"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, June 29, 2012

Hedge Funds Continue to Pummel Silver - Until Today

If you want to talk about how utterly insane our markets have become and how schizophrenic the trading action has mutated into, look no further than the last two days of trading this very week.

On Thursday, silver was mauled by hedge fund selling tied to both long liquidation and brand new fresh short selling. The result? Silver hit a 52 week low! One day later - it rockets to close 5% higher in a single day. This is the type of madness that has been unleashed by Central Bank interference into the market place which is the SOLE CAUSE of this volatility.

I could give example after example of commodity futures markets which had hit multi month lows on Thursday only to come storming back higher on Friday. Gasoline hit a 6 month low and then comes flying back $.15/ gallon on Friday because what changed? Crude oil had just reached an 8 month low on Thursday only to them come back on Friday and rise nearly 10% in price in a single day.

What has been happening is that hedge funds have been liquidating long positions across the entirety of the commodity spectrum and building short positions in anticipation of further declines in the growth of the global economy. The craven capitulation by German Chancellor Merkel to the demands of the beggar nations of Spain and Italy, roiled the markets and scared the hell out of the shorts and enticed a huge wave of fresh buying to boot.

Many of the friends of gold complain about the sharp selloffs in gold and in silver as these hedge funds liquidate their long positions en masse at the end of bull market rallies. Yet, it is these exact same mindless machines that come in on the buy side and cause these enormous rallies on the way back up. If you want them on the way up, just be prepared to deal with them on the way down. They are here to stay, sadly I might add.

I have written about this many times but I think today is a perfect example of how utterly useless these computerized trading programs have rendered the commodity futures markets for the PURPOSE FOR WHICH THEY CAME INTO BEING, namely, as vehicles in which commercial end users and producers could manage risk and lock in profits or costs.

Hedgers, which is what these folks are, cannot hedge anything in this sort of wild market environment. Their hedges get all blown to hell and force margin calls to them just like any other trader has to deal with. With these almost incessant price reversals, both up and down, reading the markets has become nigh an exercise in futility for risk managers. How are they supposed to hedge future production or future costs in an environment in which prices reverse 10% in a single day. Is this a change in the trend? If the market going to reverse? Have the market dynamics of supply and demand changed? What happens if we read this wrong and institute our hedges and then the market totally re-reverses on us again?

More and more commercials are no longer comfortable using futures contracts for risk management. Instead they are entering into private forward contracts innoculating themselves from this new brand of fools known as hedge funds. While the exchanges may pat themselves on the back for opening their doors to the HFT crowd, the hedge fund crowd and the quant crowd, ultimately they will merely watch the backbone of the futures industry slowly begin to exit. That will empty the playing field of the hedgers and leave the casino with only more of these other parasites to prey off of one another.

That being said, take a look at the silver COT chart showing the massive build in the number of OUTRIGHT SHORT positions that occured through the early part of this week. Keep in mind that this chart does not even include the fresh selling that took the price of silver to a 52 week low on Thursday.

Notice that it is the largest short position they have held in more than 5 years. It could be a much longer time frame than that - I merely stopped charting the data after that far back.
Now take a look at the silver chart and behold the downdraft. As you can, except for a brief period at the latter part of May and into early June, the course of this market has been steadily lower.

Now look back at the OUTRIGHT SHORT POSITION chart above. Do you notice that dip on the right hand side of the chart in the otherwise uptrending line showing the huge build in short positions? This dip occured at the exact same time silver was ekeing out an upmove of about $2.50 in that same time frame. In other words, SHORT COVERING by hedge funds, as well as some fresh buying took the metal higher. Once the short covering abated, the rally was sold with ferocity as brand new hedge fund shorting took the metal down to this week's 52 week low.

It has been this selling which has smashed the CCI, the Continuous Commodity Index lower. Interesting enough, the CCI as a whole had actually been faring a bit better than had silver this last week as the weather market that has seized the entirety of the grain complex, has enabled the index to move higher even as silver lingered near its lows this week. Were it not for the strength in the grains and the resultant spillover in the livestock markets, the CCI would have dropped lower as well.

Suffice it to say that the massive short covering rally that took place across the entirety of the commodity complex shoved the CCI sharply higher blowing it throught its 50 day moving average with ease and putting it in the position of challenging resistance at the 550 level. If next week rolls around and we still see these wild eyed hedge funds with an appetite for risk, that should be an easy matter. If that is the case, Silver will follow this index higher and will OUTPERFORM gold in percentage terms once again.

If risk is out the hedge funds turn sellers, then look for this index to drop lower with silver going along for the ride and losing ground against gold.

If silver is going to get anything going to the upside, it will first have to mount a successful challenge of today's high near $28. Above that, resistance lies near $29 and then another dollar higher at $30. If silver can get a handle of "3" on it and keep that, then we will have a chance of seeing some fireworks.

If that is the case, EXPECT bullion bank selling and swap dealer selling to meet this rally. This is when that segment of traders will sell the silver market, on the way up, not on the way down as some of these "blame everything on Morgan" advocates continue to assert. The bullion banks sell rallies - who do you think is on the opposite side of all those hedge fund buys attempting to absorb as many of those bids as they can to try to stem the rise of the metal? Answer - Bullion banks - nearly everyone else is buying!

Moving over to gold - if the metal can clear $1620 - $1630, which it is in position to test early next week, then it will make another run first at $1650 and then $1665 or so. I will be surprised if it can clear $1665 without any clear signs of QE coming from the Fed. The dose of liquidity coming from the Euro zone will be insufficient in itself to launch the gold market higher. It will need another jolt from this side of the Atlantic.

The thumping the US Dollar took today was pretty dramatic - Once again, for whatever the reason, (in Technical Analysis it is not important), it once again failed to manage TWO SUCCESSIVE CLOSES ABOVE the 83 level. That level is now reinforced on the charts as significant resistance. If the Dollar ever does mount those two closes above there, it is going reach for 85.

On the downside, even after today's massacre, it is still trading above the 50 day moving average. The key will be this red support line shown on the chart. If it breaches that line and fails to recover by day's end, it will drop as low as 80.50 initially where it will have a chance to bounce.