"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


Thursday, March 24, 2011

Quick Thoughts on Today's Late Session action in the Metals

I happen to be a buff of the War Between the States (incorrectly termed the Civil War by many - A civil war is when two factions are fighting to gain control over one government - The South was not fighting to take over the Federal Government but to repel an invasion by the North). Anyway, one of the things that I learned from my studies of Robert E. Lee was that he was a brilliant strategist, not only in victory but also in defeat. His Army of Northern Virginia was numerically inferior to the Army of the Potomac but nonetheless he managed to pull off victory after victory against it during the early years of the War.

When he did face defeat, one of the tactics he employed was to mount a rear guard action. What that allowed was for the main body of his army to escape back to safer territory so that it could regroup for another engagement while a smaller contingent of that same army would engage the Federals and tie them up in that skirmish thus preventing it from pursuing and overcoming the fleeing Confederates and attacking them while they were in a weakened condition. This tactic, employed by many other wise generals throughout history, allowed Lee and the Confederacy to fight on far longer than many imagined would have been possible given the numerical advantage of the Union armies, not to mention equipment and other military hardware.

I believe what we saw today was a perfect example of a rear guard action by the perma bears at the Comex. They had been routed and driven out from behind their defensive lines that they had dug and had been able to defend for some time now. In the case of silver that defense had capped the metal below $36 for the last couple of weeks. In the case of gold, the cap near $1440 had held for three weeks or so.

Both silver and gold then mounted renewed assaults on the bear's trenches this week. Silver hit them yesterday and blew through in convincing fashion while gold charged their line today and routed them. In the process both markets mounted impressive technical breakouts of congestion zones and did it on very good volume. From a technical analysis standpoint, the breakout was impressive and served to bring in additional momentum buying which is what one could normally expect to see after any market, which has been working in a sideways trade, stages an impressive upside breakout. Momentum funds will always go with the breakout and so will all technicians in general.

We all then saw what happened - both markets were hit hard in an attempt to drive them back. In the case of gold, the attack was successful - it was driven back below its breakout point and into the upper edge of the recent congestion zone. In the case of silver, the bears tried but as soon as silver dipped back towards the breakout point just below $37, buyers stepped in and prevented it from falling back into the congestion zone.

This is a perfect example of a rear guard action by the perma bears which had been beaten and were retreating to safer or higher ground. They hope to buy themselves a bit of time to lick their recent wounds and regroup and attempt to fight another day.

The interesting thing to note about this is that these enemies of honest money are quite clever much like the old fox Bobby Lee. They time their counterattack or rear guard action to coincide with other factors that tend to increase the effectiveness of the attack.

It just so happens that this week is Rollover week in Gold. Over the last decade of this bull market in gold, rollover periods in the futures markets have been one of the favorite times for the bullion banks to stage a bear raid or a rear guard attack. What happens is that successful longs in the market either will roll forward their existing longs to what will become the next most active month, in our case the June contract, so as to avoid getting assigned for delivery when the current active month (April) enters is delivery period next week. Generally during these rollover periods, many of the bigger specs will decide to go ahead and book profits since the rollover coincides with the end of the month and also in this case, the end of the quarter. By booking profits at this point the funds who are managing client money can report excellent actual gains and thereby continue in the good graces of their clients who are most pleased when they receive their statements for the month and quarter. These same funds then tend to re-establish the original positions near the beginning of the following month but they do that in the near and most active contract, which will in our current example be the June contract.

This rollover and end of month book squaring thus is a period during which many speculators are actively selling and reducing their long side exposure somewhat. As thus, it is the PERFECT time for the bears to counterattack especially if they have any other factors on their side.

In the case of Silver they got just that with today's announcement by the CME that margin requirements for Silver were going up once again at the close of business tomorrow. The old margin to control a single silver contract was $11,138. AS of the close of business tomorrow, it will rise to $11,745. Maintenace margin thus rises from $8,250 to $8,700. In other words, the accounts of those holding silver contracts will need to be able to account for the hike in margin requirements. If not, they will be forced to pony up more money or sell out. When one considers that silver dropped over 100 points from its best levels of the day to its worst level, any new long that bought near the high and whose trading account size is rather small is going to be immediately stuck with a paper loss of nearly $5,000 per contract depending on what level he or she bought in if they are still holding those contracts. A paper loss of that size will immediately put the new long in a situation where they will have to have sufficient money in their account to deal with the maintenance amount and thus will either have to pony up additional cash by bank wires or will have to sell out.

This is the sort of condition that the perma bears love to look for when they stage a rear guard action and it magnifies the effectiveness of their counterattack.

How these markets react tomorrow and early next week will tell us how effective this rear guard action has been or will be. If both gold and silver stabilize above support levels and then work sideways and hold up well, it will indicate that the attempt to beat them back will be very short lived and another leg higher will be seen sooner rather than later. If they violate support levels, then it will take a bit longer for the bulls to regroup so as to mount another charge higher.


  1. Interesting to see what the open interest looks like on H contract tomorrow morning. Hopefully most of the H longs already puked on the break.

  2. Dan-this kind of detailed information is invaluable to those of us who are engaged to the point of reading the whole thing and want to understand what's going on, but don't have the trading background. I am deeply appreciative of your efforts and wanted you to know that you are helping folks make sense of the non-sense that goes on in today's "markets". Thank you. I read your site daily.

  3. The night they drove ole Dixie down....

    I think gold will storm back quickly and more forcefully sending the rats scrambling back into their holes. These measures just have an air of desperation to it and desperate people die.

  4. I'm thinking silver stocks push higher tomorrow if silver is even a touch higher but I would imagine there will be some afternoon selling on the commodity considering the margin hike. But I remember waking up to a big spike last Monday so I'm looking to buy some on the close if we can get a little discount.

  5. Dan, I second FISD's comment. Thank you for the outstanding public service you are providing.

  6. Excellent piece! Thanks for devoting so much of your valuable time to the precious metals community.

  7. Superb analogy and illuminating analysis... and I second Turdle's comment.

    p.s. I call it the War of Northern Aggression.

  8. Great post Dan. I learned more in the last 5 minutes than I would have reading a years worth of main stream news.

  9. Bonus effort TD, may the heavens bless you. Truly a duh moment watching the walls cave in today after a powerful up move. History buff too so the military reasoning analogy was superb. One of these days I will get better anticipating these. Most likely because I have learned from the master. How did the Union overcome these parries? Did Grant just keep shoving? overunning?

  10. TraderDan - Thank you for the time and effort in writing this. it really helps the interested understand whats going down.

    Turd- thanks for directing people to this.

  11. Dan, you continue to amaze with your posts. Thank you for bringing sense to the gold and silver market... and the "War of Northern Aggression". :)

    Lee was quite a brilliant and incredibly strategic leader. Didn't hurt that he had a Longstreet either.

  12. It's one of their tactics. Remember back in 2007-2008 when the stock market was first starting to tank, Bernake would wait until right before the open to cut rates. This would squeeze a lot of people who were short equities severely damaging their accounts.

    They pulled the same tactics with Bonds not long ago. Wait for a major techinical break only to reverse course.

    The biggest problem I have with all of this is that the Masters of the Universe have unlimited funds while ours is limited.

  13. Simply Awesome explanation, Thanks Dan

  14. I'm a regular reader, seldom poster here in your house. Awesome analogy and accurate description of what took place today. Keep up the good work!

  15. again, awesome Dan. Hopefully those long holders who were attacked today stick around & pony up the cash & wait for a sunnier day.

    I'm reminded of what I read today at the top of Mr. Sinclair's editorial & the only way to legitimately win this rigged game:

    "Nothing will unnerve the paper gold shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard gold bullion to make good on deliveries. "Stand and Deliver or Go Home" should be the rallying cry of the gold longs to the paper gold shorts." --Trader Dan Norcini

  16. Traderdan! You are truly appreciated! You make the veil of "black magic and wizardry" transparent!


  17. Great article--i've been in silver positions off and on since 1986 and have observed and been bitten by this phenomenon (rollover time) many times before but never understood the whys and wherefores of it all.

    I always assumed it had something to do with people procrastinating on rolling over and being forced to do so at the last minute causing a rush to exit the front month--

    with this article as well as all of the recent research and disclosures on bank manipulations, especially demonstrating how they use this time as a signal time for all of the locals and everyone else to jump in, I now understand it.

  18. Supposed to be spot not pot, my appologies Turdle GG for the miss spelling.

  19. Thanks Dan - that was a great post. I really enjoy reading and learning from your most informative articles.

    At some point this gig is going to be up for the perma-bears.. In the meantime, I will continue quietly acquiring and holding physical PM's.

    As an aside .. My 19 year old son asked me the other day about acquiring Silver, apparently a number of his buddies are all interested in buying a few oz's each .. For whatever reason, they are talking amongst themselves about devaluation of USD and purchase of Silver .. Go figure ... Perhaps they word is starting to permeate the gen public.


    a war?? not really. just business.....

  21. Dan, thank you for giving us all the benefits of your insight and experience. Invaluable.

  22. Many thanks from me too ... hopefully people in the market will start thinking of counter-strategies in order to foil these sucker punches. Your posts are invaluable to get folks thinking.

  23. yes,great post Dan. FISD said it right, as well as everybody's interesting comments.

    Its true that the FED and JPM may have unlimited funds to play with and retail investors dont,but I imagine the chinese govt. has enough dollars to spend on the metals whenever they decide the correction has gone down far enough. and that will be the best time to buy...if something like that can be anticipated.

  24. @ReachWest Is that true about your teen son and friends buying silver? That's very alarming! When buying penetrates to that level, it always means buying is saturated and a speculative collapse is near. Just like when teens were buying tech stocks in 1999, and housewives were doing carry trades in 2008, and when Chinese students were day-trading Shanghai shares instead of attending class. Please say it's not so!!

  25. This comment has been removed by the author.

  26. @ David

    It is interesting that the Chinese are encouraging their citizens to buy PMs. It's sad really -- which government actually cares about their citizens, the US, or China?

  27. Mr. Norcini, I've learned much by observing over the past few years and this has to be one of the best analogies describing the financial market games. Thank you.

    I've noticed that these kind of feints can be seen across all chart time frames. During downtrends in price, pressure is released a bit and then slammed down to paint a short-term reversal. It's concerted, coordinated and utterly effective at breaking through stubborn support levels.

    During the long rises after intermediate swing lows (eg. end of this Jan to now), price movement is consistent at nearly 45-degrees the entire way on 4-hour and daily charts. Indicators rarely reach extreme levels before the price movement reverses course. It's as though the shorts are applying just enough pressure to sow uncertainty, preventing decisive action from being taken in building positions.

    At every point along the way, there is strong potential from a sharp spike down in the precious metals. This makes it difficult to trade very short-term. The only effective way is to understand how these masterful shorts operate.

    Because the shorts' collective backs are constantly against the ropes, there is little to no room for error. They have been able to eke out expert maneuvers since 2008, though the sheer volume of buying interest is gradually overwhelming their efforts. Due to this, there is enough of a correlation in pattern between 2010 daily charts and 2011 that a somewhat predictive indicator is present. At the very least, it can provide a guide as to the likelihood of whether a given day will be up or down.

    Of course, your own judgement trumps prior patters - if the breakout in the metals continues, they may completely separate from any relation to last year's price action.

    With rear guards, guerrilla/hit & run tactics and outright assaults on the commodity sector, this is most certainly a form of war. Attrition is the name of the game, though. Thus, the outcome is inevitable no matter how ugly it might be.

    Again, Mr. Norcini - thank you!

  28. Thank you, thank you, thank you!
    An apprentice like me picks up the tricks of the trade one at a time. Your analogy will make it stick!
    You are a true teacher, Dan.

  29. Thanks Dan.

    The south shall rise again...

  30. Excellent analogy Maestro Dan! Your work is excellent and fun to read:)

  31. Dan,

    thanks very much for this. i would have waited to go long until after the roll if i had known this before, and won't make the same mistake again.

    i think this kind of thing highlights why, regardless of fundamentals, traders need to pay attention to short-term supply / demand dynamics in these markets, and execute well-designed risk management techniques. to me, this is the best defense against a manipulated market in which one feels one must participate.

    good luck everyone!

    beeba :)


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