"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

Silver update

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.

8 Hour Gold Update - 2:30 PM CDT

It is apparent that someone was not too happy with a brand new all time high in gold today. It was stuffed back into its box quite unceremoniously I might add.

One can tell from looking at the volume that all of the new longs that bought the breakout of the nearly month long congestion pattern have been handed an immediate paper loss thanks to the barrage of selling.

It will be up to the bulls to hold the line near $1420 or the technicians are going to have a field day trumpeting a false breakout which will engender some further long liquidation, especially because we are entering a rollover period - a favorite time for these bear raids to occur in the past.

If the bulls can hold $1420, they will be okay. If they fold here, the price is going to drop back lower into the former congestion zone and will more than likely test $1410 again.

Either way the price action is not encouraging. The HUI is not helping matters either as it too is puking. Silver also is now looking like the longs are bailing. It needs to hold $36.50 on any further downside move.

Silver Deliveries information - March now at a Premium to May

There were a total of 80 delivery intentions issued for tomorrow with the largest issuer being JP Morgan. I find it interesting that these intentions to deliver from Morgan are for the House and not for Customers. As has been the recent pattern, Barclays is the largest stopper and they are stopping for customers.

There are still 717 contracts open in the March contract.

Something does appear to have changed however - the March contract is now trading at a slight premium to the May. It is not much but it is at a premium. The spread now favors the March by one cent. This is the first time in some while that it has moved from a slight discount to a slight premium. I am going to keep a close eye on this especially with silver up more than 2% today.

Things are getting very interesting in here as we wind down towards the end of the delivery period for March.

Gold breaks free from its Congestion Zone

Yesterday it was Silver that broke out of its congestion zone and began a new leg higher. Today it is Gold which has finally managed to clear the top of the congestion zone that had marked its trading pattern over the last few weeks. Volume on the breakout is strong.

The breakout also set a brand new all time high for the yellow metal in the process.

We are going to be encountering rollover pressure as speculative longs begin moving out of the April contract prior to its delivery period next week and into the June contract.  Rollover periods are a very good time to gauge the strength of a move higher as it gives longs an excuse to either book profits or reinstate expiring long positions in the next active month contract. If the hedge funds in particular choose to simply rollover with a minimal amount of profit taking in the April, that will be quite positive for further gains in Gold as we move through the month of April.

Based on the extent of the congestion zone and the subsequent breakout, a technical price target for this move in gold is near $1490.

We should expect to see buying support under the market first at the breakout point naer $1440, followed by $1435 and then $1420. I would prefer not to see any move below $1420 of any duration if this leg is going to yield a strong advance higher.

Silver blows through $38