"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, January 31, 2013

Silver - Nothing Doin' Yet

Yesterday silver looked as if it was setting up to make another test run at stubborn overhead resistance near the $32.50 level, the top of its recent trading range. Today - well, to put it bluntly, "nothin' doin'".

The ferocity of the retreat away from yesterday's high is a bit surprising to me given the big push higher yesterday. A couple of things - end of the month positioning is being seen in quite a bit of the markets that I regularly trade today and that is causing some pretty wild swings in price.

Secondly, the continued meltdown in the mining sector shares (HUI and XAU) is completely undermining strength in the metals over at the Comex. Any time would-be bulls get ready to make their move into the metals, they take one look at the HUI or the XAU and then go back to sleep. There is no reason to chase precious metal prices higher as long as the mining shares continue to reek.

The HUI is on track for its worst monthly close in THREE YEARS. What it will take to generate any buying of sufficient size to reverse the downtrend is unclear. Value-based buyers are present but are being overwhelmed by the non-stop selling hitting the sector. I get the sense from the price action that the shares are on the receiving end of a position among several larger players that has gone seriously awry. They are being forced out kicking and screaming but also bleeding profusely. When you continue to stretch a valuation of the HUI to gold to levels last seen more than FIVE YEARS AGO, someone is in trouble. When the overstretched rubber band finally does snap back, it will be quite fierce but as to when that might occur, I am unclear.

For now, there is still no sign of any definitive bottom in the mining sector.

For that to occur, the Comex metals are going to have to be able to cast off the share-related drag on their price and clear the top of their respective trading ranges. That has not yet been able to occur.

As you can see on the price chart below, the RSI failed, once again, to take push past the 60 level. That means the sideways range trade remains in effect.

Yesterday the market pushed strongly through the 50 day moving average; today it plunged right back down below it. It does remain at this point above the 200 day moving average; a slightly friendly development unless proven otherwise.

I am not sure what it will take to push these metals higher. Yesterday there was a rash of shortcovering and some fresh buying based on the lousy Q4 GDP number that had traders convinced that any talk of premature ending of QE4 was nonsense. Today, there was some second guessing that even with the higher unemployment claims number. Some are looking past today's numbers towards the payrolls number and are expecting to see some decent numbers. If the number comes in higher than expected, I would guess the metals will see further pressure on the idea that the Fed will cut short the QE program in spite of the backward looking GDP number. Remember, markets look forward not backward.

If the number comes in as expected or below consensus expectations, I think we can look for the metals to breathe a sign of relief as it will reinforce the idea that while the economy might be recovering somewhat, it is still not able to stand on its own two feet without continued easy money policies.

That means, we wait and see what the morrow brings. Sentiment in the shares is rotten; absolutely rotten but it can still get worse. Some keep pointing to this fact as proof that a turnaround is near. They might be right. The problem is you will need more than lousy sentiment to start a sustained rally - you need bullish enthusiasm. Haven't seen any sign of that yet.


  1. I am beginning to believe that these miners need to shut down production and go into maintenance mode, stop spending money on exploration and cause a very noticeable contraction in supply. Then maybe things will change.

  2. Dan,
    Thanks again for your insight and chartmagnifico. I am watching the Xau to gold. It is so close to a 3 year low. These are companies that are thought to have plenty of capital or at a minimum capital raising capabilities. The lows of the last three years were in April and September 2012.We are very close to breaking those. So, please tell me why these stocks are getting killed, when 1)gold has definitely shown stability above 1500/oz, and these prices reflect $1100/oz, 2)These stocks should be somewhat impervious to production decreases due to lack of cash 3)avg energy costs should not have been killing their operating margins as they hedge 4)currency dilution is at a "mania stage" 5)deficits continue north and with our deficit the only way we (US pay our bills is to print more 6)unemployment (u-6) is stubbornly high at over 14% 6) we are now at a peak at corp profitablilty in most sectors due to the previous 5 reasons.
    Given the above reasons I cannot believe that investors are so stupid that they listen to the bs main stream poets (guest writers at MarketWatch,MSN,Yahoo, etc..)who have no historical reference, nor clue about macro economics, or knowlege of the general panic the investors will feel very soon. I for one still believe that it is buying time.
    Thanks Dan.

  3. Having traded gold for years, Ive always found it most strange that some of the weakest days for gold are days when the dollar is weak. I can only assume that the gold bears are fearful that on dollar weak days that the gold will be up a lot, and when its not, they just take that as a sign of weakness.There is only 1 antidote to the gold bomb throwers, and that is to throw some bombs back. Put a 17 handle of it and get this nonsense over with.

  4. unusual action with silver... up, down, then up then down a bit ... in 3 days

    almost a dollar from tops to bottom, seems to be fighting back, but then goes limp

  5. Seems like just another wasted opportunity to get through 1700. What is odd is that the shorts should feel so secure with the euro at 137. Should have been an easy shot at 1700. One can be very bullish gold and still be very dissappointed with the action.


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