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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.

 

06Sep

An exercise in reckless monetary policy

Alex Commodities, Economy, Forex, Metals 0 comment

The Swiss National Bank intervened in the foreign exchange markets today, effectively devaluing the Franc by over 8% in a single day. Through a combination of an aggressive monetary policy statement and direct foreign exchange purchases of other currencies (namely the dollar and the euro) the central bank virtually collapsed a long term uptrend in the Franc.

That being said, it probably would have been sufficient for them to instead declare that they were going to pursue a more accommodating policy stance with the potential for future interest rate reductions (given the trend on the Swiss Franc charts, it would seem that it is vulnerable to any downward pressure). But, the Swiss economy is not experiencing the kind of economic slack or debt burden that justifies any of this type of inflationary policy. In fact, the Swiss economy isn’t even export-driven, so this hurts the consumers and effectively wipes away the value savers were building up in the last month. That’s not to say there was no speculation in the Franc, there was, and it was bubbling over, but this type of monetary policy is dangerous and foolish. It’s akin to trying to use a machete to perform a precision surgery.

Today’s announcement from SNB was more aimed at Swiss equities, which “rallied” over 4%. And why wouldn’t they? After all they’re being recalibrated for pricing in a weaker currency. It didn’t seem to stimulate risk appetites in the region, though, as Swiss equities were effectively alone in a sea red being painted across tickers all over Europe.

Gold and silver saw a corrective sell-off. I believe a good portion of that sell-off was margin calls happening from the move in the Franc. A lot of speculative and leveraged forex positions were absolutely smashed with the move that happened today. Over 8% downside has the capability to pancake someone employing over 12X leverage to being insolvent instantly. Margin clerks likely saw the glimmering profits in the gold and silver positions and forced holders to sell to cover the liquidity vacuum in their portfolios.

Because of that, and the strong technical support I saw in both precious metals markets today, I believe this selling presented more of a buying opportunity than a change in trend. After all, the Swiss printing an enormous amount of Francs to devalue their currency is exactly the type of central bank policy that adds a catalyst to the upward momentum in precious metals prices.