"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


Friday, February 18, 2011

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!

4 Hour Silver Chart

Following is a chart detailing the Gold/Silver ratio giving an indication of how strong silver has been compared to gold in recent weeks. The ratio appears to be getting ready to challenge the 42 level which sets it up to move towards the more extreme of its 30 year range with the first stop near 32

this and that

Nice Story on Chinese Gold Demand

The following story from Dow Jones is a good read that details one of the reasons that those Western "analysts" who continue to denigrate gold and its prospects, just don't get it.

Also, not mentioned in the story is the main driver for the impressive gold demand that we are currently seeing, negative real rates of return on savings. When we are reminded of the difficulties with rising inflation that China is facing as we were overnight with the release of data detailing the problems afflicting their real estate market and its apparent non-response to recent interest rate hikes, we can see why their public is so keenly interested in acquiring the metal.

DJ China's Roaring Gold Demand Lifts Prices

Fri Feb 18 07:37:01 2011 EST

  (This article was originally published Thursday.)

   By Tatyana Shumsky

  NEW YORK (Dow Jones)--Chinese gold demand nearly tripled in the last 10
years, helping fuel gold's record-breaking bull run.

  Gold futures set a fresh five-week high Thursday, with the most actively
traded April-delivery contract settling up 0.7%, or $10, at $1,384.70 a troy
ounce on the Comex division of the New York Mercantile Exchange.

  Prices for the yellow metal reached an all-time record of $1,432.50 a troy
ounce in December on strong purchases from investment and jewellery sectors.
The precious metal has rallied 400% over the past decade, gaining around 27% in
2010 alone, as instability in global financial markets and a more streamlined
system for investing in physical gold boosted prices.

  Chinese investors, who bought 579.5 metric tons of the metal last year
according to the World Gold Council, were a key factor behind the soaring
prices. Around 400 metric tons of gold were consumed in the form of gold
jewelry, with the remainder coming from the bar and coin sector. They are
considered investment purchases due to the high gold-carat content of jewellery
sold in the region.

  China is the world's largest gold producer, making a record 340.9 metric tons
in 2010, up 8.6% on the year, according to the China Gold Association.

  But local demand for gold outstripped supply, as investors worried about
protecting their wealth from escalating inflation that hit a two-year high of
5.1% in November 2010. Investors consider gold as a store of value and a hedge
against inflation.

  China's demand growth for gold investment could be 40%-50% in 2011, with a
corresponding rise for gold jewelry 8%-10%, Wang Lixin, the council's China
managing director, told a press briefing Thursday.

  At the same time, Chinese authorities continue to loosen policies affecting
how people invest in gold. November saw Shenzhen-based Lion Fund Management Co.
win regulatory approval to invest in gold exchange-traded funds outside the
country, opening the door for mainland investors to purchase physical gold on
the world market.

  Earlier in 2010, the WGC partnered with China's largest bank, Industrial &
Commercial Bank of China Ltd., to jointly develop investment products and
programs for the mainland market.

  Investment demand for gold has skyrocketed in recent years, in large part
boosted by the rise of physical gold exchange-traded funds. For a small fee,
these funds remove the trouble of purchasing, transporting and storing gold,
while allowing investors to buy and sell their stakes on a shares exchange.

  Gold ETFs have fanned investment demand for the metal, which is estimated to
reach 876 metric tons in the first half of 2011, up from 785 metric tons in the
same period of 2010, according to metals consultancy GFMS.

  Physical gold held by SPDR Gold Trust (GLD), the oldest gold ETF, currently
holds the largest private store of gold at 1,224.1 metric tons.

  Gold producers, meanwhile, remain upbeat about their price outlook for 2010.
Despite gold's recent price records, the world's largest gold producer Barrick
Gold Corp. (ABX) sees more upside on the horizon.

  "We're not inclined to view the gold price as being anywhere near the top,"
said Barrick's Chief Financial Officer Jamie Sokalsky.

  Meanwhile, South Africa's largest gold miner AngloGold Ashanti Ltd. (AU)
noted rising political and financial concerns as a likely factor to push gold
prices higher.

  "It could easily break above $1,500/oz given issues across the globe," said
Chief Executive Mark Cutifani.

  -By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095;

  --Chuin-Wei Yap and Devon Maylie of Dow Jones Newswires contributed to this

  (END) Dow Jones Newswires

  02-18-11 0737ET

  Copyright (c) 2011 Dow Jones & Company, Inc.

07:37 021811