"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, April 29, 2011

The Saddest Commentary I know of on the United States of America; Requiescat in Pace

The Dollar's Tombstone should be engraved with not only the above words, but with an addendum carved below that stating:

"MURDERED by THE FEDERAL RESERVE" in cooperation with the imbeciles who held public office at that time of its demise.

Gold versus US bonds - not even close!

Even though the Fed continues to rig and manipulate the US Bond market, artificially distorting long term interest rates in the name of "saving the economy" ( who will save us from the Fed?), the fact is that the US long bond has been a gigantic DAWG when it comes to the smart place to put one's wealth to preserve its value.

Watching the day to day gyrations in the US bond market and the mockery that the Fed has turned it into, I sometimes wonder who in their right mind would even consider putting their wealth into these worthless scraps of paper IOU's or regard them as a safe haven. AS a matter of fact, I cannot bring my mouth to utter the two things together in one single breath - "US Treasury" - "Safe Haven" - without a feeling of total revulsion coming across me.

While the Fed may have hoodwinked some investors into believing that they have placed their money into a safe haven where they may find a store of value, gold is not buying into that claptrap for one single moment.

Just look at the ratio comparing the two and note how gold has left the US long bond in the dust. Now, looking over this chart, which one do you think a wise investor should choose? Or perhaps a less charitable way of saying it: "Who is stupid enough to buy pieces of confetti paper promises to pay when the Federal government is spitting them up like hairballs from a long-haired Persian cat?"  The more I think about this, the more I am convinced that the hairballs have more appeal - at least they are healthy for the cat to get rid of out of its system. What can be said about US debt obligations???

SLV running up Enormous Volume

It seems as if Silver has caught the attention of the trading/investing public in a significant way based on the enormous volumes being recorded in both the Comex silver market and the IShares Silver Trust or SLV.

The volume in the Comex, especially on Monday, was so large that I initially thought it was a typo and would be corrected by the exchange. It was not. That day the volume of contracts traded hit a whopping 319,000!

Not to be outdone, SLV registered a volume of nearly 190 MILLION shares. To give you an entire of how massive this was, consider that an average daily volume comes in near 35 - 40 million with an occasionally busy day hitting closer to 50 million.

I find this especially disconcerting as it tells me that there is the potential for a lot of froth forming in the market. Please understand, this is not to say that the bull run in silver is over; far from it, as I fully expect silver to trade closer to $100 before all is said and done, particularly if the Dollar drops below 68 on the USDX. However, with volume this large and so much interest in owning the metal, it might need to take a bit of a breather before moving higher into a new upleg.

That would provide a lot of bulls who are nervous about buying at these levels an opportunity to acquire more of the metal at a better price. Rignt now the metal is unable to move past $50 - that means if a trader buys in now at these levels, he has the potential to make perhaps $1.50 on the trade before it stalls out again while the potential for the market to fall as low as $45 exists, a drop of some $3.00 or so from current levels. That is a risk/reward level of 1:2 to the downside. Those are not good trading odds which is why we are seeing some speculators selling up near $50. They want to see the price clear this level before feeling comfortable coming back in on the buy side up here.

Should the market move lower and especially if it were to for some reason take out $45 on the downside, the risk/reward ratio begins to improve tremendously. Would-be longs will then we looking for an entry point once they feel that the market has established a decent base of support from which to move higher.

Monthly Gold Charts - April 2011

Gold put in a stunning performance for the month of April taking on $117 for a gain of over 8%.

The following chart is an inflation adjusted chart using the government's official CPI numbers ( not that they are any good but they at least serve to give us a view of where the metal should be priced if it kept up with even those fairy tale figures). I should note here that as a general principle, once a market takes out a 75% Fibonacci retracement level, it almost inevitably recaptures the entire move from whence the calculation began. In plain speech, that means gold is now firmly on target to reach at least $1750.

SILVER Commitment of Traders Report

The CFTC COT data released this afternoon confirms what the daily exchange data has been telling us - open interest is declining as price moves higher due to short covering on the part of the commercial/swap dealer categories and long liquidation from managed money.

The data can lead to erroneous conclusions however from those who are not all that well versed in interpretting it however. Because the data covers the period from Tuesday to Tuesday, it picked up the huge spike higher towards $50 in Asian trading this past Sunday evening. It also caught the spike lower from off of that level which resulted in a drop all the way down below $45. That was a price swing of nearly $5.00 in less than two days' time. It was during that swing lower that the commercials were covering shorts.

What appears to be happening at this point is that we are getting commercial and swap dealer short covering on any intraday price dips in the market with managed money selling whenever the price moves higher towards $50. In other words, large specs are selling the rally toward $50 while commercials are buying the dips towards $45 to cover shorts.  As long as this occurs, $50 will hold fast and will not be breached. It will take a change in psychology for managed money to be willing to buy silver up near and then above $50. If that occurs, the price will move towards $55.

The flip side to this is that $45 should hold on any downside moves provided this commercial short covering is maintained. If they pull in their bids, price will not be able to hold support near $45 and then we will see more significant selling, this time from speculators who are forced out selling into the weakness. Such an event will be tied somewhat to the substantial hike in margin requirements imposed by the CME Group since it will not take much of a move lower to completely wipe out the entirety of the margin required for one single silver contract. This is where the small speculator becomes quite vulnerable as they have a rather sizeable net long position in this market.

Here is the scenario - as long as price moves higher, the margin hike will not affect the small specs because their long positions will be in the money and it will not become an issue. When it does become an issue however is when prices fall and trigger stop loss selling which cascades. Then paper drawdowns or losses mount quickly and margin calls go out to the smaller specs who go underwater. 

Next week will be key to where we go next as far as whether we get a new leg higher through $50 or we set back to first test support down near $45 provided the gap region between $47.15 - $46.70 fails to hold on the test lower.

Significant short covering has been occuring in Silver

Please see the comments on the chart below as this drop in open interest is a reason for a bit of caution in approaching this market. As long as the shorts cover, prices will move higher but one has to be careful to watch for when they might finish up covering.

A push through $50 will force more of this short covering and should attract more buying from the general public but the managed money is still a net seller for the last four weeks. Again - caution is warranted especially with the big hike in margins.

Gold - 8 Hour chart update

Silver knocking on the door of $50 again

The market has rallied strongly since the comments from Fed Chairman Bernanke and the press release of the FOMC but has not been able to move above $50. It will need to do so rather soon or it does run the risk of stalling out here and setting back as some longs will get disappointed and book profits, particularly if the silver mining shares do not perk up soon.