 38.2% Fibonacci retracement level from the low made in 2008, from which it did manage to bounce higher although the move has thus far not been very impressive. It is an understatement at this point to say that the hot money crowd is more concerned with slowing global growth and the backwash from the European Sovereign Debt issues and downgrades than it is with any inflationary outbreak. In such an environment, cash becomes king and that is why we are seeing the Dollar rally and Treasuries holding near record highs.

If the complex can attract enough interest however at the start of the New Year, and manage to claw its way back abovce the 600 level, there is a chance we have seen the worst for commodity prices overall. This would benefit the silver market which has fallen down to major support at 26 in today's trade.

If however we see a continuation of this deflationary mindset when trading commences next week and the index falls below the recent low, it could be a rough ride for the next few months in this complex as there really is no substantial chart support until we reach the 50% retracement level down near 507 - 500. If prices were to somehow breach that level and fail to quickly recover, the economy would be in serious, serious trouble.

Central Bankers are no doubt monitoring all of this and have certainly been discussing potential actions should things go from bad to worse. They probably feel that they now have more room to act seeing that prices of both food and energy have fallen well off their previous peak levels thereby eliminating the inflation fears that accompanied the first rounds of liquidity injections.

Next year should certainly prove to be very intersting indeed.

Silver unable to sustain price rallies

Silver has become the victim of the deflationary mindset trade with RISK AVERSION leading to a significant outflow of speculative money from the grey metal. I have said repeatedly that Silver will not go anywhere as long as INFLATIONARY FEARS are NOT foremost in traders' minds.

Note the following Gold/Silver ratio chart which details this exact thing. This ratio began moving in favor of Silver only after the Federal Reserve first announced and then began its Quantitative Easing programs back in late 2008. You can see the line beginning a steady decline as Silver appreciated at a faster rate than Gold during rallies as well as holding its losses to a minimum compared to the Yellow Metal during any setbacks in prices for both metals.

Not until the Fed confirmed the ending of the QE2 program and traders began worrying about a slowdown in the amount of liquidity being supplied to the markets did this ratio begin to reverse and move in favor of gold. Another way of saying this is that during any sort of DEFLATIONARY mindset, gold will hold its value much better than silver, which is still being viewed as a risk asset instead of as a monetary metal by the bigger players.

As the line of the ratio now advances, one can see that as long as traders are concerned over a slowdown in overall economic growth, whether from conditions in Europe or even from a slowdown in Chinese growth to a lesser degree, the trend is higher for this ratio.

Not until or unless the trading community becomes convinced that concerted CEntral Bank activity to supply further additional liquidity is imminent, will this ratio reverse and Silver begin to outperform gold to the upside once again.

HUI on Target for a Losing Year

The mining stocks are on course for a losing year, one which has been extremely disappointing for those who bought the shares in anticipation of higher gold and silver prices, only to see that take place but then having to witness the spectacle of the shares themselves lagging poorly over the last 12 months. Between Hedge funds playing that infernal Spread trade and "Risk Aversion" related selling, they could not get anything going.

Toss in the fact that more and more those looking for leveraged exposure to gold and/or silver, can buy the ETF's directly, thereby eliminating exposure to such variables as poor management, strikes, nationalization fears, environmentally-related litigation issues, risking input costs, and it seems that the shares are falling out of favor with the hot money crowd. Something will have to change on this front next year to see this sector attract consistent buying. Dividends might help somewhat but whatever it is, management is going to have to get creative to engender "value" in the eye of the big-monied investment crowd. Either that or sit there and watch the money flow into the ETF's and away from their companies.

Taking a look at the weekly chart, one can see where the HUI ended the year of 2010 and where it is currently trading. It is now down 15.4% for the year.

Quite frankly the chart looks extremely heavy right now as the buying that has been appearing for more than a year down near the 500 level and just below has seemingly evaporated. It could be a case where those buyers are simply unwilling to add to losing positions before the year end for the sake of dressing their books as much as possible and are waiting for the start of trading next Tuesday in the New Year to start accumulating again. Let us hope so because if they do not, and the HUI cannot get back inside that more than year long trading range, the gold shares are going to drop where we could potentially see this index down near 440 before any buying emerges.

You will notice that for the entirety of this year, any dips in this index below 500 have been of the nature that they are SPIKE LOWS. That means the shares sell off sharply but then rally back during the course of the week to end the week well off the low that was just made. We still have TWO TRADING DAYS left for the mining shares to climb higher and thus negate some of the ensuing technical damage that is going to take place is they do not, but the bulls had better perform HERE and NOW.

While volume is very, very low and trading is thin, it tends to exaggerate movements in price. Still, the price action is horrible as the index is now 56 POINTS above the level at which it ended the year 2009! If it cannot get back up inside that trading range between 500 and 600 right away, I see no chart support until near the 460 level initially followed by 430.

Long term holders of these shares need to be very vigilant to monitor developments down here.