Commodity Index Breaks Down - So Too Does Silver

Another payrolls report today; another down day in the precious metals. Not much of a surprise here as that has been the norm for many a year. In one sense, it really did not matter what the number was as there was more than likely going to be bearish selling pressure no matter what.

When it comes to silver, if the number was a poor one, the bears would point to the fact that the QE3 was already baked into the cake and so was a non-factor. They would then point to the fact that the poor number was sign that the economy was still muddling along without any risk of inflationary factors due to the sluggish growth. Silver MUST HAVE AN INFLATIONARY ENVIRONMENT if it is to mount any sort of SUSTAINED rally.

If the number was considered friendly, then the bears would cry up the idea that the QE was not going to be continued as long as some were initially thinking since the economy was mending.

In other words, Heads, I win; Tails, you lose.

Either way, take a look at the following chart of the Continuous Commodity Index or CCI and notice that it has broken out of the recent congestion pattern. The breakout however was to the downside. Guess what; silver also broke out to the downside of its recent consolidation pattern.

I have pointed this link out to readers here for some time now - Silver is inexorably tied to the hip of the broader Commodity markets and will remain so into the foreseeable future. Next stop for the metal is today's low near $31.25 followed by a test of $31.00 - $30.80 should that previous level fail to stem its decline.

The fact that the open interest in silver refused to sharply decline during its descent was a warning that the stubborn bulls were vulnerable to a breach of chart support. There were just too many stale longs in this market which had not experienced a good and necessary cleansing. We are now finally getting that which is what this market needs in order to generate a more lasting move higher when the conditions are correct for such an event.

Note on that CCI chart, that the red support line which has been violated came in very near the important 38.2% Fibonacci Retracement level. If the index cannot rapidly recover this support level by climbing back above it and holding, it implies a subsequent test of the critical 50% level is in store.

With this in mind, observe the silver chart and note how similar the pattern is to the CCI. As stated above, the two are linked together and will generally rise and fall together.

Notice also how silver has lost support at the bottom of the recent congestion pattern which also was rather close to its 38.2% retracement level. If it cannot reverse the decline and get back above the 32 level, it will more than likely drift first towards psychological round number support near $31 and stronger chart support down near $30.70 - $30.75.

Monthly Gold charts

October is the first month since May that gold has posted a monthly loss.

Initial resistance still begins near the $1720 - $1725 level. Above that, selling will show up near $1740.

The market remains rangebound with a bit of a near term friendly bias.

It remains below the 50 day moving average which comes in at $1737. That corresponds closely with the resistance level I noted above. To see the longer term bullish trend reassert itself, the market will need to convincingly close through this level.

Downside support still is holding firm near the $1700 level as bargain buying out of Asia is very solid here.

Can you see the significance of this $1800 level and why the bulls were unable to take it through there on this go around?  Clearing $1800 and holding it, is the KEY TO THE RESUMPTION OF THE BULLISH TREND.

Silver Clinging to Support Above $31.50 - Needs Catalyst

With market conditions extremely thin today on account of that monster storm churning up along the Eastern seaboard, it is tricky trying to read too much into one day's price action. That being said, it does seem that traders are leery of putting on too large of a position one week out from a critical election.

I know that the silver bulls are making a big deal out of the apparent lack of liquidation from the speculative side of the market; however, this is in truth a double-edged sword. I would have preferred to see a more sizeable flush with the market holding above critical support near the $31.50 level as that would have set the market in a healthier position to break to the upside. These stubborn bulls will flee in size IF, and I want to emphasize the "IF" part of this, support marked "INITIAL SUPPORT" does give way. There is a tremendous amount of firepower available to the shorts should this level fail as the forced selling would easier and quite quickly, I might add, would take the price down to support near $31.25 down to $31 before we would see some value-based buyers put their toes into the water.

The way I see this, as long as the CCI, the Continuous Commodity Index, is headed lower, silver is going to face strong opposition to any sustained uphill climb. The grey metal needs an INFLATIONARY environment in which to thrive and without the CCI confirming one in the commodity sector, rallies into resistance are going to be met with strong selling. Once the CCI turns and breaks out to the upside, so too will silver. But until that time, it is likely to remain rangebound with pressure coming from risk aversion trades and buying coming from those looking further out along the horizon to an expected outbreak of inflation in the future.

Note on the following chart the breakdown in the CCI. It today has moved down to the 38.2% Fibonacci retracement level of the entire rally off the June low. Failure to garner support here and bounce higher will set the market up for a fall down to 550. Should this occur, silver will likely break chart support and move to $31 and lower. We will need to see the CCI move back through 580-585 to see silver have a real shot at an upside breakout.

One thing about the upcoming election - if Romney does win, he has said he already does not plan to renominate Ben Bernanke to the position of Chairman of the Fed. While there still remains a sizeable contingent of doves on the current FOMC, some traders are concerned that he would nominate someone less inclined to continue a monetary policy of perpetual bond or asset buying as their predecessor.

The truth as I see it is that these bond/asset buying programs of the Federal Reserve are NO SUBSTITUTE for overdue STRUCTURAL REFORMS that must be put into place if the US economy is to begin growing at anywhere near its potential. Depending on which party gains control of the Senate, if the Republicans were to win that prize and the Presidency, I would look for an extremely ambitious agenda which will excite the business community and begin to spur economic activity. In that case, the Fed would be able to VERY SLOWLY begin reversing its bond buying program once the economy were to actually turn for the better. That of course would take time as any attempt to rapidly withdraw this mountain of excess liquidity would send a shock wave through the global finance world.

If the Democrats were to hold the Senate, Mr. (everything dies in the Senate) Reid, would do his worst to thwart any needed reforms unless there was strong public support for such. In that case, the monetary pump would continue at full force with little chance of it being scaled back.

I repeat, it is crucial to the long term health of the US economy, that structural reforms begin. Without those, the economy will merely limp along and the present status quo will continue meaning the constant tug-of-war between the forces of deflation and the forces of inflation will go on with the wild volatility only getting worse.

One thing to also watch for will be a repeal of Obamacare if Romney does win the election. Should he make good on his promise to repeal it on day one, business will applaud and money that has been sitting around doing nothing in their accounts, will immediately be put to work.

Trader Dan on King World News Metals Wrap

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


http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/10/27_KWN_Weekly_Metals_Wrap.html

Dow Jones/UBS Commodities Index Change to Benefit the Precious Metals

Every year, the various commodity indices, that are used by hedge funds and index funds to benchmark against, have a reweighting of the various commodity inputs that are used to comprise each particular index. During this reweighting process, the percentage of some commodities are increased while the percentage of others are decreased. As a result, those funds benchmarking against the index, are forced to recalibrate their particular portfolios, selling some commodity positions while buying some new commodity positions in order to come into alignment with the new weightings.

Dow Jones/UBS recently announced that the precious metal component of their index will be increased by 2% from this year's levels for 2013. This will benefit gold and silver to the extent of an estimated (by Credit Suisse analysts) to the tune of some $1.6 Billion in new money flows. The money will be evenly split between gold and silver.

There might be some buying in the metals this AM on this news given the fact that the Dollar is generally steady this AM, which would normally see some pressure on the metals. Bargain hunting occurred last evening in Asia down near $1700 and is sitll coming in against that support level on the charts.

Gold bulls need to get the price back over $1720 however and KEEP it there to stem the recent declining pattern and stabilize the market.

Strength in the mining shares as evidenced by the HUI is aiding the metals. That bullish flag formation on the weekly chart is still in force but was chipped away at by yesterday's strong down day. Mining share bulls will need to take the index up through 510 for starters to give some further hope of validating the pattern. A close in the index below the 480 level makes the pattern null and void.

Gold Chart and Comments

Gold's failure to hold the $1720 level has led to increased selling pressure taking the metal down to strategic psychological support at the round number of $1700. The market is bouncing off of that level in Asian trade this evening as dip buyers/bargain hunters move in to take advantage of the nearly $100 fall in price from its recent peak made a few weeks ago.

If the bulls can take the price back up through the blue line marked "FAILED SUPPORT", gold should stabilize and range trade. If $1700 gives way, then price is headed for a test of the line marked "SECONDARY SUPPORT".

Notice how the previous steps of the stair step pattern higher are serving as support on the downside. As each of those support levels fail, the next step becomes the new support level.

Right now there is still no sign of a bottom but the market has come down quite a bit so it would not be unexpected to see it stabilize here.

The fundamental factors that led to the August-September rise are still in place, namely the easy money policies of the Fed and the ECB and BOJ, but that is old news and the market is looking for another spark to take it higher. What will need to occur is sufficient VALUE BASED BUYING TO drive a floor under the market and soak up the speculative selling from liquidating hedge funds and other specs who are bailing out.

Trader Dan on the King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap where we discuss this week's action in the gold and silver markets as well as the mining shares.

http://tinyurl.com/8wyjjx6

Silver Fails at 32.50 Support, Attempting to Hold at $32

You can see on the weekly chart that silver failed (once again) to extend through stubbornly strong overhead resistance near $35. Having done so, it is now setting back as speculative longs are getting flushed out. Additionally, fresh shorting is occurring.

The metal looks like it wants to drift lower yet unless it can pop back over $32.50 before the weekly trading ends. If it does not, odds favor a move down towards the 50 week moving average near the $31 level. That would put it back near the middle of the very broad trading range that it has been stuck in for more than  year now and effectively leave it in limbo for a while.

Clearly the market lacks the necessary impetus to drive it higher through the stiff selling originating at the $35 level. The question is at what level it will find enough solid buying to set a floor.