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25Sep

Silver’s scary sell-off

Alex Commodities, Economy, Forex, gold and silver, Metals, Technical Analysis 0 comment

Silver and silver-related assets were smashed across the board on Friday as the World Bank and IMF met in Washington, DC to discuss the worsening global crisis.  Other commodities saw sharp declines as well.  More silver was traded that day in any given hour than silver is available on the market for an entire year.  It was an electronic sell-off.  Physical prices now command a 10-20% premium to spot paper prices, the highest in years.  Gold to silver ratio is now over 1:50, the highest in a very long time.

 Predictably news comes out after the trading day (but we must assume the large insiders knew the whole time) that COMEX was raising margins by 15.6% on silver. 

http://www.gold-prices.biz/comex-raises-gold-margins-by-215-silver-margins-by-156/

The problem is the COMEX does not have the silver to deliver, so forced liquidation is the strongest tool they have to bring prices down and take parties who would seek delivery out of the equation.

Silver is still up 46.31% on the year and has strong support in the $30.00 area.  I think we need to see what the price action is when buyers step in and shorts cover.  It could very well move up as fast as it did down (and higher) if we see ECB rate cuts, a Greek bail out, good earnings in the US, emergency Fed easing or other central bank policy movements as well as any geopolitical or event risk scenarios playing out.

Given that even though silver fell to $30.00, but physical silver commands a price of $33-35.00, there is evidence of a growing paper vs. physical price discovery bifurcation. 

http://www.apmex.com/Category/160/Silver_Eagles___Uncirculated_2011__Prior.aspx

As far as my strategy goes, I don’t see any change in the situation for the dollar long term.  The recent strength has been more of a liquidation panic in Europe and foreigners buying dollars because it’s the least bad currency for the moment.  There’s even some rumor of weaker central banks liquidating gold and silver holdings to raise liquidity.

I saw the same pattern of behavior in 2008 and 2009, yet gold and silver are much, much higher now despite the occasional (and sometimes violent) correction.

Over the last 11 years silver and gold have outperformed all sectors of the S&P 500 by many multiples.  There is no paper asset class quite as trusted during times of crisis, either. 

http://finance.yahoo.com/q/ta?t=my&s=SLV&l=on&z=l&q=l&c=SPY (three year chart)

Now, given the potential for further easing by the Fed, ECB, BOJ, BOE, SNB and others, the need to monetize debt in the US to keep the government open (i.e. the necessity for QE3) — without debt monetization the government will go in to a crisis mode where their ability to spend will be limited as interest rates rise because treasuries are sold more than bought.  But we’re not the only country that has to monetize debt.  Keep in mind the US government has over $75 trillion in unfunded liabilities and there’s no ‘economic growth’ scenario that allows these debts to be funded from revenues.

QE3 from the Fed at this point seems like a foregone conclusion once we see a sovereign debt or large bank collapse.  The ECB is also monetizing debt in the Euro zone for a few of the larger PIIGS, the BOE has QE’d in England and there’s a good chance the BOJ and SNB will continue to print money to artificially devalue their currency.

http://www.reuters.com/article/2011/09/24/us-imf-ecb-stark-idUSTRE78N1Y220110924

These actions will create a short to intermediate term burst in global money supply — and hot money seeking a high return.  These types of inflationary pressures lead to booms for precious metals.  

http://www.businessweek.com/ap/financialnews/D9PU96280.htm

Greece’s default is all but inevitable, and that is going to rock the world and create the need for much, much more liquidity.  This situation will spread throughout Europe and spread here and to Asia.  Lower rates and more stimulus will follow.

http://www.zerohedge.com/news/lehman-weekend-redux

Many shops sold out of their silver bars and coins on Friday because the appetite for physical silver was so strong at $30.00 (even though customers gladly paid the $5.00+ premium making purchases $35.00+ per ounce).  In fact I still saw online stores selling silver for $45.00 to $50.00 per ounce.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/23_Sprott_Money_Temporarily_Runs_Out_of_Physical_Silver.html

I believe that the bifurcation in physical and paper prices is important to note because it indicates that there are two markets.  A real market and a phony market.  The phony market is being manipulated downward to an artificially depressed price.

This happened in 2008, too.  But from that low price of $8.00 silver quickly rose to $48.00 in the course of three years, a 600% increase or averaged to 200% per year.

http://www.kitco.com/charts/popup/ag3650nyb.html

Gerald Celente, one of the best trend forecasters of our era is now buying physical silver.  He made the announcement on Friday, so I believe that will mean something to the many that follow his advice and watch his investments closely.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/24_Gerald_Celente.html

One year silver chart

Tonight silver is testing the 350 day moving average.  Some continuation selling was to be expected after Friday’s drop, but we’re looking for some consolidation or even a short term reversal due to the very, very oversold condition, combined with the support of the 350 day moving average at 29.57 as well as the appetite that should be present in Asia during this season.

We’re also dealing with price move that is over a four standard deviation event — i.e. something that is extraordinarily rare and it’s punctured the bottom bollinger band, leaving a reversion to the moving average around $37.00-40.00 quite possible if technical buyers come in.

24 hour silver chart Right now silver is trading at $29.83, having found some support at the $29.57 area.

Volume is light as to be expected, but once Sydney and Hong Kong open we’ll get a better idea of what the Asian appetites for metals are after last week’s discount.

Personally, I am tempted to buy silver and silver-related assets given these discounts.  Even if prices are weak short term, I know they will be much, much higher in the intermediate and longer term.

21Sep

Twist, but don’t shout

Alex Commodities, Economy, Finance, Stocks, Technical Analysis 0 comment

(Updated at 4:25 p.m.) The Federal Reserve announced that it will begin selling shorter term US Treasury securities and use the funds raised to buy in to the 6 to 30 year space.  They also indicated more easing in the mortgage-backed security market.  Stock and commodity markets had a knee jerk reaction lower, selling off on the statement’s release.  The total size of the program is expected to be about $400 billion — but there is no balance sheet expansion, just swapping of securities.   Notably the Fed did not reduce interest rates on bank reserves, thus there is no expectation that banks will lend more when they are poised to make even less because of the yield curve compression.

I believe that this is the beginning of more aggressive approach that the Federal Reserve will implement to lower borrowing rates for consumers on both fixed-rate mortgages and revolving lines of credit.  Whether this action has any material impact on the ailing economy remains to be seen, but I am highly skeptical as I don’t believe the Federal Reserve is capable of doing much more than delaying the deleveraging that must happen in all sectors of the economy.

Fed causes sell-off of equities with twist

Traders are apparently not enthused by Fed's maturity "twist."

Because of the renewed pressure on equities and the lackluster reaction to the policy release, I now expect the head and shoulders pattern to play out on major US indices.  These stock market indices have decisively broken down below the 10 day moving average, indicating a loss of upward momentum.

A sell-off down to the 10,000 area on the Dow could occur within the next week or two, and if that area does not provide technical support to markets, additional downside pressure could bring markets to the 9,750 to 9,500 area in relatively short order.  If frenzied selling occurs, perhaps as a result of news-driven events in Europe or more bombshells being revealed in the American banking sector we could see the 9,000 area give way to much lower stock prices.

Curiously silver is outperforming gold today, with gold weaker and silver spending much of the trading day in the green.  Even more interesting, however, was the difference in action in the paper and physical markets.  SLV and silver futures took a hit after the announcement and did not recover, but PSLV (the Sprott Asset Management physically-backed silver fund) saw selling and then filled the gap almost immediately, albeit temporarily.  Does this bifurcation in trading indicate that investors are more confident in the real thing or is it only a blip that will be arbitraged by the quants?  At this point it looks like an aberration as the gains have been given back, and then some.

Overall I think this monetary policy shift should be bullish in the long term for hard assets, especially gold and silver, as the maturity “twist” diminishes the interest rates on long-dated fixed-income securities and provides less “safe havens” for investors to seek returns in the paper markets.  In the short to intermediate term a longer period of consolidation and possibly a correction across the commodity spectrum is growing more likely.

Full Fed statement here: http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm

21Sep

Fed Wednesday – Policy Outlook

Alex Bonds, Business, Finance, Metals, Stocks, Technical Analysis 0 comment

I don’t want to be right about my of my dire predictions, but all signs point to a significant global slowdown:

http://online.wsj.com/article/SB10001424053111904353504576566142076103776.html

The Fed is coming out at 2:15 pm to announce the results of their policy meeting.  Many expect a variation of the 1960s “Operation Twist” where they sell their short-dated maturities and buy long-dated maturities:

http://www.zerohedge.com/news/just-2-hours-left-until-announcement-here-complete-summary-what-everyone-wall-street-expects

If they were to do this, it would actually hurt the large and regional banks because they would be borrowing at a higher rate and lending at a lower rate — but it may help the consumer, at least short term, buy making mortgages and revolving debt less expensive:

http://online.wsj.com/article/SB10001424053111903285704576560823162096888.html

They downside is that any more monetization of debt will likely be perceived as inflationary and send speculators in to commodities (including energy and agriculture) which could cause a rise in consumer prices.

I think they may even have to perform some more aggressive monetary policy measures given that the US dollar money market funds in Europe are drying up — and the EU banks are in bigger trouble than our banks:

http://seekingalpha.com/article/294705-many-european-banks-would-be-bankrupt-if-they-carried-assets-at-actual-market-values

If they announce nothing new, which is in my opinion extraordinarily unlikely given that this is a longer than usual Fed meeting (something we hadn’t seen since the last rounds of QE) I think there will be a significant market sell-off and a head and shoulders topping pattern may play out:

http://mootrades.com/2011/09/17/head-and-shoulders-setup-on-major-indices/

Whatever is done by the Fed is only a short term piecemeal solution to a broader, more structural problem with bank and sovereign balance sheets — and in my opinion it only delays any real resolution.

17Sep

Head and shoulders setup on major indices?

Alex Stocks, Technical Analysis 0 comment

Could the Dow Jones and other major indices be setting up for a head and shoulders style technical-driven sell-off?  It will depend on what the Fed has to say next week, but also on the rate of deterioration in Europe and other news-driven event risk.

For the pattern to play out, some more upside may occur, but not further than about 11,600.  The downside target, should the Dow slip below 10,600, would be approximately 10,000, but if the sell-off accelerates we could see a dip to the 9,600 to 9,800 level.

Which way the market goes is uncertain, but on the weekly charts the recent technical damage has created the potential for further downside risk.  I began aggressively taking equity positions off the table in July, with the exception of some silver and gold miners.  I encourage all readers to exercise extreme caution in the coming weeks and months as the global equity markets are extremely volatile, illiquid and therefore less volume can create much larger percentage moves.

15Sep

Central bank intervention for profit retention?

Alex Banks, Bonds, Business, Finance, Metals, Stocks, Technical Analysis 0 comment

Today we read about Kweku Adoboli, the UBS equities trader that allegedly went rogue and lost the firm $2B in Q3 profits.  We also learned about the ECB effectively using extraordinary measures to prop up insolvent EU banks.  A rumor also floated through the blogosphere that Mr. Adoboli was shorting large amounts of precious metals, specifically silver, through ETFs.  What one has to wonder, given the timing of these events and the downdraft in metals prices today, is if the ECB and/or SNB is helping to support UBS by pushing down metals prices so they can exit the short position with less of a loss to report on their upcoming earnings announcement.

This sounds like a conspiracy theory, right?  I would have thought so, too, many years ago.  However, given the recent and direct Swiss central bank intervention in the Franc and precious metals markets, the dire situation in the EU threatening the monetary union and its currency was well as the threat of a global double dip recession, it seems more than possible that central banks are beginning to exercise their power in the precious metals markets more overtly.

Psychologically it’s a very effective technique.  Hit metals hard on days that they would ordinarily rally to push weak (see leveraged) hands out of the market.  Try to inflict as much technical damage as possible (although at this point no severe damage has been inflicted — but if this continues it will be).

The question is how long could such manipulation last, if that is in fact what’s going on here?  I would personally doubt that such interventions can have staying power — at least not yet.  The SNB hit on precious metals did not last very long, and when priced in Francs gold rallied to a record high.  The previous sell-offs we’ve seen have produced a large amount of buying appetite around $39.00.

Today that seemed to be the case.  I was buying some silver CEFs (closed end funds) when the price hit $39.49.  I felt that a lot of buyers would begin to bite with more conviction as that has been the bottom end of the technical trading ranging silver has been within for the past few weeks.

There is some chance it could break down to $36.00, of course, but with a stop around $38.75, I’ll take a small downside risk given that the upside potential seems to be  about 33% in the short to intermediate term.  Good luck investing and trading, everyone.  And be careful out there.  The sharks are circling.

 

22Aug

The great rotation from gold to silver

Alex Economy, Metals, Technical Analysis 0 comment

With gold pushing all time highs on a near daily basis, far exceeding its inflation adjusted highs from prior decades and pushing through several technical overbought indicators, many are concerned a correction is looming from this recent parabolic move, where gold went from the $1500s in July to $1890.00 today in late August.

Meanwhile, silver has underperformed after the correction from the peak at $50.00 — yet silver’s fundamentals look even more promising. While all the gold that’s ever been mined and produced is still above ground and available, silver is consumed as an industrial metal, and most of that usage is not recoverable or recyclable. Silver is also more difficult to extract. There are not many dedicated silver mines out there, instead silver tends to be a byproduct of other precious metals mining. In addition, silver is the best conductor of heat and electricity of any element, it is widely used for communications, medical devices, technology and military equipment.

The most interesting aspect of silver, however, is its historical ratio of 16:1. For this ratio to be achieved at today’s prices, silver would have to hit $115.00/oz, yet it currently trades around $43.50. This could be a ‘golden opportunity’ to rotate out of gold in to silver and see faster asset appreciation during a time when all signs point to the rally in gold moderating, but silver having tremendous upside potential. Many wise and experienced precious metals investors, including the legendary Eric Sprott, are moving cash out of gold and in to silver to position for this change in the precious metals dynamic.

Having just taken out major technical resistance at $41-42.00/oz, silver is poised to move towards the next major level at $50.00. Many predict silver could reach $75.00 by the end of this year on investment demand to hedge against inflation and monetary uncertainty in the US, Europe, Japan and beyond. I have long been an advocate of buying silver to protect one’s purchasing power and once again I am stating that for my investments I am continuing to buy silver funds as well as silver mining and channeling equities.

Remember that every investment strategy carries risk, and that one could potentially lose their principle if the investment strategy fails — but also remember that paper assets have a long history of catastrophic failure. Whatever path you choose, I wish you and yours the best of luck in the coming financial storm.

12Nov

S&P 500 uptrend intact for now

Alex Commodities, Finance, Futures, Stocks, Technical Analysis 0 comment

The S&P 500′s uptrend remains intact in a defined channel that found support today, during the stock market sell-off, at the 20 day moving average. The chart below shows the trend channel as well as the moving averages.

S&P 500 chart

Uptrend channel intact

There are some technical issues at play here, however, that we cannot discount. First and foremost, as I mentioned in the previous post there is a double top pattern in the S&P 500 that is playing out and causing a decent amount of fear. Combine that with Chinese inflation worries that toppled the Shanghai index down over 5% last night and we find the markets climbing a wall of worries in to the weekend. Most commodities took extreme hits today, with sugar, silver, palladium, gold, cotton and various grains falling off their highs. Oddly enough the dollar was weak while all this selling in commodities and equities was taking place, which is contrary to what we’ve seen in the past months.

Seasonally this time of year tends to be rather positive for equities. The holiday season usually gives earnings and employment a boost and consumer sentiment usually picks up — except for what we witnessed in 2008 of course. Next week should shed more light on the technicals and fundamentals of these markets. As we see trading begin in Asia it will be interesting to see if the appetite for precious metals is once again renewed as it was after the silver sell off on Tuesday after the CFTC raised margin requirements by 20% (from 5% to 6%).

09Nov

Is the rally topping out or just starting?

Alex Bonds, Commodities, Forex, Futures, Stocks, Technical Analysis 0 comment

We’ve seen a significant gain since the bottom in March of 2009, up about 80% since those 666 S&P 500 lows.  Now the market is facing significant resistance, even after the massive $600 billion QE2 plan to inject more liquidity.  The resistance comes both in the US dollar beginning to find trend line support and the S&P 500 showing potential resistance at what could become a double top formation.

First let’s have a look at the long term dollar chart:

US dollar long term chart

It’s clear that the US dollar, despite a large drop in recent months, is beginning to find support at the trend line formed from previous lows. If this trend holds it could bolster the ailing US currency and provide room for not only a short term reversal, but some significant appreciation on the back of Europe’s woes and a correction in the commodity currencies. On the other side, the dollar is seeing significant headwinds towards sustainable appreciation because of the unsustainable forward looking debt load of the US government combined with the massive stimulus and easing programs.

Now let’s have a look at the S&P 500 chart:

We see the potential for a double top formation in the index around 1220. If this level can not be broken to the upside then we have some serious downside potential to contend with in the US stock market. The rally of around 15% over the last two months indicates that many are confident in putting their money in to equities, rather than bonds, and with that a lot of speculative stocks have seen impressive gains. But another side of this rally is that it has largely been supported by extremely loose monetary policy, a “Bernanke put,” is what many are calling it, meaning that there’s no reason to buy protection (or put options) on your investments because the Fed will be there to prop up the market.

This is an inflection point. It has the potential to decide the direction of where many different markets, including currencies, commodities, equities and bonds, will be trading for the next several months ahead. Should the dollar fail its trend line support and the S&P break to the upside of the resistance around 1220 we’ll see a massive rally in other currencies, commodities and equities. If instead we see the dollar hold firm and appreciate against other currencies, reinforcing the trend line support and the S&P breaks down at the aforementioned resistance level then we could see a daunting correction in other currencies, equities and commodities.

All we can do now is watch, wait and act accordingly…

22May

Market bounces on extreme oversold condition

Alex Futures, Stocks, Technical Analysis 1 comment

On Friday the US stock market enjoyed a bounce because of an extremely oversold technical market condition.  These market conditions often happen when there are extreme emotions in the market.  It may seem obvious, but excessive greed leads to overbought conditions and fear leads to oversold conditions, such as the one we recently experienced.

NYSE index

The above chart of the NYSE index (a broad US stock-based composite) depicts the rally and the recent selling.

This chart illustrates levels that are considered overbought or oversold on the NYSE McClellan Oscillator.

The condition, illustrated by the red arrow in the chart, has not been fully worked out so there is still room for more buying.  On a technical basis, oversold conditions typically occur after waves of selling that knock an asset out of balance with supply and demand creating a void that must be filled.  They are measured by various technical indicators.  I prefer the NYSE McClellan Oscillator.

As you can see in the above charts when there is an oversold or overbought condition that reaches an extreme, it is typically corrected and often with violent reverberations throughout the markets.

Downtrend to continue?

Even as the oversold condition resets, it is unlikely that we have seen the last of the selling.  Global market conditions are worsening.  Sovereign debt defaults, EU stability and China’s perceived slowdown are at the forefront of concerns by market participants.

Typically there is a large bounce that resets the oversold condition to neutral or even overbought and then the downward volatility will continue, assuming that the market is going to continue to keep its eye on the powerful headwinds a global recovery faces.

Fundamentals failing

So far the rally since March of 2009 has priced in what economists call a “V-shaped recovery”.  That is to say, a powerful drop and an equally powerful recovery.  In order for this theory to play out there must be improving macroeconomic fundamentals, but instead the exact opposite is occurring as the fundamentals deteriorate.

US Government debt and GDP percentage of debt graphic

This chart shows US government debt is climbing fast and already at multiples of our GDP.

Western government debt is soaring much faster than any GDP growth.  The GDP growth projections are just as unrealistic as the expectation that a debt crisis can be solved with more debt. 

A pronounced fear is building up that this surge in global stock prices we’ve seen for the last year may have been nothing more than a mirage without a basis in reality.  It’s likely that massive tax increases and spending cuts across many governments are going to be inevitable. Such actions will crush the economies of those countries and create more problems for the global economy.

Alternative measure of unemployment     Americans not finding enough work

Unemployment continues to stay at high levels.  In the US unemployment as measured by the Department of Labor U6 survey is at 17%, meaning over 1/6 people cannot find enough work, if any.  U3, a more conservative measure is close to 10%. 

These levels of unemployment are devastating to everyone trying to support themselves financially. Another effect is that it creates a vacuum of sustainable durable or discretionary spending now and in the future hurting businesses everywhere.

The coming correction

At some point there is going to be an even more significant correction than what we’ve seen so far.  One that brings asset prices back in to parity with fundamentals.

While zero percent interest rates and government bailouts may have buoyed the markets, they have not improved the economy.  Some would say these actions actually damaged the economy because the failing companies were not allowed to dissolve.

As the flight to safety occurs we may see an appreciation in US Treasuries, US Dollars and perhaps even gold.  The Japanese Yen will probably also appreciate, damaging the nation’s ability to be competitive with its export prices.

02Sep

Thoughts on equity, energy and metals markets

Alex Commodities, Economy, Energy, Metals, Stocks, Technical Analysis 0 comment

At this point there is some distortion between energy and metals which have a direct relationship as energy must be expended to mine the metals. usually the ratio is 10x the price of a barrel of oil for an ounce of gold, but now it’s been in a range of 12.5x-15x.

Either oil is very undervalued (which is unlikely) or gold is overbought at these levels.

Today’s close of the stock markets and oil seems to indicative of a risk repricing that began last week.

960 (around the 50 day moving average) on the S&P 500 and $65 a barrel on light sweet crude are my downside targets short term, but if either breaks we could trade to much lower support levels.

In addition, when examining the huge sell off in natural gas prices, it’s near certain that energy has more negative catalysts than positive because industrial utilization continues to lag despite the green shoots propaganda that we keep hearing.

Finally, there are a growing number of bears calling for a shake out of March’s lows coming this fall because of a new leg down in commercial real estate that will bleed liquidity out of the equity markets and REITs.