Trader Dan on King World News Weekly Metals Wrap

To listen to my radio interview with Eric King of King World News on the Weekly Metals Wrap, please click on the following link:

You can also hear Bill Haynes, from CMI Gold & Silver whose views on the physical product market are always informative and insightful.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/2/19_KWN_Weekly_Metals_Wrap.html

Silver Margin Hikes

I wish to clear up a misconception floating around that the CME has hiked margin requirements on the main silver contract. It has not. Margins were raised on silver intramarket spreads, not the main 5,000 ounce silver contract.

Margin requirments for the full sized, 5,000 ounce contract remain the same as last month (Jan 20) when they were raised to $11,138 from $10,463 for initial margin.

The previous hike in margin rates for silver occured last year (Dec 16, 2010) when they were raised to $10,463 from $9,788.

Prior to that, margin rates on these full sized silver contracts were raised Nov 16, 2010 when the initial margin requirement was raised to $9,788 from $8,775.

I will keep the community updated on any subsequent margin hikes in silver or in gold.

Some thoughts on Analysts and the Silver market

I have been reading with some amusement the comments of some who seem as if their sole raison d’etre is to provide a perpetual example of folly masquerading under the supposed guise of wisdom.

By this I mean to say the comments of those who continue to deny that there currently exists a shortage of silver in the market. They cite their reasons, and offer their opinions, which I might add here, they are welcome to and should have the opportunity to voice, even when they are consistently wrongheaded and yet apparently feel under no sense of honor to modify even when proven wrong.

Let me first begin by saying that as a trader of more than two decades’ experience, there have been, and I am sure, will be, times when I have been wrong about a market. I feel no shame in admitting that – why should I, as I am a mere mortal and am not infallible. To give a recent example – I have been a bear on the US equity markets beginning back in 2008 and continuing to hold that bearish opinion until November of last year. It was not until that time that I realized that no matter what I thought about the reasons why US stocks should not be rallying, the stock market was going to continue to rally especially now that the Fed had announced a fresh QE program. The old trader’s adage, “You cannot fight the Fed” was proven to be true once again.

I might add here that I had also been wrong about the bond market for some time and was of the opinion that a falling Dollar would result in a falling bond market. That too was not the case during the credit crisis of 2008. I learned a good lesson about all that back then.

I still have my doubts about the veracity of this move higher in US equities or of its ability to endure but the fact is that the stock market is moving higher, regardless of what I think about it.

Now, as a trader I can do one of three things with this.

One – I can continue to stubbornly insist that the stock market should not be going up and take out a huge short position and continue until my trading account is no more, declaring that the US stock market should not be moving higher. At some point in the future, the market will no doubt correct and move lower at which time I will perhaps feel vindicated. The problem is that by that time I will have not made a dime off of my views and very possibly could have lost my entire trading account and with it my livelihood, although at the very end I will have the self-satisfaction of telling myself and others: “SEE, I was right all along. I told you so”. Result – I am broke and busted but feel proud and smug.

Two – I can do nothing and stay flat because while I see the market moving higher am greatly suspect of its lasting power. I will not make any money following this course of action but neither will I get hurt financially either.

Three – I can see the trend and while I greatly suspect its lasting power, can take a long position and attempt to ride that trend higher until such time I see it nearing an end. This course of action, while fraught with peril because of my own views of the market, will make me money as a trader if I employ sound money management techniques and use wisdom and do not get careless or complacent.

Here is the lesson in all this, a lesson I might add, learned the painful way through many years experience. THE MARKETS DO NOT CARE ONE BIT ABOUT OUR OPINION.

The sooner one learns this lesson, the better a trader/investor they will become.

I remember earlier in the past decade reading the reports from a rather well known and respected analyst who was consistently bearish on the copper market. Back in 2006, when copper was trading closer to $2.00, having rallied up from down near $1.40 - $1.50, he kept producing studies adamantly denying any reports suggesting that there was a tightness in the copper supply based on real fundamental supply/demand statistics. He cited reasons such as hedge funds artificially distorting the supply by taking huge sums of copper off the market and storing it in warehouses thereby creating the drawdown in stocks at the LME and in Shanghai that were being registered. He stated that copper was therefore overpriced and was primed for a fall.

This he continued doing while copper rose towards $2.50 - $2.60 pound. He was still bearish while copper went on to hit $3.00. “Still overpriced”; “No real shortage”; “Supply is being artificially reduced – the copper is still there just not in the public warehouses”, etc. all the while the price of copper kept rising.  Before it all ended, copper had moved up to over $4.00 in May 2006 before it finally sold off. It then retreated all the way down to $2.40 before it turned around and went back up again reaching nearly $4.30 in 2008 before it crashed alongside the rest of the commodity complex when the credit crisis erupted.

Maybe this analyst was right; maybe he was wrong; maybe hedge funds were indeed taking copper out of storage in public warehouses and stashing it into private warehouses. Who knows and who really cares at this point? Here is the point in all this recapping. One could have followed the three options just cited.

Option one:  “Well Mr. respected analyst says that copper is overpriced and should not be moving higher. Therefore I will listen to Mr. respected analyst and take a short position”.  What would the result have been for the average trader/investor? Answer – the average trader/investor would have lost the entire amount invested on a short copper position if not more due to the leverage effect. Question – was this a good course of action? Answer – obviously it was foolhardy.

Option two: “Mr. respected analyst says that copper is overpriced and should not be moving higher. He is probably right because he knows more than me but I see the price chart is moving higher and therefore I will do nothing because he must be smarter than me and I must be wrong”. Question – how would that have worked out? Answer – no harm done but neither did the average trader/investor make a single dime. He is no richer or no poorer for his choice and is as well off as he was before. He has however lost a very good opportunity.

Option three:  “Mr. respected analyst says that copper is overpriced and should not be moving higher. The price chart however tells me that the market does not care one whit about what Mr. respected analyst thinks because IT IS MOVING HIGHER”. I will therefore take out a long position in copper because I believe that the combined opinions of ALL MARKET PLAYERS is outweighing the opinion of one Mr. respected analyst. Question – how did this choice work out? Answer – the average trader/investor made money and profited from his action. He has increased his wealth and has used a market trend to his advantage.

Let’s now take this a bit further and run it back to silver. We have the same persistently negative analysts who continue to assert that there is no shortage of silver and that silver is overpriced. Maybe they are wrong; maybe they are right. I personally happen to believe that they are wrong but even at that, who am I and why does what I think about this even matter. The key is that the COMBINED OPINIONS OF ALL PLAYERS that trade in the silver market presently believe that there is a shortage of silver.  How do I know this? Simple – the price chart tells me so. Which way is it going, higher or lower? If the combined opinion of the players in the silver market believed that there was more than enough supply around, more so than current demand supported, the price would not be going higher; it would be going lower.

Not only that, but the backwardation type price structure on the silver board is also saying with a clear and loud voice: “Silver demand is currently extremely strong – so strong that buyers are willing to pay up to obtain the metal right now rather than wait for it”.

Now, we have come full circle and are back to facing the same three choices that I have listed earlier in this commentary.

Option one – the trader/investor listens to the persistently negative analysts who tell him there is no shortage, takes out a short position expecting price to be obedient to their assertions and move lower, only to get run over and left for dead on the trading floor with huge paper losses. He not only does not make a dime, he loses all the money he bet against the rise in silver.

Option two – the trader/investor listens to the persistently negative analysts who tell him there is no shortage but he sees price moving higher and doubts his own judgment. Therefore he does nothing. He makes no money; he loses no money either but then kicks himself for following their opinion and second guessing himself.

Option three – the trader/investor listens to the persistently negative analysts who tell him there is no shortage of silver but he sees the price chart and then comes to the conclusion  “ the market is telling me in no uncertain terms that it does not agree with the assertions of the persistently negative analysts because its price chart is telling me so. I will therefore trust my own judgment and take a long position in silver. Question – how did the average trader/investor who followed this course of action fare thus far? Answer – it depends on when they instituted their long positions but let’s just assume that they went long when silver closed above the $30 level and held that tough resistance level refusing to break lower. So far, so good. Now, by employing proper money management techniques, they will be able to lock in a healthy profit if they are a trader or at the very least will have managed a return or gain on the silver bullion they might have purchased.

Here is the final point in this. I have been around this industry for a very long time. Over that time I have seen countless “analysts” come and go. I have also seen some traders who have survived and thrived over that same period. Here is a vital and important distinction that needs to be kept in mind.  

Analysts get paid to “analyze” and give opinions on markets. They make money whether their opinion is right or wrong. In that sense they are no different than the TV weatherman. He gets paid to produce a forecast. Sometimes he gets it right; sometimes he gets it wrong but regardless he gets paid. He suffers no consequence for failure. However, those who rely on his forecast and make business plans based on those forecasts may suffer terribly if they act on his forecast.

Take the example of a guy running a concrete company who plans a big pour for a certain day because the weatherman has given his forecast for no rain in sight. The big day comes, the contractor spends thousands of dollars on material and pours only to have a downpour wash it out. The Result – the weatherman goes on TV the next day, issues another forecast and collects his paycheck at the end of the week. He has no accountability or suffers any consequence whatsoever. The unfortunate concrete contractor, who put his faith in the weather forecast, is entirely a different matter. He has lost his thousands and suffered immense pain as a result. Life goes on for the weatherman but the concrete contractor might possibly have been ruined.

Analysts are the same – they can issue opinions all day long and suffer not the least bit of consequence for their failure. However, those who listen to them and make decisions based on those opinions can suffer immense harm. Life goes on for the analyst, no matter how often he is utterly and completely wrong; life can be extremely difficult however for those who took their guidance from him.

Analysts therefore make their living OFF of the market – not IN the market. This is a vital distinction.

Traders on the other hand, make their living IN the market. If we are wrong, we suffer the consequences of our actions. If we are right, we enjoy the reward. If we are wrong, we are forced by the nature of the business to QUICKLY realize and ADMIT we were wrong. By doing so, we survive and even prosper. Failure to admit when one has erred is not only stupid and foolish, it is ruinous.

Analysts on the other hand generally cannot make a living trading a market. The reason is because many of the ones that I have seen over the decades have had one huge failing that hinders them from ever becoming successful as a trader – their EGO prevents them from admitting error.

Remember this well the next time you read an opinion by an “analyst”.

Good traders are confident but are also humble. If they survive long enough it is because the markets have humbled them and they have learned to respect it above all others. That is why as a trader we let the markets tell us what the COLLECTIVE OPINION of the market players are at any given time. That opinion is always right, even it may happen to be “wrong” in our own minds. Learn to respect only THIS OPINION and you will be successful. Learn to ignore those whose opinion contradicts this COLLECTIVE OPINION, and you will thrive.

The goal in trading is not to be “right” but to make money. Everything else is noise.

Gold Commitment of Traders

Good action here. Lots of spec interest coming from the Managed Money side of the equation whose buying is now driving this market higher.

As you can see on the chart, they have ramped up their net long holdings but even at that remain rather lightly invested in this market, even at current price levels seeing that they are still well off their recent peak holdings.

Swap Dealers and Commercials are once again plying their craft of "Sell, Sell, Sell".

The other large reportables are steadily drawing down their net long holdings and are also at a relatively low level of exposure to the long side compared to the recent past.

The general public, the small specs, are showing some interest in the long side again.

Silver Commitment of Traders

Things are back to business as usual in the Comex silver market  with the Managed Money camp eager to buy in on the long side while the Commercials and Swap Dealers generally take the other side of the trade.

Silver has rallied another $2.18 since Tuesday's close which is no mean feat. Short positions in this market are deeply hemorrhaging since that cut off day which makes it all the more remarkable that thus far we are not seeing a reduction in total open interest. That means that the shorts are not being squeezed out yet although yesterday's and today's action has all the hallmarks of a significant short being squeezed out of this market.

There are still some fresh sellers however who keep coming in. Someone on the short side has some amazingly deep pockets to deal with this kind of onslaught and continue piling on more positions.

On the other hand, Managed Money is getting aggressive with this market and because of its small size, they have considerable firepower at their disposal which allows them to run this market very hard to the upside.

The general public is sleeping right now and must have missed this move. They are well down from their recent peak of nearly 20,000 net longs. That I take as a further positive sign.

Reposting the 4 hour silver Chart

I want to thank Charlie for letting me know that I had forgotten to refresh the comments on the 4 hour chart from the other day.

Here is a new, improved version!

Below is a weekly chart of silver employing the Directional Movement Indicator, which is a favorite of mine for determining whether or not a market is in a trending fashion or is just chopping or consolidating.

The line in black, the ADX, will rise if a market is trending. It can be a bit confusing but this line will actually rise if a market is moving lower also, as long as it is a trending move lower.

Generally speaking, when the ADX line turns down, the trend has been interrupted and longs or shorts will want to close out positions at that point and then wait to see what is going to happen next.

By noting the directional lines, the blue and the red, one can then see in which direction the market is pushing.

If the market is moving upward and the trend is higher, both the positive directional movement line and the ADX will be rising in unison. At that time, the negative directional movement line, the red line, will be moving down.

If a market is in a distinct downtrend, the red line will be rising along side of the ADX or black line with the positive directional movement line (the blue line) moving lower.

When the market is not trending, the ADX will be moving lower while one of the directional movement lines will be rising and the other falling depending on where the short term direction is leading. 

What looks very promising on this chart is that it is a weekly chart and the ADX has resumed its upward turn which is suggesting a new leg higher as the market is back to trending, in this case, picking up where it left off a few weeks back when the market topped.

Keep an eye on the blue line. Ideally we want to see it surpass the peak from the previous high in price.

There will be more on this as time progresses and we get a chance to see how things play out.

Thomas Jefferson comments on the modern day spending spree of the US

"The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." --Thomas Jefferson

Daily Gold Chart and Market Comments

There is so much to write about today that it is difficult to pick a place from which to get things rolling.

We will start with the grey metal – attempting to describe what is occurring with silver is like attempting to describe a sunset over the Pacific – it is breathtaking. This market is blowing through upside resistance levels as if they did not exist. I cannot confirm this as of yet because the open interest is not currently reflecting it, but this has all the look and smell of a large short in some very serious trouble with a pack of wolves slashing at its throat. The sheer speed and angle of its ascent is indicative of a panic among the short sellers. Apparently some large entities are going for the jugular here and from the looks of it, they have succeeded. This might indeed be the very long awaited Commercial Signal Failure that some have been predicting for many years now. We will know shortly if that is indeed the case. If so, this market will go vertical.

One thing that happens when a large short or number of short sellers end up getting trapped  - they are all desperate to get out and will pounce on any offers that might hit the pit that are large enough in size for them to exit as many contracts as possible in the shortest time possible. When the sharks see that, they begin to compete with the shorts and will go for the bids also, forcing the price higher and making it more and more difficult for the shorts to extract themselves from their losing positions without having to pay up. Simply put – the pit takes no prisoners and there are no such things as friends in the pit. It is a ruthless business.

In attempting to project some potential resistance levels on the silver chart we are pretty much in new territory. I am one of those guys which while I study the long term price charts in an attempt to decipher levels where selling or buying might surface, also realizes that when you are talking about going back in time for more than 30 years, a large amount of those who might have been making the market in silver at that time, are either no longer trading in size or might even possibly be dead! In other words, I am just saying that I am not sure how relevant resistance levels from 30 years ago might be in today’s world.

That being said, it looks to be like silver could have a bit of resistance show up near the $33.20 - $33.30 level. If that gives way, it then runs to $33.50. If the trapped shorts really begin to get squeezed, then $33.50 will also not hold and will promptly give way. I will be going through the COT reports this afternoon to see where we are in the size of the short position from the Commercial and Swap Dealer category to get a better feel for all of this.

Open interest is slowly but surely moving back up again in gold announcing the return of the specs to the long side, precisely the medicine this market needs. They are looking over at silver and seeing its strength and are moving into gold. Their return is behind the ability of the yellow metal to punch through the $1380 - $1382 level. It now looks on a firm footing with the setup to make a run towards $1400.

Downside support in gold now lies first back near $1380 and down a bit from there near $1365.

The HUI is very strong today, gapping up on the open and not looking back since. It looks very strong on both the daily and the weekly charts with the index solidly above all major moving averages and those all either moving higher or in the process of turning higher indicating a trending move is underway. Bulls will try to take the shares high enough to push the index into the 570 level. I would expect to see a bit of selling there. If not, the shares are going to move high enough to take the index through 580 and put it in a position to make another try at the 590 – 600 region.

On the rest of the commodity front – the Brent / WTI crude spread reversed today and is currently near $15.75 with both markets moving higher. Brent does not seem to want to move below $100 and WTI seems to have found a floor at $84. What I find very noteworthy is the push higher by gasoline today which has continued to make new 29 month highs time after time this week. It certainly looks to be getting ready to put in a very firm close on the weekly charts and if it holds its gains for another week or so, on the monthly chart as well. On that chart, it will have registered a breakout to the upside. Based on what the futures markets are telling us, consumers had better get ready for an expensive driving season this year.

More and more we are getting reports about monetary officials from various parts of the globe expressing growing concern over the relentless rise in commodity prices, specifically food prices. That engenders chatter about the need to raise rates. Here is the problem for those monetary officials in the West – they need to hike rates if they are going to dry up the liquidity that is sloshing around the planet and making its way into the food markets. However, they cannot seem to hike rates because the “recovery” is still too fragile. So they basically sit and do nothing. Meanwhile, inflationary pressures continue to build in an environment of ultra low interest rates creating the perfect environment for gold in which to thrive.

Equities – well they do not care about anything except for all the funny money that is being created by the Federal Reserve – not the sheer overwhelming amount of debt that is swamping the US, not the protesters in the streets in Wisconsin, not the protests that are spreading to other states such as Ohio, not the fact that these protests are due to the fact that the states are out of money, not the fact that even the Fed officials are telling us that the labor markets are going to be stuck with mediocre growth for as far out as a minimum of 5 years and not the fact that the commodity markets continue moving sharply higher pushing input costs up for business across the board, etc. Nope – nothing matters except the punch bowl. “Drink up me hearties” as Jack Sparrow might say.

Along that line, China was once again forced to hike bank reserve ratio requirements in an attempt to cool down their overheating real estate market. I get the visual picture of a guy standing with a garden hose shooting water onto his house which is engulfed in flames whenever I see the battle that they are having over there with inflation. Negative rates of return on savings, a direct result of this roaring inflation, is what keeps feeding gold demand from China.

Bonds finally moved lower today in the face of a stronger equity market, but even at that, they have not fallen apart yet. Apparently there is enough Fed related buying coming in that the bears cannot pull the rug out from under that market for the time being. You can see it day after day by watching this market trade tick for tick. In come the bids every time it looks as if it is ready to break down. Even at that, this is a market living on borrowed time  which is going to break down as the year progresses. How much newly created money the Fed is going to waste on propping it up we will wait until they are done to calculate.

This is also the reason I have no patience for those who claim that any of us who believe that the US monetary authorities are constantly manipulating and interfering in the markets, particularly in the gold market, are a bunch of nuts. For crying out loud – they are publicly manipulating the bond market in the face of the entire world to behold! Oh but that’s the bonds – gold doesn’t count. Yep – that takes care of that argument now doesn’t it? Imagine Chairman Ben sitting in front of the Congress testifying with a straight face that there is no inflation problem with a gold price over $1500!