"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, March 11, 2011

Continuous Commodity Index Daily Chart and Notes

Dow Jones / Gold Ratio

How is the Dow doing compared to Gold?

 A rising line indicates it is outperforming the metal. A falling line indicates that Gold is outperforming the Dow.

The first chart is a weekly chart of the ratio going back to 1979. The latter is a Daily providing a closer look at the last few years. Notice how gold was outperforming the Dow during the credit crisis eruption in the middle of 2008 but since the FEd began its Quantitative Easing policies, they have managed to keep the liquidity pumping into the stock market in order to levitate it. Even at that, the ratio has been pretty much flat although so far this year, Gold is slightly outperforming the Dow as a whole.

Silver COT in Detail

Most of the readers are no doubt aware by now that every Friday afternoon the CFTC releases the data known as the Commitment of Traders report (hereafter referred to as COT). That data comprises the positioning of traders from the close of trading on Tuesday the previous week through the close of trading on Tuesday of the current week. The lag is to allow CFTC to gather the data which is provided by the various brokerage firms on reportable traders.

In looking over this week's data for silver, and this includes the Disaggregated report for both Futures and Options, I am once again struck with something that has me completely perplexed, namely the apparent lack of substanial buying noted in the report.

Let me explain, on Tuesday of last week, the active Silver contract closed at $34.42. Tuesday of this week, it closed at $35.65 after spiking as high as $36.74 on Monday of this week. Taken together, from its close to its best level, silver tacked on a whopping $2.32 before closing up $1.23 for the reporting period. Either way, whether taking into consideration the amount of buying required to take price to its peak near $37 or even to its closing print, that is a lot of buying that occured.

One would obviously expect this to show up in the COT report when examining the various categories of traders.

Let's start with the big Commercial Class, named as the Producers, End Users, Merchants, etc. The report showed them covering 1,739 existing short positions and adding 679 new long positions for a net 2,418 contracts. Summary - they were buyers on the week.

Then lets move to the Swap Dealers category - they sold 551 existing long contracts and added 1,423 new short positions or a net total of 1,974 shorts. Summary - they were sellers on the week.

You will note that these two categories of traders make up the entire short interest in the Silver futures contract. So for the most part they ended up offsetting each others positions with the exception of 444 longs not accounted for.

Then we move on to the Managed Money category - this is the category that generally drives markets up or down. Once again as has been the case now for two consecutive weeks, this category supposedly was a net seller over the reporting period to the tune of 214 new short positions. When we consider that over that same two week reporting period, silver has moved from $32.85 to a high of $36.74, a distance of $3.89 we are somehow supposed to believe that Managed Money was selling during the entire period. That defies common sense given the extent of the move higher and the fact that the technical indicators were in a buy mode. Summary - net sellers on the week.

Moving on to the next category, Other Large Reportables. This includes the large locals, large private traders and other traders such as CTA's. This category added 660 new longs and ended up covering or buying back 1,164 existing short positions. That totals out to a net buy of 1,824 contracts. Summary - net buyers for the week.

The last category of traders is the Non-reportables. This is the small traders or general public category. This week they sold out 1,770 existing longs and added 284 new short positions which makes them net sellers of 2,054 contracts.

This is the first week since January 25, that the giant Commercial Class, the biggest shorts in the Silver market, showed a reduction in their extremely large net short position. We know from the Bank Participation report, that they increased their short positions early in the month of March but it should be noted that this week's data includes the March delivery process. It is perfectly normal during the delivery stage for the Commercial category to show a reduction in their net short position since some of that is due to deliveries and come downs in the active contract.

What has me perplexed however is that practically all of the change in the net short position of the Commercial class was offset by the Swap Dealer category, which is the other large short in silver.

This week's data showing net selling on the part of the Hedge fund community then means that it was left to the large locals and private traders to take the price higher with no assistance from the biggest longs in the silver market. Once again, I find this at odds with the extent of the overall price movement; a $2.32 move higher takes a lot of firepower to generate. The more I look at the less sense it makes, especially coming on the heels of the previous week's numbers. I had hoped we might get some clarity that would help explain what we were witnessing when comparing price movement to the shift in traders' commitments.  Maybe next week?

Silver Commitment of Traders Report looks like it was produced on Fantasy Island

I will have more on this later but once again it appears that this week's COT report is a fantasy.

4 Hour Silver Chart - update

Bulls were able to blast silver through resistance centered near the $35.50 level forcing out the weaker shorts and propelling the market above $36. The volume was tremendous indicating the panic among the shorts and the strong pressure being exerted by the bulls. Once price moved above the $36 level the same persistent seller appeared and stymied the move higher.

However, if bulls can force price through this level early next week and hold it above $36, this market looks as if it wants to run to $40. Just as $30 was the level that thwarted silver for a while back a few weeks ago, so the $36 level is now serving as a similar barrier.

If it goes, so does silver. If it holds, price might well work back down towards $34 once again and perhaps set up a range trade.

Goldman Sachs Exec warning of Central Bank exodus out of the Dollar

Dow Jones newswire services is reporting comments made from Goldman Sach's co-head of their Healthcare, Consumer and Retail Financing Group, Richard Kimball, that US federal debt levels and continuing budget deficits run the likelihood that Central Banks will begin moving more of their foreign currency reserves out of the U S Dollar and into other currencies.

He also spoke to the subject of rising crude oil prices exacerbating money flows from oil producing nations to emerging markets such as Brazil and other various Asian economies contributing to further inflationary problems in the recipients of those flows as well as the inherent instability resulting from the swelling of international capital flows.

The point to bring away from this is what we have been echoing for some time now - inflation is a major concern in the emerging market nations around the globe and that is the reason that demand for gold and silver continues to remain robust.

It also points out the difficulty that the US is going to have continuing to attract enough willing lenders at current levels of interest yield for the mammoth amount of borrowing that it is going to require to fund those deficits and debt levels.

Do you not find it ironic that the Dollar was whacked today given all the turmoil around the globe.

4 Hour Gold Chart

HUI - MIdday chart

4 Hour Silver Chart

Japanese Quake fomenting further market volatility

The massive earthquake that has struck Japan during early morning hours here in the US is resulting in a surge in activity across the currency markets, the bond markets and the precious metals not to mention the equity markets which are generally lower across the board on the news.

Bonds immediately caught a firm bid as they continue to now look strong on the technical price charts. What QE could not do for long term interest rates, namely lower them, rising crude oil prices and their effect on economic growth have done.

With the market keeping a watchful eye on Saudi Arabia coupled with the after-effects of the earthquake in Japan, prices could move very sharply in a short amount of time. Stay alert.