New Kid On The Gold And Silver Block

April 24, 2016

A week ago the price of gold was fixed at $1227…and silver was $16.17. After the SGE opened for trading on Tuesday, prices were steady at first. Subsequently, they then began to improve, with silver suddenly spiking higher with the gold price lagging all the way. On Friday, the closing fixes were $1243.25 and $17.19, respectively, for a weekly gain of 1.3% and 6.3% – this after being dragged off their highs by the typical waterfall attacks we have come to know so well. This is a dangerous game with high risk for the Cartel to play. Surely, they are fully aware of this -- and the fact that the attacks are continuing is a measure of their desperation. Or is it confidence in their ability to control the prices of the metals despite the new presence of a metal exchange in Shanghai?

The risk to the Cartel is two fold. Firstly, with their large short positions in the open interest of the two metals, which are near all-time high numbers, there is the risk of being caught in a violent short squeeze. Secondly, with judicious timing, any players with large deposits of the metal in SGE vaults can exploit any opportunities for arbitrage between Comex and the SGE, even if the timing of the two legs of the trade has to be adjusted for the difference between the two exchanges. This would not matter too much, once a bull trend on the SGE is fully established.

The effect of such arbitrage, which amounts to selling at a higher price on the SGE and purchasing contracts on the metals at a lower price on Comex and requesting delivery at the appropriate time, will be to exhaust Comex reserves of the metals. Given the precarious state of their supply, sustained arbitrage could lead to default and force majeure, which would end Comex’s role as a major exchange for precious metals and perhaps (probably?) spread to other commodities as well once Comex has lost credibility in one arena. Thus, very high risk indeed! Desperation, indeed!

This desperation is also evident in the behaviour of Wall Street and the US dollar, the former more so than the latter. The DJIA is within a few whiskers of making a new all-time high – this at a time of ever greater concern about the state of the US economy. There is no indication that the propulsion higher is sourced in the kind of herd madness that was seen on Nasdaq prior to the March 2000 high; the gain then of 88% in six months is much greater than the 15.6% gain of the DJIA Wednesday last week, but the latter was achieved in just over two months of craziness. There can be no doubt that this time it is not the result of herd madness!

There has been no further information about the reason for the Fed’s panic just two weeks ago – which by itself is a clear indication that the cause of their panic cannot be divulged to avoid a greater and more widespread public panic. Last week, it was speculated here that the recent strong yen and perhaps also the surge in the prices of the precious metals was a flight to safety by investors, who desired to flee from both US and European assets, as they are aware of a coming crisis in both areas.

Now that there has been no further news for more than a week and, most probably, heavy behind the scenes activity and intervention to defuse the reason for the Fed’s panic, so that the flight to safety has slowed or even reversed to some degree. This implies that the intervention has been successful, but is no guarantee that a similar crisis is not ready to pop on another front. There is, however, always a limit to how many breaches in a dike can be contained before the whole thing gives way.

Euro-Dollar

Euro-dollar, last = $1.1223 (www.investing.com)

The euro’s steep recovery off strong support at the bottom of channel KL ($1.1041) has topped out, but the trend in bull channel JK ($1.1591) is still intact. A euro rally has to break clear above line K to be confirmed, after which there is new resistance at lines P ($1.1764) and C ($1.1768) with which to contend. The euro was strong against the dollar for much of 2016, but acted in fits and starts. While the yen has started to weaken against the dollar, the euro has held quite steady, as if the risks in the two regions are perceived to be much the same. The bullish trend of the euro against the dollar is however still intact.   

Dow Jones Industrial Average (DJIA)

The steep and remarkable levitation on Wall Street, following a reversal off 15660 at the support at line L, broke above resistance at line P (17624), top of the current bear channel, to show that the rally was not over yet. The move higher also broke above significant resistance at line B (17922), getting closer to the all time high at 18 312. As mentioned earlier, this does not appear to be normal market behaviour.

Dow Jones Industrial Index, last = 18004 (money.cnn.com)

Gold PM fix - Dollars

Gold price – London PM fix, last = $1243.25 (www.kitco.com)

Sustained pressure on the price of gold since about mid March, before April options expiration and FND, has now lasted into April, with limited successes after the SGE opened for trade last Tuesday. Gains since then have not kept pace with those of silver, but every move higher, however limited, adds pressure to the short positions and requires additional short positions to repulse. This bull trend and intervention cannot continue indefinitely. Either there has to be a massive and lasting bear raid to compel many longs to desert their positions, or there has to be a rush by weaker members of the Cartel to close their short positions at the lowest possible price.

The admission of guilt to market manipulation by Deutsche Bank and willingness to reveal more about other transgressors must have weakened the resolve of some of the members of the Cartel. Knowing the game might be up, they may decide to act quickly to limit their losses. That would release the brakes on the new bull market in gold and also silver. 

Gold PM fix - Euro

Euro gold price – PM fix in Euro, last = €1105.4 (www.kitco.com)

Last week the euro was mostly steady to softer against the dollar. With gold now in a new rising trend, the euro price of gold managed to return just into bull channel KL (€1112), but then also just failed to hold the break. However, the rising trend in gold, should gold be moving faster to catch up to silver, should see the euro price of gold also maintains its new bullish trend, perhaps moving clear into channel KL.

Resistance at lines W (€1181) and R (€1187) is still some distance away.

Silver Daily Fix Chart

Silver daily fix, last = $17.19 (www.kitco.com)

Last week, the gold-silver relationship changed, with silver now leading the way. By breaking above the resistance at lines D ($16.76) and R ($16.84), silver may have shaken off the shackles that have been imposed on it by the Cartel. While this does not imply complete freedom ahead, has now taken silver clear of the bottom of bull channel KL ($16.22).

With silver’s open interest breaking into new high territory, reluctance to increase the short position by repeating the waterfall attacks of last week has to be setting in. Hitting out at gold to influence silver also seems to have lost its earlier effect, to present the Cartel with a fresh dilemma. It will be interesting to see how they try to resolve this problem during and after this week. From what has been seen on the SGE during its first four days of trading, time must be running out rapidly to find a solution. Of course, a major raid using contracts on Comex and the metals on the SGE would have effect, but the regulating powers on the SGE may not look with as much kindness on such selling as the CFTC does on Comex. 

US 10-Year Treasury Note

The strong rally that followed the start of 2016 has run out of steam before testing the market resistance at line E (1.654%) …and then easily broke back above market support at lines K (1.712%) and D( 1.831%). Last week, the bear trend speeded up and the yield is now testing the steep market support at line  W (1.892%). A break back into bear channel VW would be first confirmation that the trend has reversed and is no bearish – at least while the break into the steep channel holds.

For quite some time it seemed that the dollar and the yield on the 10-year were on old fashioned scales; when one turned weaker, the other managed to become more bullish. It was speculated that this was contrived to present foreign holders of the Treasuries with a steady price, so that there would be no temptation to take profit. This link may no have broken down under more severe pressure from the markets;  the dollar index weakened substantially until the late recovery last week, while the yield on the 10-year had also turned bearish – perhaps also as a result of flight out of US assets.

A clear break back into steep channel VW, perhaps followed by a break above bull channel KL (1.997) – so close to the psychological 2.0% level that were important in recent past – would confirm that a bear market in Treasuries has taken root.

US 10-Year Treasury note, last = 1.891%   (www.investing.com)

West Texas Intermediate Crude. Daily close

The attempt to obtain a production freeze from the oil producing countries failed, as could have been predicted. Iran was not going to agree while they are still trying to get back to earlier production levels; they desperately need foreign revenue after a long period of sanctions. Much the same applies to Russia, another key producer.

Yet, despite bad news from that meeting, the price of crude has remained mostly bullish. Widespread positive comments on the supply-demand relationship has kept a bullish sentiment alive. However, with increasing weakness in the global economy as measured by various indicators, such as the Baltic Dry Index and others, as well as greater awareness that the global debt is stifling any attempts to stimulate more economic activity, one has to wonder whether these comments are made on behalf of a ‘political book’ in this election year!

Will time prove the correctness of these bullish comments or will slowing demand in time drag the price of fossil energy lower again? Secondly, what would the effect be if the cause of the Fed’s recent panic re-asserted itself, perhaps on another front?

WTI Crude – Daily close, last = $43.73 (Investing.com)

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