"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


Tuesday, May 3, 2011

Silver becoming a proxy for the entire commodity complex

Note the following chart comparing the price action in Silver against the price action of the broad commodity complex as a whole as illustrated by the Continuous Commodity Index.

The parallel is remarkable. What appears to be happening is that silver is becoming a type of proxy for the complex as a whole and in particular, for risk trades.

When risk trades are in vogue, silver is rocketing higher alongside of the rest of the commodity complex. When traders are avoiding risk and jettisoning the risk trades in favor of bonds or cash, the entire commodity complex seems to be following the exact same path as silver, namely down.

As mentioned in my earlier post, until the risk trades come back on, the silver market is going to languish. I am not sure what pill the hedge funds will have to swallow to bring them back to another frame of mind but the fact is we need the money flows that only the hedge funds can provide to take it back up again.

Money Flows absent in the Commodity Complex

It appears that there has been a shift in hedge fund strategy in regards to risk trades since the beginning of this week.

I have been watching the CCI and it is moving down rather sharply and is  now threatening to take out a chart support level should it continue to move lower tomorrow.

I cannot as of yet ascertain what the thinking is behind the abandonment of some of these risk trades but whatever the reason, it has resulted in a loss of money flows into the broad commodity markets for the time being.

There has been some chatter over nervousness concerning possible reprisals by terrorist groups as a result of the death of OBL. Crude oil in particular has been roiled by this since Sunday evening with crude traders unsure what to do next. That has led to wild swings in price in that market but I have noticed broad based selling across several of the commodity markets irrespective of fundamentals. The selling is of a nature which tells me that it is algorithm related because it is mindless and indiscriminate.

Bonds continue going straight up which is evidence that they are getting some sort of safe haven bid as well which helps confirm in my mind that this is related to risk aversion.

I am not sure when the money flows will reverse but when they do, the commodities will begin moving higher based off the weakness in the US Dollar, which is hovering above chart support and attempting to stop from dropping like a rock.

Silver fails at $42.50