Commercials Getting Closer

October 4, 2021

Since mid-May the price of silver has been under significant pressure, but held above $24. Three weeks ago, that floor was penetrated lower and for a week $23 became the new support. Then, two weeks ago, $22 became the new and lower floor, which on Wednesday failed to hold. The price hovered sideways in the mid $21 level until it broke higher again back above $22 midday on Thursday. It remained below $22.20 until early on Friday when demand in Asia set the price on a course to end the day still below $22.60. Last week, the discussion again touched on a possible reason for this period of increased pressure. Is the break back above $22 a sign that the bull trend has resumed, or is it a fresh trap for the unwary?

At the time of the recent CoT report, on Monday 27 September, the net short position of the Commercials had increased to -28 510 from the previous week’s -28 055; not the direction they want to see should they be working towards a goal where they could get rid of the silver albatross around their necks. Given the still relatively large net short position of the Commercials, the discussion last week concluded that we could expect the pressure on the price of silver to be sustained. It would not have surprised if the price dipped below $22, as it did on Wednesday. Yet this new low silver price was not protected, but allowed to move higher to the low $22 level on Thursday and then to even higher on Friday.

A possible reason for this relaxation in the price suppression can be found in the fact that the silver OI increased by almost 5000 contracts on Wednesday when the price dropped below $22. It would appear that to keep the price below $22 required fresh selling by the Commercials?, probably because the hedge fund algos had calculated it was a good time to take profit on their new short positions – which definitely was not what the Commercials had hoped or expected and the price of silver was allowed to bounce back above $22 on Thursday and continue higher on Friday.

One could speculate that the move higher in the price of silver, to approach $23, has the objective of setting a trap for the hedge funds. Reducing the profit margin on the short positions could have the effect of stopping the profit taking and inducing a new session of shorting the metal. Whether so intended or not, the jump in the silver price on Thursday resulted in a decline in the silver OI of 6604 contracts – possibly because the hedge fund algos were again going short. On Friday the silver OI fell even more, but only by 606 contracts.

Should this increase in the silver price really be designed as a trap, it would seem to be working, as reflected in the decline in the silver OI, else it is merely a fortuitous development for the Commercials – which they might realise and then try to exploit it further. Doing so would require careful management of the price of silver. If it were to increase too fast or too far, the algos might fear a short squeeze on the way and then decide to reduce their short positions. If the price falls too far or it is too steep, then the algos could resume taking profit. One has to assume that the Commercials and the hedge fund algos – wittingly or unwittingly – are involved in a chess game where each change in their ship is analysed by both parties to guess at the motive and what their next move should be.

A similar game is of course being played in the gold futures. In one sense the game will be less critical than the one in silver, because a net short position in gold futures is not as subject to a potential short squeeze as the one in silver. On the other hand, a complicating factor is the influence the price of gold has on the market in the silver futures – either emotionally or financially because of gold-silver spreads. No wonder so many PhDs in physics and the mathematical sciences have found employment in the financial market sector!

The gold CoT chart shows that during the past month of lower prices for gold the net short position of the Commercials in the gold futures has declined by 23 164 contracts from -235 808 to -212 644. Perhaps because the prices of gold and silver tend to move closely in tandem – mostly with silver being more highly geared on the downside – it can be expected that the algos will follow a similar strategy on the two metal futures.

If by continuing this common trend in the two metal prices the hedge fund algos could be induced to go more short in both of them, there can be a win-win situation for the Commercials. Should they manage to realise their presumed objective to clear their net short position in silver, it would be an opportune moment to let the price of silver rise freely and to start going more long in silver to the extent the market allows. With the hedge funds then committed to close their silver short positions in a market with few sellers, the Commercials might be able to largely cover their losses on gold short positions with profit made on their net long positions in silver.

After suffering a significant loss on Thursday, Wall Street futures started off with a further small decline in Asian trading, for the DJIA to reach a low of 33 618, down by 200+ from the previous close. The futures market then uncharacteristically went deathly quiet for most of the early morning, but gapped higher when trading began, reaching a high of 33 946 – up by 103 for the day. This did not last; a steep sell-off soon reached set a new low for the day, down by 56 from the previous close, for a decline of more than 150 points and which surely had the Bears piling in on the short side, boots and all.

The possibility of a trap being set for the greedy was mentioned earlier. By hindsight the quiet day after the flurry of selling in Asia struck me as strange – one would have expected a repeat of previous days when a Big Buyer was active in very early trading to prevent any significant selling from setting a trend. The quiet was broken with the selling that reversed the gap higher at the open to set a new low for the day – and the Bear trap was set at the low of 33 524!

During the six hours of trading that remained, the DJIA gained 705 points – about 300 of these without even a minor correction! No wonder turnover in the 30 Dow stocks was more than 40% above the 3-month average. With Wall Street down almost 550 points on Thursday, a negative close on Friday would have prepared for a disaster on Monday. The powers that be were fully aware of this and set up a trap for the Bears. Keeping the market so quiet for most of the day prior to the open, must have created a feeling of security among bearish traders and fund managers who had spent much money to support their preferred stocks on the last day of the quarter, with probably only rare successes.

Once the anticipated opening rally was getting tired, they climbed in and sold – only to seal the trap that was set for them and designed to make certain that Monday will not become a red letter day. As recent Wall Street history shows, it is much easier to hold a market at a high level than to drag it higher out of the dumps. Which does not mean the bull market remains intact indefinitely; as Herb Stein would have it, a time will come when the real state of the economy trumps the wishes of the powers that be to see a strong Wall Street as proof of how well the economy is doing. The bull trend will not only come to an end, but reverse.

On the Covid front, dr. Peter McCullough is making himself unpopular with the health authorities and among his vaccine promoting peers with his videos on the dark side of the pandemic that is rarely reported, including the lack of safety of the vaccines.

Euro–Dollar

Euro–dollar, last = $1.1594 (www.investing.com)

Following the break below the euro bull channel PQRS, the tentative trend line G, with line X as backup, could assist to effect a reversal higher. Should the downwards trend extend to break below the euro bear channel, the implication is the dollar will become even more strong; something that appears doubtful given the massive money printing that is going on and a suspicion that the recent dollar rally was manufactured to help Wall Street and confirm the strong US economy. Logically, the support at lines G and X therefore is expected to hold and for the euro to be steady to firm.

DJIA daily close

Background to the recent behaviour of Wall Street has already been provided. On the technical front it is interesting that the sell-off on Thursday reached to 0.2% from the support along the bottom of the main bull channel IJK. This channel contains a larger part of the bull market that took off after the Covid bottom spike in March last year – again clearly with substantial assistance, as had happened in March 2009.

Line G recently acted as resistance and if it were to again cap any new attempt at a rally, the odds begin to favour a break into channel KL, probably then with a distinct bearish bias. It all depends on how long the Bears take to recover emotionally and financially from the surprise on Friday, or on a new shock to investor confidence.

DJIA. last = 34326.46 (money.cnn.com)

Gold London PM fix – Dollars

Gold price – London PM fix, last = $1757.05 (www.kitco.com)

The situation with respect to the price of gold was discussed earlier. It seems unlikely, given the position in which the Big Banks find themselves, that the gold price will rally and be allowed to break above $1800. But neither will they press too hard to get the price substantially lower and thereby increase their net short position too much. This implies that the new week should proceed much like the past few weeks, with a stable price to a slightly lower trend.

Euro–gold PM fix

The euro-price of gold tried to recover into its main bull channel for a second time, but ended right at the line with Friday’s London PM fix. Accepting that the price of gold is not expected to rally much, then the euro price of gold would fail in attempt to break into the bull channel unless the euro can weaken even more against the dollar. Also, support along line E does not look to be in imminent danger of being tested, to imply that the euro price of gold seems set to drift mostly sideways for now.

Euro gold price – PM fix in Euro. Last = €1515.10 (www.kitco.com)

Silver Daily London Fix

The price of silver reached and rebounded off the support of horizontal trend line H to end at resistance of line D, the bottom boundary of bull channel AD. Again in light of the earlier speculation about the behaviour of the PM market, it would not surprise if the price of silver is to move mostly sideways between lines D and H – with a break below line H to imply that the Big Banks are being more aggressive in their attempt to sucker the hedge funds into not taking profit, but going more short.

Silver daily London fix, last = $22.095 (www.kitco.com)

U.S. 10–year Treasury Note

1.10–year Treasury note, last = 1.465% (www.investing.com )

The new and second break above broad channel AF of two weeks ago, has extended a little to test and briefly break above line Y. The new trend higher has not yet started to break back into channel KL, from where it had broken lower not so long ago. A break higher above line Y, if that were to happen, would not be decisive if the yield then mostly moves between lines R and Y.

However, when a possible break above line Y extends into channel KL, this event will confirm that the bond market is fully aware of the coming inflation and that it will not be transitory.

West Texas Intermediate crude. Daily close

The price of crude oil dipped a little lower on Monday after it reached resistance at lines B and S. This marginal decline did not last and the price then spent the rest of the week sitting close to the two resistance trend lines. Here also, as for the yield on the 10-year Treasury, a break higher to remain in steep bull channel JKL would imply that the market is anticipating inflation to continue to increase.

Failure to break into the steep channel could see the price still with a break above the two lines of resistance, but then followed by a sideways move. Alternatively and more likely only if the economy really and obviously grinds to a halt, is a reversal off the resistance to move lower and sideways.

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In every cubic mile of sea water there is 25 tons of gold

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