The Lone Ranger Strikes Again
Daan Joubert
Last week's essay dealt with the Lone Ranger and his silver bullets and the way that the silver price is acting like a shot by the Lone Ranger to incapacitate the efforts of those who are trying to keep the silver price under a price ceiling. And gold too. Two weeks ago the silver price very briefly spiked to about $6,26, but then pulled back quite rapidly to close the week just below $6,20.
That was only the start of the volatility!
On Tuesday the silver price rallied very quickly to again briefly reach $6,48, only to fall back as before under some profit taking - or determined selling? - to settle first at $6,26 and then decline further to the closing level
of the previous week at $6,19, before settling into a sideways band in the low $6,20's. Later during the week, on Thursday, just as people became accustomed to the price level, a sudden and violent raid on the silver price,
said to be executed by Morgan Stanley, pushed the price lower by some 12 cents to $6,11 within a few minutes.
Instead of a collapsing price as further selling from stopped out longs get triggered, the price rebounded just as quickly and was soon back at $6,18 - a sure sign that all the Lone Ranger people out there were looking for more silver to pour into bullets! The price from then on recovered gradually and by early morning NY time, as US markets opened, silver was back at $6,23.
Then something very similar to the week before happened. Readers may remember that silver suddenly spiked higher two weeks ago, from around $6,12 to $6,26 just as the US joined the markets. The opinion was expressed that it could only have been one of the larger short players in the market deciding that enough pain was enough and proceeded to close out
some short positions. The analogy to two teams engaged in a tug of war was drawn. While the teams have an equal number of members, the struggle is generally tight and evenly matched; but let just one person from one team switch sides and join the other team, and the effect is sudden and very marked. Victory for that team is assured.
This seems to have happened again last week. During Friday morning in New York the silver price simply took off and rocketed higher, to $6,48 - as the week before, just short of the psychologically important $6,50 level. This time, though, the price did not fall away immediately; it settled and then closed around the $6,46 mark.
Again, as the week before, the surge in the price was halted either by profit taking or by increased selling - or simply because buyers were thinking twice about pushing the price even higher shortly before the weekend begins. However, if one assumes that the sudden rise in the price was not so much the result of natural buyers flocking into the market, but that someone was feeling the deep pain of a bear squeeze, a different scenario emerges.
The sudden and very steep rise in the price of silver - from $6,23 to $6,48 in a matter of 4-5 hours - indicates that the concerned and determined buyer did not obtain enough stock to satisfy his requirements, but had to
keep on increasing the price to draw volume into the market. It was only as the price approached $6,50 that volume increased enough to keep the price steady - the sellers probably being short-term speculators who,
having sold out their positions before the weekend, can be expected to come back this week as buyers on any dip in the price - or perhaps because the short buyer thought it wise to wait into this week before beginning to
buy again.
In either case one would expect that there is now a floor under the silver price - either the specs returning to the market or the short player resuming his purchases. Should this be so, i.e. that the price steadies at or near the closing level, more and more potential buyers will gain sufficient confidence to move into the market - adding further demand to drive up the price even further as people become accustomed to the new level; but also
placing more and more pressure on the short players to start covering positions - thereby adding much greater volatility to the market and increasing the possibility of a very steep and sustained jump in the price. With high volatility - very good for people with call options!
Perhaps we will see one final concerted attempt to push the price lower and shake out the longs. Based on what has happened over the past two week the chances of this happening are receding faster than the chances of it
succeeding.
Therefore one should expect much higher volatility in the silver price, with a steeply increasing trend.
Gold
The gold price has also reacted upwards, closing above the key $425 psychological level. The market is subject to much the same dynamics as what silver has been reacting to and it is logical to expect that the gold price could follow silver's example and break steeply higher at any moment.
So far attempts to keep the gold price under control has had substantially more success than is the case with silver, but the probability of gold also breaking steeply higher - perhaps with $450 as a first target - is also increasing with every upwards move in the price of silver.
PS
The above was written over the weekend. This morning in Asian trade - and with Tokyo closed! - a strange thing happened. The precious metals are usually quite settled into a rut during Asian trade, and that is how gold and platinum behaved. However, silver started an early run and soon moved up to $6,58 from the overnight $6,46 - good move that held quite steady and must have made the silver bulls very happy.
But that was not the end of it - when European trading got into its stride, silver took off again, reaching to about $6,75 before peaking and correcting back to around $6,68 where it settled with some sustained volatility. Now, as the opening of US markets approaches, silver is giving up a good deal of its late gains and returning to sit just above $6,60.
The Big Question now is what will happen when US markets join the rest of the world with silver having gapped from $6,46 to $6,60 or so. A possible alternative is for the short squeeze to come into effect again, pushing the price upwards to $7,00. Another is that the short players can muster enough strength (= silver metal) to force the price down to below $6,48 to
close the gap. A third is that all the market players sit and wait for something to happen so that the price takes direction again.
Under current conditions the third alternative has a low probability; this means that market players can make ready for a violent ride again - in either direction.
Almost as if the LR is out there with a "Hey-ho, Silver!" Ready to charge off.
14 January 2004
© January 2004 Daan Joubert
All rights reserved to author and www.GOLDSignals.com
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