"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, May 5, 2011

Gold drops into a very strong support level and bounces

The market has found good buying just above $1460 and continues to push higher off of this level as it enters very early trading in Asia. The drop of nearly $110 has stimulated value based buyers of the metal who have been waiting on a pull back.

If the market can push through $1500 and hold that level and not sink back below it,  it will be friendly. Some will depend on the payrolls number out tomorrow. If it is a stinker and comes in below expectations, we might see more risk aversion and potential selling as the unthinking, knee-jerk reaction will be to rush to the "safety" of the US Dollar ( I have to gag when I write this). The Yen also will probably benefit although the Japanese monetary authorities are probably already saying things unfit to print over its recent climb back up to its last whipping level.

Even at that, the market has fallen, so far, so quickly, that any short who wishes to actually realize their gains is going to have to ring the cash register before long if they are wise. Bulls make money; Bears make money but Pigs get slaughtered.

HUI sinks further under the weight of collapsing silver prices

So much for a potential bottom having been formed in the mining shares based on the performance yesterday where the sharp spike lower was followed by a strong rebound and high range close. That low near 542 gave way early in the session and the index never managed to seriously threaten it since.

We are back to watching for a sign of a bottom. A substantial amount of buying came in near the session low at 526 but as to whether or not we get a pop higher tomorrow across the shares is unclear.

I find it difficult to believe that even with the margin hikes silver has that much more to fall but a lot depends on the willingness and financial means of the large specs left in the market to maintain their existing long positions. A drop of this magnitude cannot last much longer and I would be surprised to see silver fall below $32. If it did, it would meet with enormous demand on the physical side of things.

Even at that I will want to see the HUI stop going down and find a stable bottom before I am confident that the rout in silver is over. Reports indicate that demand for the physical product is very robust on this huge price drop. if that is the case, then it will not be long before the Asians swoop in and clean up the remains of the exchange-killed silver longs.

Collusion by Fed officials and Commodity Exchange heads has its intended effect

I find it amazing how effectively these people can coordinate their policies with the heads of the commodity exchanges and their pals at the big banks who are perennial shorts in the markets and have now managed to pluck the money out of hundreds of thousands of commodity trading accounts enriching the big banks (government sponsored hedge funds) in the process. Nothing like a freely operating financial system where the playing field is completely level and no one has an advantage over the next guy!

By their continued hiking of silver margins, the exchange effectively removed the liquidity in the silver market that the smaller specs have been providing. That left the market vulnerable to severe drops in price as these specs exited due to financial constraints which then removed a source of potential bids under the market as the CFTC commitments report has shown the small specs to be good buyers in the silver market. Even the bigger hedge funds are impacted by such a sharp hike in margins as their losses in silver then precipitate even more losses across other assorted commodity markets due to the cascading effect of mounting paper losses and margin calls and the need to raise cash.

As the silver market tanked the exchange officials could then warn about Clearinghouse integrity and have more reasons to drive margins even higher as they point to the increased volatility, volatility which I might add, they created themselves by hiking margins to such an extreme degree.

I find it hypocritical, if not downright wicked, that this is occuring against a backdrop of a senior executive at the CME Group, one Mr. Bryan Durkin to be exact, warning regulators against reining in High Frequency Traders. He parroted the usual BS about their presence providing much needed liquidity warning that any attempts to bring them under more intense scrutiny or curtail their activity would result in markets becoming less efficient.  Does anyone besides me marvel at the temerity of these people who spout such idiocy and then go about deliberately instituting a series of devastating margin hikes which are deliberately designed to KILL LIQUIDITY guaranteeing less efficient markets and roiling the entire commodity complex in the process. Is this what an efficient market is supposed to look like when crude oil prices collapse nearly 9% in a single day because there are no bids or silver which is again down nearly 9% also in a single day?

The truth is that the exchanges are money hungry bastards that want the fees generated by the HFT crowd and do not want anyone to mess with their golden egg laying goose.

Regardless, this collusion on the part of the players involved has accomplished, for the time being only, what the Fed has been trying to do ever since it instituted its second round of QE, which by any standard of objective measurement, has failed. To wit - keep long term interest rates low to generate borrowing.

Unfortunately for the Fed, the bonds were not cooperating and were actually moving lower for a while  as commodity prices were responding to the breakdown in the Dollar and holders of long term bonds were balking at hanging on to an "asset" that was priced in a collapsing currency while being threatened with a serious outbreak of inflation as a result of all the reckless money creation.

What could be done especially with the US Dollar within a mere point of crashing through a critical support level which would have seen the onset of a currency collapse and a resultant crisis?

Oh by the way, I might note here that the Japanese Yen has moved to within 58 pips of the level that brought about a massive coordinated intervention back in March that was tied to the tragic earthquake and tsunami. All of those billions spent on knocking the currency down have been wasted as the newest plan to derail the commodity markets brought about another unwinding of the Yen carry trade causing the exact same problem for Japan once again. In other words, less than two months later and after spending billions to derail the Yen and prop up the Dollar against it, we are right back to where we started on Dollar/Yen.

Next move guys???

Silver continues to plummet mauling the entire commodity complex in the process

The complete and utter rout of the spec side silver longs - thanks to the antics of the exchange who decided to bail out their member firms who had played cute and shorted silver all the way up and bled out a large portion of their trading accounts, is now contributing to further pressure across the entirety of the commodity complex, regardless of fundamentals in several of the markets.

Even the grains, are getting smashed as hedge funds and other large specs incur huge losses in silver and are now dumping everything as a result. Panic selling tied to paper losses takes on a life of its own so until the Comex exchange is finished wiping out the trading accounts of the longs for the benefit of their pals, the market will keep falling. When the selling does run its course, and it will at some point, several of these commodity markets are going to stage very sharp reversals to the upside since the algorithm-related selling is overdoing it to the downside in those particular markets with very strong fundamentals.

Remember, hedge funds are technical animals whose algorithms do not care one whit about fundamental factors. It is all about money flows and those are tied to the last price tick.

I have noticed this morning that silver's demise was finally too much for crude oil to bear and spec longs in there had no choice but to now cough up their longs in that market as well. At least that is welcome news to drivers who can get their gasoline a bit cheaper than last week.

The CCI continuest to plummet and as long as silver keeps moving down, so too will it. I do think however that some of the bigger commercials, particularly in the grain complex, are going to use the hedge fund selling to secure any long side coverage that they might need for their risk management programs.

Silver now looks like it is headed down to $35 at a minimum.