Dollar On - Commodities Off

As I suspected earlier in the week, we hadn't yet seen the bottom in Silver.  After a 2.5 day snap-back rally (forming a perfectly tradeable bear flag for the chartist of you out there) the selling commenced again on Wednesday and continued into Thursday, where we hit and bounced off the first level of support mentioned in my previous post at ~ $32.50.  (see chart below).

Will this bounce at support mark the bottom of this sell-off?  Possibly, but before going there, let me bring a few additional charts to your attention.  First, here is Gold.

As you can see, similar to Silver in the initial sell-off from two weeks ago, but notably stronger performance during this past week by not putting in a new low when the sell-off resumed.

And here is a chart of WTI Crude

Once again, very similar to Silver, and though it got much closer to putting in a new low on Thursday, like Gold,  it too bounced and reversed higher before consolidating with in a range on Friday.

And now, take a look at the EUR/USD chart (that's Euro-US Dollar for any newbies out there). 

Are you starting to see any similarities here?  For those who were relegated to taking the short bus to school, the selling in all of these charts, though each slightly unique, all began on the same day and have continued on roughly the same path over the past 7 or so trading days. 

Coincidence?

Well, I gave you a clue in the title to this post.  "Dollar on", remember?  Yes, all of the commodities listed above are dollar denominated, and the trading pair EUR/USD is also reflection of dollar strength or weakness.  This being the case, the following chart of the US Dollar Index should come as no surprise.



Low and behold, the USD has been rallying a bit over the past 7 days, and that has, in part, been the cause of the sell-off we've seen in commodities.  To be precise, the dovish comments from ECB chief Trichet regarding further interest rate tightening in Euro land caused an immediate sell-off in the Euro...300 pips worth over a single day.  That was the catalyst.  Then came a series of margin hikes for silver and oil futures contracts in a manner never before witnessed in recent times (perhaps ever!), and voila, everything came crashing down.  

Does this mean that we've turned the corner and all is well again with the Dollar?  Go back and ask yourself the same questions posted in my previous post.  In a word, "no".  However that doesn't mean we won't see short term snap back rallies in the dollar as it continues to plummet.  After all, the Euro and Europe are not much better off than we are, so for a time, I fully expect to see the USD/EUR relationship go back and forth, taking the commodities complex along a similar ride.  Dollar strong = Euro and commodities weak, and vice-versa.  But then there will come a time when commodities (gold and silver in particular) will completely decouple from the EUR/USD trade and go their own way....up. 

But that's another story for another day.  For now, we could see further dollar strengthening as the debate around further Greek debt restructuring nibbles away at Euro credibility, which could result in renewed selling early in the week on our precious metals.  On the other hand, note again the relative strength of Gold during this entire episode....and of course, keep an eye on crude.  It's not like the Middle East has suddenly turned into a land of peace and harmony.   A new flare-up in this region could spike oil prices anew, and drag the PMs along with it. 

A Gift

Other duties and projects have kept me from posting on a regular basis this Spring, but I've gotten several emails in the past few days asking for my current thoughts on Silver and Gold, so I figured it was time to dust off the blog and throw out a few charts.

Over the past few days we have witnessed a truly impressive beat-down across the entire commodities complex, with the most impressive illustrations being Crude - down over 10% and Silver down over 25%.  The following graphic really tells it all (click to enlarge).



After seeing a parabolic rise in Silver since the middle of January, we truly were in need of a correction.  The question for now - how much farther to go before the sell-off in Silver is complete?   Hard to say when the selling gets this intense.  There were several places along the way where I thought we would see a pause and some consolidation during the past two days, but these levels provided about as much support as spider web would to a falling brick.  Nada.   Last night before going to bed, I was thinking that the area around $34 would be the bottom, but in early morning trading today, we are already down in the $33's, so it looks like we may have some more downside to come.  The next technical support levels have been shown in the above chart, and if I were a betting man, I would say that we'll likely test $30 before all is said and done. 

Question #2 - Is the rally in Silver over?  If you're not capable of independent thought and all you do is listen to the pundits on television, you probably believe the drivel they've been spewing - that Silver has simply been in a speculative bubble, and now the bubble has been popped.  Hmmm.... 

If, on the other hand, you've been paying attention to what's really been going on, you'll understand that we've just been given an incredible gift - the opportunity to buy more physical silver at a 25% discount, and perhaps even more, by the time the sell-off is complete.  How can I say this?  Do you think I'm nuts?  Well, I'll come right back to the same question that I have been posing for the past 3 years.  What has changed? 

Has the U.S. Govt curbed spending?  Nope - as a matter of fact, front and center on the Congressional debate docket is another push to raise the U.S. debt ceiling, because our idiot politicians won't make any real attempts to cut spending...particularly on entitlements and the military.

Has the Fed stopped monetizing debt?  Nope - we are in the middle of QE2, with the Fed buying $100 Billion a month in U.S. Treasuries.

Have the largest states in the union (economically speaking) suddenly become solvent again?  Nope - California, Illinois, New York and Michigan are all barely keeping their heads above water, and are a far cry from being prosperous.

Are the big banks all healthy and lending?  Are you fucking kidding me?  Hell no!  They are all still carrying massive losses on their balance sheets that have been covered up by not having to mark their assets to the market, and have been showing profits via accounting gimmicks and their prop trading desks, just so their executives can continue to rake in obscene bonuses.

How's that housing recovery going?  Have real-estate prices in your area recovered to 2005 - 2007 levels?  Nope, not even close.

Nothing.  Has. Changed. 

The only thing our leaders have done is kick the can down the road for the past few years, but we are rapidly approaching the time when the can will not move another inch.  And what has happened as a result of the incessant can-kicking?  Well, one thing our leaders are doing is destroying the US Dollar, which hit new 3 year lows early this week. 

Once again, if you listen to the news, you'll be told that dollar devaluation is a good thing because it makes US made products more competitive in the international market place, and is therefore good for our economy.  I guess that's okay if you're the CEO of a large manufacturing company, but the real effect of dollar devaluation for Joe and Joanne Sixpack is inflation.  As I've explained on this blog before, commodities around the world are priced in U.S. Dollars - from crude oil to pork bellies, orange juice to soy beans...the USD is the defacto valuation medium.  So what happens when Ben Bernanke prints $100 Billion per month in new USD's?  It lowers the value of all USD's around the world.  What happens when the USD loses value?  It takes more USD's to buy the same amount of wheat, corn, oil, and beef....in other words, the prices for everything goes up.  Unless you've been living out in the wilderness as part of a self-sufficient commune, I think it's safe to say that we have all seen this effect over the past 6 months at the grocery stores and at the pump.

Going forward, is it likely that we will see any significant change?  I find it highly unlikely.  In the very short term (1 - 6 months), we will probably see very volatile markets, and a significant sell-off in stocks.  This is the only way that Ben Bernanke and our other illustrious leaders will be able to justify QE3 in the public eye, and believe me, QE3 is all but a certainty, in some way, shape, or form.  With the Fed buying up 50% or more of our public debt every month, who do you think will buy it if they were to suddenly end QE?  In years past, you could always count on the Europeans, the Japenese and the Chinese to purchase US debt, as they all saw US Treasuries as a safe haven investment.  Not anymore.  The Chinese are actually dumping their USD assets, and the Europeans and Japanese are in financial shambles themselves.  So who would step in to buy US debt if the Fed stops?  The answer is, nobody.  The US would have a failed auction, resulting in a funding halt to the federal government.  So yes, QE3 is coming folks.  There's simply no alternative.  Unfortunately, this will result in the final death spiral for the USD, and Americans will be faced with rampant inflation.

Which brings me back to the point of this post.  We've been given a gift.  Even if Silver drops to $30 or $25 - this will be a short term correction.  Whether prices remains suppressed for a week or a number of months remains to be seen, but trust me, once QE3 gets announced, or anticipation of QE3 starts getting priced into the market, commodities are going to explode and we will not see prices this low ever again.   I still stand by my call that we will see silver priced at over $100/oz by sometime next year.  The only way you will be able to protect yourself, your family, and your dollar denominated investments from the coming inflationary onslaught is to buy physical silver and/or physical gold. 

I'll try to post more regularly in the coming weeks/months.   Thanks for stopping by.

Sunday Night Musings

First off, regardless of your religious or spiritual persuasion, we should all be saying a prayer, crossing our fingers, or otherwise thinking about our Japanese brethren as they deal with the ongoing catastrophe resulting from the recent 8.9 earthquake.  If you haven't been keeping up, I urge you to click on the link below and watch both of the videos posted by the folks at Zerohedge.com.  Video number 2 is particularly disturbing and heart wrenching.  An incredible display of mother nature at her most destructive.

http://www.zerohedge.com/article/stunning-new-footage-incoming-tsunami

My heart goes out to the people of Japan.  The Tsunami effect, coupled with the destruction wrought by the earthquake, and then the follow-on disasters related to their nuclear power plants....all together, an unparalleled  catastrophe in recent times.  Just try to imagine something of this magnitude happening within 50 - 100 miles of your home.  The devastation is simply unfathomable.

In terms of the financial markets, the Bank of Japan (the equivalent of the US Fed) announced an injection of  7 trillion Yen into the Japanese Money Markets this evening (morning in Japan), in an attempt to calm the markets in the face of a 5% + drop in the Nikkei.

On the precious metals front, both gold and silver are surging this evening as the futures market open on the Globex.  Silver is currently trading at $36.39, and based on the hourly chart below, looks like it wants to make a stab at the previous highs (36.76).

Will be interesting to see what happens if/when we get into the "range".

As I said earlier this weekend...should be an interesting week!

An Interesting Article

In yesterday's post I mentioned that I wouldn't be at all surprised to see some sort of correction in the near term on silver.  The article in the link below does a much better job of articulating this same theory.  The author has also done some analysis to back this up. 


http://news.silverseek.com/Zealllc/1299863417.php

Does this mean that we are definitely headed for a correction?  Nope.  And if you want a good example, take the massive rallies in the S&P 500 that we've seen over the past few years as proof that a bull can keep churning higher much longer than anyone might believe possible....yours truly included. 

So what's the deal - are we going to sell-off or keep rallying up?  Well if we knew for sure, we'd all be retired billionaires, wouldn't we?  As I penned yesterday, and as this other article emphasizes, silver has gone incredibly high in a very short amount of time, so a correction should be expected, if not down right welcomed, and a double-top right around the recent highs would be a very logical place for this to happen.  If it weren't for all of the recent and ongoing events in the world arena, I might be much more inclined to be an aggressive speculative seller at the $36.75 - $37 range described yesterday (speculative seller = shorting on the Comex or buying puts - not selling my physical silver), but it doesn't appear that things are quieting down much at all in the Middle East, and any additional negative press out of that region will likely take crude up another leg.  The precious metals seem to have been in lock-step with crude lately, and this relationship is something to respect.

At the end of the day, my closing comments in yesterday's post remain the most valid for anyone who is trading this volatile market.  No matter what your personal bias is - be nimble and don't over-leverage in either direction.  If your an investor - don't worry about the short term swings.  Long term, the fundamentals remain intact and we can expect to see silver much, much higher.  Just use the corrections as buying opportunities for more physical. 

Silver - Back Inside the Pennant Formation

If you go back to my last post from Wednesday, you'll see that silver was working its way through a pennant consolidation pattern and we were waiting to see which way things would break.  At the time I had already taken profits and was back in cash, and wasn't feeling to good about it.  As luck would have it, the sellers ended up taking control in the Weds - Thurs overnight session, and took price down below the pennant.  Then on Friday we (here in America) woke up to news of the earthquake in Japan, and we saw quite a sell-off across almost all market sectors, precious metals included.  Then by mid-morning on Friday some bad econ reports in the US and resultant posturing by a score of pundits in the media discussing the potential necessity for QE3 sent the precious metals rocketing higher. 

The 60 minute chart above shows the price action in silver that I just described in the opening paragraph.  Back on Wednesday I said that if we ended up selling-off, I would be looking to buy the dip at either the $35 or $34 support levels.  I wasn't able to watch the markets at all on Thursday, but on Friday morning I was watching $34 in silver and $1400 in gold very closely to see if they would hold.  This next chart below shows silver on a 4 hour time frame, and illustrates why I saw the $34 level as significant support.

Silver only got down as far as $34.05 in the spot market, then it was rally-ho from there.  I bought some May call options when price broke through $34.50, hoping for the best, but ready to sell if we sold back down to $34.  It was touch and go there for the first two hours with price dropping back below $34.20 again, but the silver bulls finally took control and sent us back over $36 by noon time (EST).   Then guess where we met resistance?  Yep, back at the descending trend line that formed the top of our pennant pattern from earlier in the week.  So if you refer back to the first chart above, you'll see that we are right back in the middle of the consolidation pattern, so once again, we are waiting to see how this pattern resolves.  I took profits on half of the position I entered on Friday morning...I mean, a $1.50 - $1.75 move in silver within the space of 4 hours is pretty huge when you're speculating with options, and there's no sense in getting too greedy.  After all, who knows what will happen over the weekend, right?

Where we go from here is the question.  I think chances are good that we will at least go back up and test the previous high at $36.76, and then $37.  That range is the key inflection point.  As previously mentioned, silver has had quite the run-up since the last correction...$26.50 - $36.75 in the space of seven weeks is pretty impressive...so it wouldn't surprise me to see correction after double-topping between $36.75 and $37.   In fact, I'll probably take profits on 50% of my remaining position if we get in this range then wait and see how things go.  If the bulls remain in control, we could see $40 pretty quickly, but I think we only have a 30% probability of that happening just now.  As we get closer to the end of the May futures contract, we will very likely break $40, but that move is some weeks away in my opinion.

Should be an interesting week yet again. There are a lot things going on around the world these days and then there's the media's spin on these events, both of which are adding a lot of volatility to the markets.  My best advice - stay nimble and don't over-leverage in either  direction.

Silver Trading Update

Over the past 5 - 6 months, silver has (on average) performed best early in the week, then come Wednesday, Blythe and her traders at the JP Morgue step in and give price a beat down for a few days.  Considering the huge rally we've witnessed over the past 10 days, I was really expecting silver to get hammered today, so I rolled out of all my call options yesterday at a very nice profit, and decided to sit back and wait for an opportunity to buy the dip.   Well....long story short, we didn't sell off today at all.  In fact, we seem to be consolidating right around $36 as the chart below illustrates.

So now I'm completely out of my speculative positions, and to be honest, I'm feeling like I might've made a mistake.  Anyone who's ever traded will tell you, the only thing that comes close to the pain of having a trade go against you, is the pain that results from being out of the market when a big move comes.

But done is done, and at this point, all I can do is wait and see which way this consolidation pattern resolves itself.  If I had to guess, I would say chances are better that we will see another leg up...mainly based on the state of affairs in the Middle East.  If the idiots in Libya torch another oil field or two, we'll likely see Brent crude over $120/barrel and WTI crude hit $110, which will in turn raise the entire commodity complex, precious metals in particular.   So I'll be watching the news and tracking crude prices...if it starts taking off, I'll likely jump back in with some more silver calls.  If on the other hand Blythe starts hammering silver down through the lower trend line, I will wait and buy the dip, looking for support first at $35, and again at $34.  I may even buy some puts and trade the downside move....really depends on when the sellers go on the attack.  Their latest M.O. has been to go on the offensive during the overnight, thinly traded, GLOBEX session, and if that happens, I'll just wait for the dip and go long.  We shall see....

All for now. 

Silver Hitting Escape Velocity?

A picture is worth a thousand words, so let's start there with a weekly chart of spot silver. (click to enlarge)

As previously posted on this blog, I think this is just the beginning, and anyone trading precious metals should continue to buy the corrections.  Anyone with any significant amount of savings should also be purchasing physical silver (and/or gold) as a hedge against a currency collapse.  Don't laugh and don't jeer.  Open your eyes and your mind.  Considering the current state of affairs, both here in the U.S. and around the world, the probability that we will see a major collapse is rising by the month.  If you don't believe me, surf over to Google and do your own research.  Here are a couple of questions to help you out...

If all is well with the US Dollar, other global fiat currencies, and the world economy...

1.  Why have central banks around the world been active buyers of gold in the past months?

2.  Why has China in particular become the largest buyer of gold over the past several months?

3.  Why have recently deposed, third world dictators been caught trying to escape their native countries with private jets loaded with gold and silver bars, and not bundles of $100 bills?  (as would've been the case in the 1980's and 90's)

4.  Why are the U.S. State Governments of Utah and Virginia engaging in serious debate over the topic of using gold and silver as a means to settle debt?  

Is it maybe because the power elite no longer trust the paper fiat currencies of the world?  One thing that is a given - the power elite in this country and around the world are privy to much more information than you and I will ever be, and they are positioning themselves for a future that will likely not include the Dollar, Euro, Pound and Yen as we now know them.  Perhaps we should be following their lead?  It's your decision to make, but I've been doing so since the crisis of 2008. 

As for silver...as I've said time and time again, the fact that this metal has value both as an industrial commodity and a historical medium of exchange means that as fiat currencies around the world continue to devalue and real inflation takes hold, the price of silver will sky rocket.  The chart above shows that silver has already doubled in price since last year.  Now consider this from the US Mint on 3/2/11:

Production of United States Mint American Eagle Silver Uncirculated Coins continues to be temporarily suspended because of unprecedented demand for American Eagle Silver Bullion Coins. Until recently, all available silver bullion blanks were being allocated to the American Eagle Silver Bullion Coin Program, as the United States Mint is required by Public Law 99-61 to produce these coins “in quantities sufficient to meet public demand . . . .”

Although the demand for precious metal coins remains high, the increase in supply of planchets—coupled with a lower demand for bullion orders in August and September—allowed the United States Mint to meet public demand and shift some capacity to produce numismatic versions of the American Eagle One Ounce Silver Proof Coin.

However, because of the continued demand for American Eagle Silver Bullion Coins, 2010-dated American Eagle Silver Uncirculated Coins will not be produced.

The United States Mint will resume production of American Eagle Silver Uncirculated Coins once sufficient inventories of silver bullion blanks can be acquired to meet market demand for all three American Eagle Silver Coin products.

Hmmm....looks like a supply problem really is developing, but as I said above, do your own research, and I am confident that you will come to the same conclusion.

Silver is poised to go parabolic....and I believe that this will happen between now and October 2011 based on what has been happening on the COMEX since December.  We will very likely see a COMEX default by October, and when that occurs, the manipulated price suppression will cease, and you will see silver rise in accordance with the normal laws of supply and demand.  If you don't already own silver by then, my feeling is, you will have missed the boat.

Just so everyone is clear - I am not gloating about my successful silver trades.  This is a wake-up call for anyone who still believes that all is well in the world and that the US economy is on the mend.  It's not, and things have the potential of getting really ugly in the not too distant future.  Prepare for the worst and hope for the best - there may not have been a more appropriate time for this particular statement in our current generation.

For the traders:
In the near term, I think we will see an intermediate top in both silver and gold sometime this coming week.  Silver may go as high as $37, but I would then expect to see a short term correction, and it could be quite violent.  It wouldn't surprise me to see Blythe and the JP Morgue take it all the way back down to $30.50, but we should see support at $34 and even stronger support at $32.50 first.  I will be a potential buyer at both of these levels, and if it does get all the way down to the $30.50 - $31 range, I will likely take a very large speculative position via forward month call options. 

For the investors:
Buy some physical silver now, and continue to buy an incremental amount every month, just as you would invest in your 401k or IRA.  Don't worry about short term price fluctuations...longer term, you will be in a very good place.