Silver Chart

Silver was whacked along with gold in today's session as technical selling kicked in after the takedown began once it appeared that the run to $44 would fail to build on its gains. After $42 gave way, selling accelerated as down side stops were run which were helped along by the frontrunning High Frequency Trading club ( also known as market parasites and general pond scum).

The market did bounce higher from the $39 level however and while it still looks heavy, the level from which it bounced is the confluence of three technical support levels on the chart. The first is horizontal support noted in heavy red which also is the former Fibonacci 38.2% retracement level which was a pivot level around which silver was trading for the better part of the last 5 weeks. You will also note a short term uptrendline which has been forming drawn off the last June lows and the early August swing low that comes in very near this level as well.

Ideally, we would like to see silver hold in this general region to prevent a deeper fall towards $37.00 - $36.50. I would feel a bit more confident about its immediate prospects if it could regain its footing back above the former 50% retracement level up near $41.25 - $41.50 on the price chart.

Volume was very heavy today indicating a great deal of panic type selling was taking place. Unlike the drop that occured in silver back when it neared the $50 level in April, the Commitment of Traders report shows a relatively low level of speculative interest on the long side compared to past  for the managed money or hedge fund category. They are currently about 11,000 contracts shy of their net long position size that they were holding back in April at the peak.

Also noteworthy is the fact that the Swap Dealers are barely net short while the Commercial net short exposure is also relatively small. The latter two categories rarely if ever sell into downward silver markets so if any selling is going to occur in silver, it is going to have to come from either additional long liquidation or fresh speculative side short selling.

In regards to the former - while the hedge funds are net longs, after today it is fairly easy to theorize that that long side exposure has been whittled away considerably. That begs the question - is this category of traders going to start aggressively moving to the short side? One would be rather challenged to build a fundamental case for that. In the meantime  we will watch to see where chart support emerges and where the long liquidation will ease off.

CME GROUP hikes margins for gold

Here it comes....


CME GROUP - Gold Margin Rise Effective After Close Of Business Thursday

Margins will be raised 27%

Old Margin  $7,425
New Margin  $9450

Old Maintenance  $5,500
New Maintenance  $7,000

Equity Bulls Banking on Fed's Bernanke playing the role of the Easter Bunny

Stocks are rallying in today's session on anticipation of another round of QE to be announced by Chairman Bernanke this Friday at the annual Jackson Hole, Wyoming meeting of various monetary officials.

As a matter of fact, the commodity complex is rallying as well with the CCI (Continuous Commodity Index) moving back towards the top of its recent trading range. It certainly appears that the hedge funds are trying to send a signal to Bernanke to bring his bag of market jelly beans to the meeting.

What everyone of these reckless money changers are remembering is last year's meeting where the first hint that another round of Quantitative Easing was in the works was announced during Bernanke's speech at this very same event. The hedge funds are hoping that lightning will strike twice. Methinks that they are going to be seriously disappointed.

Politically Bernanke is in no position to announce another round of QE. If he were to try this route once again, a route which has obviously been an abject failure considering that between QE1 and QE2 over $2.5 TRILLION  was spent with nothing to show for it except a collapsing Dollar and rampant inflation in energy and food prices, he would unleash a firestorm of protest here in the US and certainly abroad by our largest creditors, China in particular.

The Chinese have already made quite clear their extreme displeasure with the impact that the QE programs are having on that portion of their reserves which are Dollar-based. One cannot continue to poke their banker in the eye without generating an unpleasant response.

I should note here something I consider extremely telling - if the equity bulls are getting giddy over the prospect of more Fed-dispensed Jelly Beans, the bond market is not buying it. Bonds should be getting hammered with both equities and commodities moving higher and the Dollar lower. Instead, they are barely lower with any dips down generating additional buying. One gets the sense that the bond bulls are just itching to snare the shorts once again and proceed to generate yet another short squeeze.

The prospect of another round of QE, instead of generating buying in gold and silver, is leading to selling. With gold being so overextended to the upside, this is welcome. With silver however it is "Heads - I win; Tails - You lose" for the silver bears. They are talking up silver as a safe haven metal which will not be needed if another round of QE is unleashed and the Fed comes to the rescue of the markets once again. The problem for those guys is that if the RISK trades come back on, then silver is going to be very difficult to keep down, especially if the copper market starts rising.

I would like to see silver keep its footing above the $42.00 level, especially after yesterday's strong showing, if it is going to move back up and revisit resistance near the $44 level.

The HUI needs to hold above 580 to prevent another round of selling in the mining shares.

Monthly Gold Chart with some Price Projection levels

Gold has shown continued strength going into the Asian session this evening. In the process of so doing, it has reached the upper limits of the pitchfork extensions shown on the chart. I have chosen the monthly upon which to do some analysis so as to get the long term picture and point out several things which merit mentioning.

Notice that the dark green center line has acted as the upper boundary for the entire move since the reaction that occured in the gold price in late 2009, early 2010. All subsequent rallies met this line and held below it until this month when price exploded through the center line alerting that the trend higher in gold was now accelerating.

The three red outer lines and the single blue outer lines are projected levels where we can expect to see some resistance form. Thus far the two red lines nearest to the center have failed to cap the price rise. We are currently trading right on the outer 3rd red line of the upper set which this month passes through the $1925 - $1935 level. Beyond that is a blue line which this month comes in near the $1950 - $1960 level.

What we are attempting to do is to project levels at which we might expect some selling to occur and a potential reaction in price to take place. There is nothing set in stone which states that these levels must produce selling. They are merely given as POTENTIAL areas of selling resistance. Should the market blow through these levels, then we will have to resort to other methods to anticipate some potential inflection points.

For now, traders can monitor price action near these levels and trade accordingly.

Should we actually get a turn lower in price, any subsequent retracement should find buying support at each of the upsloping colored lines on the way down. The dark green center line should hold any retracement if the market is going to continue with a strong and sharp advance. Thus gold could move lower to the tune of $150 - $170  from current levels and still be very strong on the chart. If such an event were to occur, the bulls would like to see the price then hug that same green center line as it forms its low and bounce upward off of that level as the overall trend continues to the upside with a bit less steep of a price advance.

Gold to Crude Oil Ratio indicates profitability of Gold miners

Following are two separate charts tracking the ratio of  the price of gold to the price of crude oil.

The first is Brent Crude, the global benchmark for crude prices and the second is WTI crude, which is the Nymex benchmark and the one most often quoted by American wire services and news organizations.

The reason for the charts is that which Eric King and I discussed on this past Friday's KWN Weekly Metals Wrap where we talked about the severe undervaluation of the gold mining stocks. The point we were discussing was the direct impact that lower energy costs have on mining operations. The rise in the price of gold with a simultaneous fall in the price of crude oil, is lowering input costs for mining companies at the same time the price they are receiving for their finished product is rising rapidly. That is a surefire recipe for increased profitability moving forward. Given the fact that one of the arguments against buying the miners has been that their input costs have been rising at the same rate that gold has been rising, this effectively kills that argument.

It does seem from the price action of today's session, that some of the market players are finally catching on to this. If even one or two of the major shorts in the gold shares begin covering in size, the resultant buying wave will take prices of many of these shares through technical resistance levels on their price charts, resulting in further short covering as the hedgies which foolishly overstayed their welcome and attempted to squeeze the last 20% out of an otherwise profitable trade, begin to get snared by their own greed.

A closing monthly push through the all time high marked on the chart should see the miners do some rapid catching up to the gold price and reverse the downward trend in the HUI/Gold ratio.

Trader Dan on King World News Weekly Metals Wrap

Please click on the link below to listen to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/454trh7

 

Silver Stuff

I wanted to post a few comments about the Silver market for some of those who have been asking me to do so. As mentioned in previous posts here, silver is finding itself caught in a war between those running out of risk trades who are selling commodities and equities, and those who are buying it as a safe haven metal.

That tug of war has prevented it from surging alongside of gold but nonetheless, even in the face of such selling, it has been attracting enough buyers that its technical chart picture is slowly but steadily improving.

I want to first note that it has regained its footing above the 50 day moving averaage having bounced firmly off of that key technical level last week. Since then it has established a nice little uptrend which has taken it back to the region where it has encountered selling resistance over the last month or so. I am speaking specifically about the region near and just above the $40 level.

If you will also note, all four of the major moving averages that I use in tracking this market, are now moving higher with the silver price ABOVE those ma's. That is bullish. What I would like to see and what it appears that we are likely to soon get, is for the 10 day moving average (blue line) to move up and crossover the 20 day moving average (red line). That would put the market solidly in an uptrend as it will take some stability at these current price levels for such an event in the moving averages to occur.

If, and this is an important "IF" from a technical perspective, silver can close out the week tomorrow on a firm note, preferably with a push through the $41.30 - $41.50 level, it will enter the following week on very solid technical ground and set up a run to the $44 level for starters.

It still has some downside support first near $39.50 which is followed by another level of support near the $38 level. It would have to breach that latter level for a move towards $35 again.

At some point, as gold continues to move sharply higher, silver will become increasingly attractive to value-based buyers as it is still very affordable if one considers the current options in what can be termed "precious metals", platinum ($1845), palladium( $758), and gold ($1835). None of these metals are cheap any longer ( in the sense that the common man on the street can plunk down some loose change for an ounce) making the little grey metal, "poor man's gold", likely to outperform on a percentage basis in the coming months.

Mining Share ratio to gold back at pre QE1 levels

The following ratio chart says in a picture just how severely undervalued the gold stocks are in relation to the price of bullion.

You might recall that as the credit crisis erupted in the summer of 2008 with the failure of Lehman Brothers and subsequent meltdown of other large financial firms, stocks and commodities plummeted as the Yen carry trade unwound and deflationary fears escalated.

The rumors began to circulate as the crisis deepened that the Federal Reserve was getting ready to implement some unorthodox policies in an attempt to stave off the deflation and prevent a credit market lockup. That was when the phrase, "Quantitative Easing" first began making the rounds in the markets.

So confident were traders that the Fed was not going to sit idly by while the entire US financial system imploded that they began covering shorts and bidding up the price of equities and commodities ahead of what was then announced with certainty in November of that year.

Look at the chart and you can see that while the HUI/Gold ratio is not at the depths it reached during the peak of the credit crisis, after today, it is now at levels last seen just before the QE1 was actually implemented.

If you look across the chart to the left and note the blue line reaching back to the end of 2001, you can see that the mining shares relation to gold had actually plummeted to levels last seen near the VERY BEGINNING of the now decade + long bull market in gold. That is how cheap the shares had become to gold bullion in the third quarter of 2008.

Quite frankly, we are not all that far off from levels seen at that time with today's round of selling across many of the mining shares. This has occured in spite of the fact that we have spent more than $2.5 TRILLION between QE1 and QE2 and seen the gold price leap from $700 in November 2008 to over $1800 as of today's close.

Based on this fact alone, either the price of gold is going to have to plummet quite sharply from current levels or the shares are going to be at levels last seen in relation to the price of gold bullion when the bull market in gold began and that was at a price level of $270-$290 gold. While gold may correct at any time from its strong rally, why in the world would the gold price be the one moving lower given the current state of the global economy and particularly with all the implications regarding the integrity of the currencies of many nations in the West? The only way to correct this glaring imbalance is for a very sharp and incredibly swift rally in the mining sector.

I have been detailing the ratio-spread trade being employed by the hedge funds across the mining sector for some years now. As a trader I understood the rationale behind that trade - why risk issues related to mines such as management changes, labor disputes, environmental lawsuits, hostile laws and regulations, aging mines, etc. when you can get leveraged exposure to gold by using the ETF's instead. One could buy the ETF or Comex gold and sell short some of the weaker gold shares and laugh all the way to the bank. As an investor myself in the gold shares, I was not happy to see this trade but I could understand it.

I must say that it has now reached a point where those who ply the trade are treading on very thin ice. There is no longer a fundamental case that can be made to justify the trade at current levels of the shares in relation to the price of gold. Smart traders will run a trade as long as they can but they will leave the last 20% for the foolhardy and the novices who think that they are clever enough to pick exact tops or bottoms in markets. The pros do not practice such stunts - if they do, they do not remain pros for much longer but soon become, "EX" traders.

The first hedge funds out the door of this trade are the ones who are going to make the money in it. They will take their profits and they begin looking for another golden goose that may lay yellow eggs for them. The ones that stick around and think they are quick enough to exit before getting run over by all the rest of the funds in such a crowded, lop-sided trade will be the ones who overstayed their welcome and end up losing big when they could have retired the trade with decent profits had they not been so mindlessly greedy.

The first inkling we get of any acquistions by a major gold mining outfit of a quality junior and it is game over for this trade.

Wake up hedgies - the trade to have been in for the last few months was to be long the miners and short the broader markets. There was your money maker. How many times on this site did we mention this trade and urge you to get out of the wrong one? Stop relying on your damned computers and do some thinking and analysis on your own.