A Policy Driven Silver Price Crash

By: Clif_Droke

Silver has once again stolen the investment market spotlight. Margin requirements for silver trading rose 84 percent last week, which prompted a major sell-off. Silver posted its worst four-day drop since 1980 and was down more than 25% after the CME Group raised the costs for investors to trade the metal four consecutive times within a week. 

The impact of these rather drastic increases in margin requirements was decidedly negative on trader psychology. Last weekend when the latest margin increase was announced, one analyst observed, “Many commodities traders in the US cannot trade on the weekend, and when Chicago opens many will instantly be hit with margin calls because of the immediate rise in margin requirements.” The selling pressure was immediately felt on Monday, May 2, at the commencement of trading with selling pressure spilling over into the subsequent trading sessions.

The weakness in silver spilled over into other commodities, including crude oil, which declined almost 10% on Thursday, May 5. Among the many issues the sell-off has provoked, the idea that inflation has made its return is being questioned.

The silver sell-off was by no means a “normal” correction; it could be called a policy-driven crash and it did significant damage to the silver uptrend. While a bottom can occur at any time – the market is certainly “oversold” enough from an immediate-term technical standpoint – it’s questionable that a full retracement of the recent crash will occur quickly. Even if CME Group reverses its policy decision and significantly lowers margins in the coming days (not likely), the psychological damage to silver isn’t likely to be healed so quickly. Traders and investors are spooked and they have good reason for questioning the soundness of the exchange group’s policy decisions as well as its motives.

Some questions should be asked of the CME Group in the wake of last week’s happenings. If CME Group was truly concerned with a silver bubble, why then did it not raise margin requirements on the metal shortly after the commencement of the Fed’s second quantitative easing program (QE2) when it was obvious that the increased monetary liquidity would lead to increased commodity speculation? Why wait until after silver has had a meteoric and is at an all-time high before delivering the hammer blow of not one, but four consecutive margin requirements increases? The CME Group surely knew what the outcome of their decision would be on the silver price.

It’s hard to argue with the basic logic behind CME Group’s decision to raise margins, though. There can be no denying that speculative bubbles are impossible without the significant use of leverage, which is normally accompanied by low margin requirements. This makes it easier for speculators to load up on a commodity trading position with a smaller outlay of capital. What’s questionable in this case is the timing of CME’s decision to raise silver margins. Suffice it to say the CME’s policy decision would have been timely had it been executed a few weeks ago.

What made the recent CME policy debacle even more intriguing is the myriad of demands for a margin requirement increase from financial commentators in the days immediately preceding the event. In an article appearing in the BusinessInsider.com web site datelined May 1, the writer argued that CME should raise margin requirements by 30%, otherwise silver would be setting up for a “record-setting crash, which could impact many other markets in the process of correcting, especially other commodities like Gold and Crude Oil.” The writer went on to say, “We are not talking about a 5% correction setting up at these levels for silver, we are talking in terms of a 20% down day that poses a contagion effect to markets in general.”

It gets better. He further wrote, “As the very real possibility of a 20% two-day correction is moving towards becoming a very real probability, it could bring down a lot of other markets in the process. Remember, we had the flash crash around this time last year? Well, if the Silver market isn’t cooled off [by raising margin requirements], it could potentially be one of the catalysts for another broad flash crash this year.”

How prophetic! Unfortunately, the author didn’t foresee that the very policy he was advocating would in fact lead to the outcome he feared the most, namely a commodities crash. Sometimes, the “cure” is worse than the disease.

Meanwhile the iShares Silver ETF (SLV), our silver proxy, ended up closing at its 90-day moving average on Thursday, May 5. In “normal” market conditions we could expect the SLV to react to the 90-day MA, which we use to identify the market’s dominant interim bias. Often the 90-day MA will act as a strong support and can even reverse a decline. Ultimately, though, the only cure for a sell-off of this magnitude is for the fear of market participants to exhaust itself. This fear appears to have been exhausted on a short-term basis and if silver can establish support above the 90-day MA in the next couple of days we’ll have a good indication of a market bottom.

There are two major lessons that can be learned from the recent silver crash. One is that policy, no matter how well intentioned, can have profound negative consequences on the market. The other lesson is that markets are hyper-sensitive to abrupt changes in policy given where we are in the long-term deflationary cycle. The Federal Reserve has had a relatively easy going in rejuvenating the financial market with its loose money policy in the last year due partly to the fact that the last of the long-term cycles, namely the 6-year cycle, is still up. The 6-year cycle is due to peak this October, after which time the Fed will likely have its work cut out for it in terms of artificially sustaining the inflationary trend in both stock and commodity prices. Once the 6-year cycle has peaked there will be no long-term cycle of consequence (beyond the 4-year cycle) up until after 2014.

Viewed from the standpoint of the yearly cycles, the “flash crash” of last May and the late silver crash could be viewed as a “shot across the bow” warning for the coming arrival of deflation once the final long-term cycle peaks. The ranks of the deflationist camp have bee noticeably thinned in recent months as commodity prices soared and most commentators resigned themselves to the belief that hyper-inflation would be the dominant them in the coming years.

Before we arrive at that path, however, deflation must finish its work before the 120-year cycle bottoms in 2014. The early stages of the final deflationary (or de-leveraging) process commenced in 2007-08 with the credit crisis. We should see signs of the re-emergence of deflation in 2012 with the years 2013 and 2014 being severely deflationary. The next few months should be used by individuals to de-leverage in advance of the Kress Cycle Tsunami.

Gold & Gold Stock Trading Simplified

With the long-term bull market in gold and mining stocks in full swing, there exist several fantastic opportunities for capturing profits and maximizing gains in the precious metals arena. Yet a common complaint is that small-to-medium sized traders have a hard time knowing when to buy and when to take profits. It doesn’t matter when so many pundits dispense conflicting advice in the financial media. This amounts to “analysis into paralysis” and results in the typical investor being unable to “pull the trigger” on a trade when the right time comes to buy.

Not surprisingly, many traders and investors are looking for a reliable and easy-to-follow system for participating in the precious metals bull market. They want a system that allows them to enter without guesswork and one that gets them out at the appropriate time and without any undue risks. They also want a system that automatically takes profits at precise points along the way while adjusting the stop loss continuously so as to lock in gains and minimize potential losses from whipsaws.

In my latest book, “Gold & Gold Stock Trading Simplified,” I remove the mystique behind gold and gold stock trading and reveal a completely simple and reliable system that allows the small-to-mid-size trader to profit from both up and down moves in the mining stock market. It’s the same system that I use each day in the Gold & Silver Stock Report – the same system which has consistently generated profits for my subscribers and has kept them on the correct side of the gold and mining stock market for years. You won’t find a more straight forward and easy-to-follow system that actually works than the one explained in “Gold & Gold Stock Trading Simplified.”

The technical trading system revealed in “Gold & Gold Stock Trading Simplified” by itself is worth its weight in gold. Additionally, the book reveals several useful indicators that will increase your chances of scoring big profits in the mining stock sector. You’ll learn when to use reliable leading indicators for predicting when the mining stocks are about o break out. After all, nothing beats being on the right side of a market move before the move gets underway.

The methods revealed in “Gold & Gold Stock Trading Simplified” are the product of several year’s worth of writing, research and real time market trading/testing. It also contains the benefit of my 14 years worth of experience as a professional in the precious metals and PM mining share sector. The trading techniques discussed in the book have been carefully calibrated to match today’s fast moving and volatile market environment. You won’t find a more timely and useful book than this for capturing profits in today’s gold and gold stock market.

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Gold Silver Ratio Still Low Relative to Recent History

by Bespoke Investment Group

Although both silver and gold have rallied over the last year, on a percentage basis the rally in silver has been a lot sharper. The result of silver's leadership in the metals rally was that the ratio of the price to gold versus silver dropped dramatically over the last year. From 2000 to 2010, it basically took an average of 60 ounces of silver to buy one ounce of gold, but then in late 2010 silver gained an increased luster relative to gold. When silver made its recent high just over a week ago, the ratio of gold to silver shrunk from close to 70 a year ago all the way down to 32! 

Now, even after the recent drubbing in silver, it still only takes about 40 ounces of silver to buy one ounce of gold, which is still extremely low by historical standards. All this seems to imply that unless some new demand for silver materializes from a previously non-existent source, either silver is still overvalued or gold is undervalued.

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Does Unreal GDP Drive Our Policy Choices?

By John Mauldin

I am back from Rob Arnott’s conference in Laguna Beach, and I must confess that if I had attended it before I wrote last week’s e-letter I might have had lower odds on the US political class solving the debt crisis, absent a real economic crisis forcing them to. There were several presentations that made the problems quite clear. It remains a tough issue.

This week’s Outside the Box is a recent white paper by Rob, where he argues that the traditional way we look at GDP is flawed, because it overstates what is happening in the real, private part of the economy, which is the productive part. Government spending is either money collected from the private sector in the form of taxes or borrowed money that future generations must repay. While not likely to become a mainstream economic view, this is very useful for our own thinking about what constitutes productivity and investments. This is a short but powerful piece from one of America’s most honored economic writers.

And let me note that I will be speaking at the annual Agora Financial Investment Symposium, perhaps the only conference in the country where I am the bull in the crowd. [BR adds "I would challenge that assessment"] It is July 26-29 in Vancouver. You can find out more and register at http://www.agorafinancial.com/reports/vancouver/2011/afis2011b.php. If you come, be sure and say hello.

Have a great week. It is good to be home. I am off to see the Texas Rangers, after a happy hour with David Tice of Prudent Bear fame. And I must say that watching the Mavericks-Lakers game Sunday from the Admiral’s Club in LA, while waiting for my plane, was quite fun. Not as good as being there, but fun!

Your trying to remember there is more to life than economics analyst,

John Mauldin, Editor
Outside the Box

JohnMauldin@2000wave.com

 

Does Unreal GDP Drive Our Policy Choices?

Gross Domestic Product is used to measure a country’s economic growth and standard of living. It measures neither. Unfortunately, the finance community and global centers of power are wedded to a measure that bears little relation to reality, because it confuses prosperity with debt-fueled spending.

Washington is paralyzed by fears that any withdrawal of stimulus, whether fiscal or monetary, whether by the Administration, the Fed, or the Congress, may clobber our GDP. And they’re right. But, GDP is the wrong measure.

Without an alternative, we will continue to make bad policy choices based on bad data. Eventually, our current choices may wreak havoc with our future prosperity, the future purchasing power of the dollar, and the real value of U.S. stocks and bonds.

 

What is GDP?

GDP is consumer spending, plus government outlays, plus gross investments, plus exports minus imports. With the exception of exports, GDP measures spending. The problem is GDP makes no distinction between debt-financed spending and spending that we can cover out of current income.

Consumption is not prosperity. The credit-addicted family measures its success by how much it is able to spend, applauding any new source of credit, regardless of the family income or ability to repay. The credit-addicted family enjoys a rising “family GDP”—consumption—as long as they can find new lenders, and suffers a family “recession” when they prudently cut up their credit cards.

In much the same way, the current definition of GDP causes us to ignore the fact that we are mortgaging our future to feed current consumption. Worse, like the credit-addicted family, we can consciously game our GDP and GDP growth rates—our consumption and consumption growth—at any levels our creditors will permit!

Consider a simple thought experiment. Let’s suppose the government wants to dazzle us with 5% growth next quarter (equivalent to 20% annualized growth!). If they borrow an additional 5% of GDP in new additional debt and spend it immediately, this magnificent GDP growth is achieved! We would all see it as phony growth, sabotaging our national balance sheet—right? Maybe not. We are already borrowing and spending 2% to 3% each quarter, equivalent to 10% to 12% of GDP, and yet few observers have decried this as artificial GDP growth because we’re not accustomed to looking at the underlying GDP before deficit spending!

From this perspective, real GDP seems unreal, at best. GDP that stems from new debt—mainly deficit spending—is phony: it is debt-financed consumption, not prosperity. Isn’t GDP, after excluding net new debt obligations, a more relevant measure? Deficit spending is supposed to trigger growth in the remainder of the economy, net of deficit-financed spending, which we can call our “Structural GDP.” If Structural GDP fails to grow as a consequence of our deficits, then deficit spending has failed in its sole and singular purpose.¹

Of course, even Structural GDP offers a misleading picture. Our Structural GDP has grown nearly 100-fold in the last 70 years. Most of that growth is due to inflation and population growth; a truer measure of the prosperity of the average citizen must adjust for these effects. Accordingly, let’s compare real per capita GDP with real per capita Structural GDP.

 

A New Measure of Prosperity

Real per capita GDP has recovered to within 2.5% of the 2007 peak of $48,000 (in 2010 dollars). So, why do we feel so bad? For one thing, after two recessions, we’re up barely 6% in a decade. Furthermore, this scant growth is entirely debt-financed consumption. The real per capita Structural GDP, after subtracting the growth in public debt, remains 10% below the 2007 peak, and is down 5% in the past decade. Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.

As a diagnostic for why this has happened, let’s go one step further. Few would argue that a healthy economy can grow without the private sector leading the way. The real per capita “Private Sector GDP” is another powerful measure that is easy to calculate. It nets out government spending—federal, state, and local. Very like our Structural GDP, Private Sector GDP is bottom-bouncing, 11% below the 2007 peak, 6% below the 2000–2003 plateau, and has reverted to roughly match 1998 levels.

Figure 1 illustrates the situation. Absent debt-financed consumption, we have gone nowhere since the late 1990s.

Figure 1. Real GDP, Structural GDP, and Private Sector GDP, Per Capita, 1944-2011

Source: Research Affiliates

As the private sector has crumbled, and Structural GDP has lost 13 years of growth, tax receipts have collapsed. Real per capita federal tax receipts have tumbled to levels first achieved in 1994, and are fully 25% below the peak levels of 2000.² The 2000 peak in tax receipts was, of course, bolstered by unprecedented capital gains tax receipts following the wonder years of the 1990s. But this surge in tax receipts fueled a perception—even in a Republican-dominated government!—that there was money to burn, as if the capital gains from the biggest bull market in U.S. stock market history would continue indefinitely!

What does this mean for the citizens and investors in the world’s largest economy? If we continue to focus on GDP, while ignoring (and even facilitating) the decay of our Structural GDP and our Private Sector GDP, we’ll continue to borrow and spend, mortgaging our nation’s future. The worst case result could include the collapse of the purchasing power of the dollar, the demise of the dollar as the world’s reserve currency, the dismantling of the middle class, and a flight of global capital away from dollar-based stocks and bonds.

None of these consequences is likely imminent. But, few would claim today that they are impossible. Most or all of these consequences can likely still be avoided. But, not if we hew to the current path, dominated by sheer terror at the thought of a drop in top-line GDP.

After World War II, the U.S. Government “downsized” from 43.6% of GDP to 11.6% in 1948 (under a Democrat!). Did this trigger a recession? Measured by GDP, you bet! From 1945 to 1950, the nation convulsed in two short sharp recessions as the private sector figured out what to do with all the talent released from government employment, and real per capita GDP flat-lined. But, underneath the pain of two recessions, a spectacular energizing of the private sector was underway. From the peak of government expenditure in 1944 until 1952, the per capita real Structural GDP, the GDP that was not merely debt-financed consumption, soared by 87%; the Private Sector GDP, in per capita real terms, jumped by more than 90%.

Was the recent 0.5% drop in GDP in the United Kingdom a sign of weakness, or was this drop merely the elimination of 0.5% of debt-financed GDP that never truly existed? Spending dropped by over 1% of GDP; Structural GDP was finally improving! 

We must pay attention to the health—or lack of same—for our Structural GDP and our Private Sector GDP before they lose further ground.

 

Conclusion

Government outlays were not reined in by either political party for most of the past decade. Real per capita government outlays now stand some 50% above the levels of just 10 years ago, even with Structural GDP and Private Sector GDP down over the same span. Federal spending is more than 40% of the Private Sector GDP for the first time since World War II.

Even our calculation of the national debt burden (debt/GDP) needs rethinking. Is the family that overextends correct in measuring their debt burden relative to their income plus any new debt that they have accumulated in the past year? Isn’t it more meaningful to compute debt relative to Structural GDP, net of new borrowing?! Our National Debt, poised to cross 100% of GDP this fall, is set to reach 112% of Structural GDP at that same time, even without considering off-balance-sheet debt.³ Will Rogers put it best: “When you find yourself in a hole, stop digging.”

While many cite John Maynard Keynes as favoring government spending during a recession, he never intended to create structural deficits. He recommended that government should serve as a shock absorber for economic ups and downs. He prescribed surpluses in the best of times, with the proceeds serving to fund deficits in the bad times, supplemented by temporary borrowings if necessary. And he loathed inflation and currency debasement, which he correctly viewed as the scourge of the middle class.

GDP provides a misleading picture and a false sense of security. Instead of revealing an economy that we all viscerally know is weaker than a decade ago, it suggests an economy that is within hailing distance of a new peak in prosperity for the average American. Top-line GDP has recovered handily from its lows, on the back of record debt-financed consumption. But, our Structural GDP and Private Sector GDP are both floundering. Focusing on top-line GDP tempts us all to rely on ever more debt-financed consumption, until our lenders say “no más.”

The cardiac patient on the gurney has had his shot of adrenaline and is feeling better, but he is still gravely ill—more so than before his latest heart attack—as these two simple GDP measures amply demonstrate.

 

Endnotes

1. A “correct” measure would subtract all new debt that is backed only by future income, lacking collateral. Very little private debt lacks collateral, and very little public debt is backed by anything other than future income. So, for simplicity’s sake in this article, we subtract only net new government debt.

2. Despite no change in tax rates since 2003, this situation is often blamed on the perfidy of the affluent, not the evaporation of capital gains, hence capital gains taxes. We should recognize that the enemy is not success, it is poverty. But, when we rue the latter, we too often blame the former.

3. See the November 2009 issue of Fundamentals, entitled “The ‘3-D’ Hurricane Force Headwind,” for more details on the daunting levels of off-balance-sheet debt. Our debt/GDP ratio may be poised to cross 100% of GDP this fall, but our GAAP accounting debt burden is already well past 400% of GDP and well past 500% of Structural GDP.

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The Collapse of the American Standard of Living, Inflationary Depression

By: Bob_Chapman

As the economy stumbles the American standard of living recedes. 44 million people are using food stamps and in one year that figure will be 60 million. Washington and Wall Street say, what me worry? Of course not they are the masters of the universe. We are 24 months into an inflationary depression and it still goes undiscovered. Who cares that the issuance of food stamps is up 80%, as long as the bonuses on Wall Street and in banking continue to flow and bureaucrats get higher and higher salaries and benefits? The high cost of health insurance, no longer affordable to most have increased and Medicaid users are up 17%, as the program costs increased 36%.

Those on welfare rose 18%, as costs rose 24%. It is now evident to many that the choice of early retirement in the late 1990s at 52 and 59 years old was a big mistake. Many must now work into their 70s, or starve. Many retirees are forced to reenter the workforce. Recently there were 2,000 job openings and 75,000 people applied. How is that for recovery? The birth/death ratio is bogus and real unemployment is 22%. The economy needs 2 million new jobs a year and that is impossible. Good paying jobs are still being offshored and outsourced. How about the millions without jobs now for years? While all this transpires the Fed bails out Wall Street, banking and government and leaves crumbs for the dispossessed. 

It always gets us when these acceptable writers use soft or euphuistic phrases to describe creeping national state socialism. The big picture is dreadful, but government, Wall Street and the media won’t tell you that. Truth has nothing to do with business. They all spin one lie after another, just as you have recently seen with a certificate of live birth and the death of Mr. bin Laden. It reminds one of the old song, “Anything Goes.”

Those running Washington from behind the scenes know America can never pay off and liquidate its debt. 

That is why there is little effort to do so. The real idea is to destroy the system. It reminds one of Argentina in 1999, before they defaulted on 2/3’s of their debt only in a much bigger way. The dollar, because it is the world reserve currency, and that nations hold about 60% of foreign reserves in US dollars affects the entire world. America’s Wall Street, banking and government has had a 66-year party and everyone gets to pay for it. The next step, rather than austerity, will be confiscation of all, or part, of pensions, that $12 trillion pool of government and individual retirement funds. Needless to say, such irresponsible actions only delay the inevitable monetary collapse.

Tagging not far beyond is England and Europe, both of which have used the same template for so many years. In the US and all of these nations we see more than 50% of the population functionally illiterate and this same group country to country essentially pays little or not taxes, and receive benefits from government. That does not include the illegal alien population in each country that pays virtually no taxes. Spending far beyond tax receipts can only mean eventually that the deficits will destroy the system. That means a lower standard of living, which has already manifested itself in all three regions. Such profligacy has in the US, UK and Europe caused the Fed, the Bank of England the European Central Banks to create money and credit out of thin air monetizing buying and holding sovereign debt as well as debt clogging the balance sheets of the financial sector. In Washington the administration is considering an oil tax increase as the public pays more than $4.00 a gallon and in Germany it’s $9.00 a gallon. Expect more of this non-income tax taxation. Each tax increase and each loss in services brings less purchasing power, as inflation rages.

All these entities each day find it harder and harder to sell bonds to support their debt load, thus, revenues have to be increased. In the US the top 10% of taxpayers will end up paying 75% of total income taxes. This has already started an exodus of high-income earners to leave the country over the past 15 years, and the numbers are increasing exponentially. That in turn throws an added burden on middle class taxpayers. 

At the root of the problems of all these nations is Keynesian economics, which has become the basis for corporatist fascism. The growth of money and credit worldwide has been exponential and continues apace as nations refuse to cut spending and central banks continue to be fonts of money and credit for their financial sectors and for governments. The financial system worldwide is awash in liquidity, which is accompanied by low or near zero interest rates. If those conditions were to be higher interest rates and less monetization the world system would collapse, although governments are manipulating markets downward such as gold, silver and commodities. What they are accomplishing is very little versus the intermediate to long run. That is why in the long run gold, silver and commodities have to move higher, as investors flee the general stock and bond markets, that don’t reflect the results of inflation. That is why inflation will worsen as central banks continue to spew out more money and credit, which is now euphemistically called quantitative easing. First we saw inflation rise in the developing world for a number of reasons, which has since moderated to a great extent. Inflation is growing at a realistic 4% to 6% overall. The problem lies in the developed world where real inflation runs from 8% to 20%. Nations such as the US, UK, China, India, Brazil, etc. are not only suffering high inflation, but they are exporting it as well. Not enough to keep inflation at bay in their own countries, but enough to make financial conditions in victimized countries difficult. As an example, take America’s neighbors Canada and Mexico; instead of having a natural 3.5% inflation for 2011, their inflation at year-end will be 4% to 4.5%.

As we predicted a year ago, QE3 will become reality, although it will be called something else. Not only in the US, but also in the UK, Europe and other countries, as well. If the issuance of money and credit were to stop and interest rates were to rise the world would head into deflationary depression. That is why the music has to continue. Sooner or later it will stop and when it does the bottom will fall out of the world economy and financial system. 

The Fed continues to create money and credit and prices continue to rise and will do so for at least 1-1/2 more years. If we get the equivalent of QE3 that will be extended 1 to 1-1/2 more years. Dependent on how big a QE3 could be two to three years ahead, inflation could range from 25% to 55%. As this affects the US economy the banking system will remain weak and near insolvency. As inflation rises in a moderate fashion in the developing world the first world will see inflation rise higher quickly. 

We currently see yields on Treasuries falling again from 3.60% on the 10-year note to 3.22%, as the Fed manipulates lower yields into position. That would be in anticipation of higher real interest rates caused in reaction to QE3. This is all rear guard action to try to create employment from a sector that remains under intense pressure. Any job creation is being offset by the high layoff rates of municipal and state workers. These measures by the Fed will also continue downward pressure on the dollar and upward pressure on gold and silver and commodities. Any tightening by the government or austerity measures to reduce the fiscal deficit would be disastrous. That is if you want to keep the game going at today’s level. It is a different story if you really want to solve the problem. 

As we switch to the Middle East we see serious trouble coming. In fact it probably is the groundwork for World War III, the event needed from an historical prospective to begin a new world war to cover up the economic and financial collapse now taking place. Why else would the US and UK stir up rebellion in Syria, the home of a Russian naval base and in Libya where the Chinese just recently had to remove 29,000 workers due to a US and UK created rebellion. Libya supplies relatively inexpensive quality oil to China in large quantities. As these adventures unfold it becomes more obvious that a new war is being set in motion. As a reaction we see China saying they want to reduce their dollar forex position by 2/3’s or by $2 trillion. The US won’t let that stop them, so China is going to be a large dollar seller and part of those funds will go in gold and silver. That means the dollar will definitely fall lower both in terms of other currencies, but more importantly versus gold and silver. Dollar bulls are very hard to find. Those negative regarding the dollar we doubt have a clue that WWIII is underway. What has come to the attention of those negative on the dollar is that the US is developing into a Nazi police state. The US government wants to know exactly where all the assets of every American are and at the same time set compliance rules on foreign banks and institutions, which have US persons as clients legally. For Americans, foreign countries have to report any real estate owned by Americans in their country and on January 1, 2013, annually these nations banks have to send 1/3rd of all bank assets to the US IRS ostensibly to pay taxes, which in most instances have already been paid. It is a grab of the assets of Americans who dare to live in another country. As a result the US government gets little or no respect outside the US. The US is a pariah and the laughing stock of the rest of the civilized world. What people other than Americans could believe the fantasies of the obviously phony “live birth certificate” and the death of a man that had already been dead for almost 10 years. The foreign opinion is that the sheeple deserve it.

As an adjunct to this the US government is going to keep US troops in Iraq beyond the end of the year. The Iraqis have to approve this action, so we’ll have to see what happens. It is obvious the US has no intention of permanently withdrawing their troops. The excuse is based on the Shiite uprising in Bahrain and the massive Saudi intervention, along with events in Yemen where the dictator has agreed to leave. Iraqis believe that accommodation with Iran is the only way to coexist. They see iran as the only real power in the region. They also recognize Iran as an emerging regional power. Thus, we see Iran balking at the US leaving 20,000 troops in Iraq.

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MARGIN SQUEEZE CREATES Q2 DOWNSIDE RISK

by Cullen Roche

With earnings season largely finished we are beginning to generate some solid conclusions. One persistent trend this earnings season has been margin compression across many companies as costs surge. Danske Bank recently offered some good commentary on why this is setting off some red flags for them:

“…But beware – most companies are guiding down for Q2
That we nevertheless urge caution going into Q2 is due to the challenges that we perceive for corporate earnings going forward. Companies have already felt the pinch from sharply rising input costs in Q1. Commodity prices have broadly speaking risen by some 70% on average since mid-2010, and this is being reflected in spiralling prices. Hence companies are already seeing their margins squeezed and this will intensify in Q2. This is also why twice as many US companies are now cutting their expectations for Q2 as raising them. On the positive side, the figures suggest that growth is merely being postponed to late 2011 and 2012, when there are more upward than downward outlook revisions. We further see a risk to company earnings in Q2 from a temporary slowdown in the global economy. Our concerns stem from the monetary policy tightening currently under way in the developing economies and Europe (ECB) and also the fiscal cutbacks that are being enacted in the EU and that are so obviously needed in the US. Both factors will shift the focus from growth to tightening, which all else being equal will undermine companies’ ability to pass along input cost increases to output prices and softening sales volumes. This will be further reinforced – especially in the US – by the effect on consumption of the soaring energy prices.”

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Silver Investors Shock and Horror, Where Next?

By: Clive_Maund

Silver newbies discovered to their shock and horror last week that silver can actually go down as well as up, and even worse, that it drops a lot faster than it goes up. We were partly fooled ourselves last week by the seemingly bullish COT figures, but not to the extent that it stopped us implementing protection in the form of Puts, or Calls in silver bear ETFs such as ZSL. 

After last week's devastating plunge the silver battlefield is littered with the corpses of silver longs, with those who are still breathing being exhorted to "put their shoulder to the wheel" again by undismayed silver cheerleaders, who are hailing a "fantastic buying opportunity" for the ride of a lifetime. Is it?? - let's see what the charts have to say... 

On its 6-month chart we can see that after hitting the top of its intermediate trend channel in the high $40's, where it showed signs of running into trouble that we will look at in more detail on a one-month chart, silver suddenly turned tail and plunged, crashing through the lower support line of the channel as if it wasn't there. This near vertical plunge took the form of a rare and very bearish "4 Black Crows" that we will also delineate on the one-month chart. By Friday silver had gotten deeply oversold and the steep downtrend paused at the support level shown, with a more bullish long-tailed candlestick appearing on the chart. The cheerleaders are certainly right that silver is now short-term oversold, and some sort of rally looks likely soon, probably after some choppy action near the upper support level on our chart - and it could drop even lower towards the lower support level shown and its 200-day moving average before a significant rally occurs. 

Should such a rally get going it will of course be hailed by the cheerleaders as the "start of the big one" and it could be if the dollar tanks, but what concerns us is the bearish 4 Black Crows" candlestick pattern that occurred last week, which portends a more prolonged and severe decline - possibly even a bearmarket. Yet how can that be? - isn't the Fed's reckless and relentless money printing and zero interest rate policy pushing the dollar ever close to the abyss and the US towards hyperinflation. Yes it is, but do you think the Fed doesn't know that? These people should not be underestimated - keep in mind that they engineered a financial system which essentially turned the rest of the inhabitants of this planet into servants of the United States, with their reserve currency status for the US dollar, and have cajoled the rest of the world into handing over its savings to be used to support a sumptuous standard of living in the US and a big miliary to police the globe in furtherance of US interests. So put yourself in their shoes now and imagine that you are faced with a collapse of both the US dollar and the Treasury market - what's the best way to prop up both and buy some time? Give you a clue - think 2008. Got it yet? - well in case you haven't I'll spell it out for you... 

With its back to the wall everyone expects the Fed to wheel out QE3 in a timely manner. If they don't what will happen? - the first thing that will happen is the threat of higher interest rates will cause the commodity markets and stockmarkets to tank - and where will the liberated funds go? - into the dollar and Treasuries of course, not because they are good investments, but because most investors and fund managers are too dumb and unoriginal to think of anything else. Commodities and stocks have not been going up because of economic recovery because there is no real economic recovery, much less because of genuine demand for end use - they have been going up because of the huge leverage employed in these markets by speculators, who have been borrowing money at zero or near zero rates and turning round and pyramiding speculative positions, as set out by smooth talking Karl Denninger in his timely article But It's All Money Printing . 

As soon as these markets percieve a threat to the supply of cheap money they will tank and the drop will be magnified by margin calls against hordes of distressed speculators. The Fed can quickly achieve this result by making noises to the effect that it is not going to do QE3, and then do it anyway a little later to save its cronies in the big Wall St banks from the threatening consequences of a derivatives implosion. When they do QE3 after all, the commodities and stocks roadshow can get rolling again. Just imagine how much money will be made by the elites who are in on this game plan - it certainly helps to know which big levers are going to be pulled and when. We don't that this is going to happen for sure of course, it is a hypothesis, but the first whiff of it would certainly explain the bearish action in commodities last week. 

Getting back to the charts we will now look at recent action in silver in more detail on a 1-month chart. This chart demonstrates the power and utility of candlestick charting, for on it we can see clear warnings of an imminent reversal occurring very close to the highs, which is why we took defensive measures such as buying Puts, and Calls in bear ETFs, to protect open long positions in silver. For as we can see two pronounced dojis formed during the weeks of the top. Dojis are where the open and close for the day occur almost at the same level and indicate a condition of stalemate, which, occurring after a long runup, often precedes a reversal. Last week we saw 4 heavy down days in succession, with the price opening near the previous day's close and falling heavily to close not far from its lows for the days. When you see 3 such days in succession it is known as "3 Black Crows" and it is bearish in purport, as it is a sign of heavy and determined selling. Four such down days in succession, "4 Black Crows" are much rarer and correspondingly more bearish. However, by completion of the 4th day, bearish or not, the market has obviously dropped a lot and become heavily oversold short-term, so it shouldn't be chased down - what normally happens is a relief rally that often retraces about half of the drop before renewed decline to lower lows sets in. So you might want to keep this in mind as the cheerleaders become more vocal on a bounce in coming days/weeks. 

What about the latest COT chart? As mentioned in the opening paragraph we were thrown somewhat last week by the bullish looking COT chart, but the COTs didn't save silver which plunged, bullish COT or not. The latest COT chart looks a lot less bullish than the one last week. This is because despite silver having fallen heavily for 2 days by last Monday's close, the Commercial short and Spec long positions had barely moved, and we would have expected them to decrease significantly if silver was set to reverse to the upside soon. So on the basis of these erratic indications, we are going to attatch somewhat less importance to the COT figures for silver going forward, especially after them being grossly misleading last weekend.

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Is It Time to Buy Silver?

By: Jared_Levy

Unless you have been hiding under a rock, you probably know that silver has had a major correction over the past week. The precious metal plummeted about 30% from a high of almost $50 an ounce to less than $35 yesterday. This six-day drop is one of the largest since 1983.

Silver has given back just about all of its gains for the past month and some traders are thinking it might be time to get long. But before you run and buy silver, there are a couple things to consider.

Forces That Move Silver
The U.S. Dollar
There are many theories on why this sell-off is happening. Obviously, any real strength or even support in the U.S. dollar will generally be bearish for precious metals like gold and silver. This is mostly because the U.S. holds the largest stockpiles of these metals and they are traded in U.S. dollars globally. Even though gold is more of a recognized currency, they both have sensitivity to changes in the U.S. dollar's value.

The falling U.S. dollar has recently leveled out. That means we've seen a small correction in dollar-denominated commodities and metals overall. Earlier this week, the European and London central banks held their rates steady. The ECB also hinted that they may not raise their rates next month either. This is good news for the U.S. dollar.

The U.S. dollar traded higher late in the day yesterday and sent other dollar-sensitive commodities like oil and even stocks much lower on the day. Oil had its largest percentage drop in three years. If you don't believe that the dollar is in control here, think again...

For now, it seems that the U.S. dollar will continue to be relatively weak. The rally seems more like a short-term bump rather than a long-term trend. Current Federal Reserve policy puts general downward pressure on the U.S. dollar.

Gold/Silver Ratio
Then there is the historical ratio between gold and silver. A good "average" ratio of gold to silver is about 55, according to many experts. That means 1 oz. of gold should buy 55 oz. of silver. The gold premium is because there is much more silver on this Earth than gold. Even though silver has industrial uses beyond gold, there is a global desire, respect and currency reserve with gold that silver just does not have.

If that ratio gets extremely high, like 100, that means that silver is cheap relative to gold and may be a good value. If the number is low, silver may be getting overly expensive.

On April 28, the gold-silver ratio was about 30, relatively low. Now the ratio is back up around 43, still low, but not extreme. I'd like to see that ratio above 48 if I were thinking of buying.

Using current gold prices of $1,494, that means a drop in silver prices to $31.12 an ounce. Remember, though, that ratios are a two-way street. That means gold prices can climb, too, putting the ratio closer to its "good average."

Technicals
Technical formations also play an important role in finding buy and sell points. Looking at iShares Silver Trust (SLV:NYSE), you can see the sharp sell-off on the right side of the chart. In my opinion, it seems that we are nearing a short-term bottom. The lower Bollinger band (gray area) was just broken yesterday, as prices dipped below the lowest level of the band. This is generally an indicator of an oversold condition just before a bounce.

I also would look to the 50% Fibonacci retracement line (dotted) of about $33 for support. (For more info on Fibonacci retracement lines, read this Smart Investing Daily article.) The danger here is the fact that we have broken below the 50-day moving average, which is not good for the bulls. To solidify a strong trend, I would like to see the price of SLV get above that 50-day moving average, at about $38.

You can't simply view the charts in a vacuum. There are other things "manipulating" the market.

Margin Requirements
The manipulation here is the recent 500% jump in margin requirements for silver futures. When you buy a futures contract on silver (one futures contract is for 5,000 ounces of silver), you are required to put up a deposit called "margin." That initial cost has risen tremendously as of late. They have also raised the amount of margin you have to pay once you are already in the trade and it starts to go against you.

If traders cannot meet the new margin requirements, they are forced to sell their contracts. This new rule will deter new buyers.

It's like someone raising your rent from $1,000 to $5,000 in a month. Higher margin requirements can also make a sell-off worse, as contracts are sold to cover losing positions. These requirements affect everyone from individual traders to hedge funds. This is one of the main reasons why silver is making 10% moves daily.

Now in all fairness, the dollar cost of margin will rise as the price of silver rises, but the CME (COMEX) has increased the margin requirements abnormally in the past week and will raise them again Monday.

May traders are selling ahead of this hike.

ETFs
ETFs like the SLV hold actual silver and futures contracts. At present there are about 600 million ounces of silver held by ETFs. When traders begin to sell shares of an ETF like SLV, the ETF may sell silver futures to keep everything in balance. About 6 million ounces of silver have exited ETFs in the past week.

ETFs can also add to the domino effect, both long and short. But remember that stocks usually take the escalator up and the elevator down!

Once the hype settles down and the CME completes its margin increase on Monday, we should see silver prices stabilize. From my perspective, I see $33 as a level I may cautiously begin to buy. If silver breaks below that level, I think support will be around $29 until the Fed decides it's time to cool inflation.

I am sure that Ben B. was feeling quite happy with the corrections in gold, oil and silver this week. Perhaps Americans will feel some reprieve as well...

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Small Cap Stocks at a Critical Juncture

by Bespoke Investment Group

The small cap Russell 2000 index finds itself at a critical juncture to start off the week. As shown in the chart below, the index is currently sitting just above its 50-day moving average (DMA). Whether or not the index can hold this level will help to dictate short term sentiment towards the smallcaps in the days ahead. 

Adding to the importance of the 50-DMA is the fact that breadth in small caps has been weak. While the Russell 2000 index made a higher high in the most recent rally, its underlying breadth lagged and failed to make a higher high. As long as the index holds above the 50-DMA, you won't hear many people grumbling about the negative divergence in breadth. If the Russell does not hold the 50-DMA, however, you can expect to see a lot more people turn negative on small cap stocks.

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Commodities Crash Pain Eased by Dividends From Large-Cap Stocks

By: Money_Morning

Jon D. Markman writes: After several weeks of quiet in the markets, economy and geopolitics, last week exploded with excitement and volatility, seeing commodities tumble and large-cap stocks end strong.

It started with news that Seal Team Six had taken out Osama bin Laden in Pakistan and ended with silver crashing 26%, crude oil plunging 15%, and corn down 6.5%. Determining how these events are connected will provide historians with rich material to ponder in years to come.

It is very rare to see the prices of unrelated commodities plummet like that in a single week. It's an event that might occur once in a generation. Now you can say you were there.

When you consider that these commodities are all inputs for industrial manufacturers, you would intuitively imagine that stock prices would jump on the news. Suddenly the prices of two major expenses -- raw materials and fuel -- are lower. But that's not how it worked out.

Large U.S. companies' shares fell by 1.5% over the week, while small companies' shares sank 3.6%. Overseas markets fell 3.5%.

The big news of the week was in the commodity pits, where crude oil futures plunged under $100 a barrel for the first time since February. On Thursday alone, gasoline futures plummeted 7%, heating oil fell 8% and natural gas fell 7.9%. Over in the metals, gold sank 2.7%, silver sank a whopping 12% and even palladium sank 4.5%.

The grains and softs were in no better shape. Corn fell 2.8% despite a difficult start to the growing season in the rain-soaked southeast, while oats fell 3.6%, rough rice fell 5.6% and cotton fell 3.3%. All commodities are represented in the PowerShares DB Commodities Index Tracking Fund (NYSE: DBC) chart, above, which broke down in a big way.

The main issue that traders were dealing with Thursday, and really the spark that puts the whole engine in motion, was the sharp advance in the value of the dollar. As you can see in the accompanying chart, the U.S. dollar gapped up Thursday in a way very reminiscent of the last two times that it shot back to its declining 150-day average.

I've read a lot of explanations as to why the dollar rose, but it was probably stirred by the European Central Bank's surprise decision not to raise interest rates.

The last two times the dollar jumped like this led to a prolonged commodities price decline and more important for us, a multi-week decline in stock prices. Surely you remember the tough month of August last year, as well as the difficulties of last November. They both started with a dollar spike higher that looked very similar to Thursday. For reference, check out the chart below.

Large-Cap Stocks: Strength in Numbers

Showing resilience during a tough week was a group of stocks that has not been heard from much in the past two years. A group that has been standing on the sidelines of the big dance, waiting for someone cute to tap them on the shoulders and pull them in.

I'm talking about large-cap stocks, like the dividend-paying defensive stocks in the telecom, drug and utility sectors, such as AT&T Inc. (NYSE: T), Eli Lilly & Co. (NYSE: LLY), Exelon Corp. (NYSE: EXC) and the enigmatic, suddenly awesome Intel Corp. (Nasdaq: INTC), which is almost hard to categorize these days. The chipmaker is acting as if it is high on Red Bull and pixie dust -- the surprise leader of a fairly moribund technology sector.

Everyone who thought Intel would be up four times more than Apple Inc. (Nasdaq: AAPL) three weeks after each reported Q1 earnings, as shown above, raise your hands. I don't see too many. Not sure what this means, but look back a few days to find my 12-year chart of Intel and you will see it is lifting out of an excruciating downtrend now and has a legit shot at $30 if the animal spirits continue to stir.

That was the 2002 high, though of course it would have to triple from here to get back to its 2000 high. The $30 level is very possible, as Intel is one of the very few survivors of the 1990s tech bubble that has not at least kissed its 2001 level for a minute in the past five years.

Even Microsoft Corp. (Nasdaq: MSFT), a bag of bones and old code, has done that, in 2008. Dell Inc. (Nasdaq: DELL), a lonesome dove, did it in 2005. Oracle Corp. (Nasdaq: ORCL) did it in 2010 and has not stopped since, and is now pressing on 2000 levels. So keep an eye on Intel. Its forward Price/Earnings multiple is a meager 9.6 despite a year-over-year earnings growth rate of 39%, and a robust return on equity of 25%. It's so cheap it makes your eyes water.

Indeed, this is a great example of a company that could double merely from an increase of confidence that took its P/E up to the low to mid-teens like, um, Kimberly-Clark Corp. (NYSE: KMB)and Colgate-Palmolive Co. (NYSE: CL), which are not exactly growth powerhouses. Keep in mind that one of its chief antagonists, the mobile chip giant ARM Holdings Plc (Nasdaq ADR: ARMH), rocks a P/E of 90, as befits a king.

What kind of world do we live in where the world's biggest chipmaker is less highly valued than tissue and soap makers? The recent price move is signaling the start of a change of opinion, and the mood does not have to change very much for shares to lift. I don't own it, and it is not in any of my models, but I find the story intriguing and worth investigating further.

Divvy It Up

One fascinating thing about the Tuesday session in particular last week was that if you look at the stocks in theDow JonesIndustrials that pay a dividend yield of 3% or greater, you will see that all but one was up, and some performed very well -- much better than you would expect given the fact that the index finished flat. Here they are, with the Tuesday change in the last column.

The two stocks that pay the lowest dividend in the DJIA -- Bank of America Corp. (NYSE: BAC) at 0.3%, and Alcoa Inc. (NYSE: AA), at 0.6% -- were actually up a little more than 2% each as well, suggesting that they are seen as good values despite their low yield.

The point of these observations is that if you were in this elite set of high-divvy stocks -- mostly non-speculative, conservative names -- then you didn't even notice the volatility that wracked the rest of the market. Most of the strong negative, churning action in the market occurred in the commodity-related stocks that have become a bit more speculative due to a nascent reversal in the dollar to the upside.

This could be a change of tone in the market, though two days' action is not enough time to say for sure. But if we just look at the one-year returns of most of these conservative dividend payers, we can see that they at least have been buoyant for most of the recent past.

The upshot is that the DJIA has quietly become the leading index of the past month among institutional investors -- better than the Nasdaq, better than the Standard & Poor's 500 Index. I think it is most likely part of this move we have been discussing toward a refocusing by institutional investors on big, strong, reliable, high-earning, high-yielding thoroughbreds in the next phase of the cycle.

Over the course of the whole year, the evidence still suggests that mid-cap growth will be the winner of the size/style sweepstakes. But the homeboys of the Dow could make it a race. We'll look for a good location to buy them. Maybe it really will be that simple this year. Could happen.

The plain-wrap version is in the fund SPDR Dow Jones Industrial Average ETF (NYSE: DIA), and there are also two leveraged versions, the 2x ProShares Ultra Dow30 ETF(NYSE: DDM) and the 3x ProShares UltraPro Dow30 ETF (NYSE: UDOW).

The Volatility Factor

As for volatility, it's been in an epic downtrend for the past 24 months, as the CBOE Volatility Index has sunk to around 15 from 80. As you can see in the chart below, the index, sometimes called the Fear Gauge, dropped to a four-year low last week.

I'm sure that most investors would be perfectly happy if volatility continued to trend even lower. And with inflation low and liquidity abundant, there is no reason why it could not ultimately get back to the 10 level, which prevailed during much of 2005-2007, by this time next year.

That would constitute a big surprise for bears who expect the market to crash under the weight of debts, lifting volatility skyward again.

In the near term though -- i.e. the next couple of months -- my research does suggest that a combination of factors, including the end of the Fed's bond-buying program, the rise of energy inflation, and austerity politics in Congress, could create a lot more jumpiness.

This would actually give us the best of both worlds: We like volatility because it shakes loose windows of opportunity. Any major setbacks such as what we saw in March would give us a chance to buy our favorite long-term ideas -- energy, industrials, healthcare, emerging Asia and possibly Europe -- at lower prices. Stay tuned.

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Commodities After The Crash, No Way But Up

By: Andrew_McKillop

After a suspiciously short and likely programmed commodities crash we can only have the right hand leg of a "V" profile for commodity prices - until and unless big things happen with the major currencies and national debt crises of most OECD countries, or we have a global economic crash. To be sure, this is the context for highly classic speculative frenzies, where fundamentals are put on the back burner, and the front burners are turned to full on.

By May 9, after a week of slaughter on the precious metals, energy, food and metals exchanges there was no place else to go but up. The commodities rout of April 29-May 6 knocked at least US$ 90 billion of nominal or paper value off the estimated value of all 24 commodities included in the S&P GSCI index. The value of market tradable paper in this group of leading commodities fell to about US$ 805 billion on May 6, from around US$ 891 billion on April 29, according to Bloomberg.

This was a classic - and short - bear squeeze needing very large falls in the nominal value of "underlying assets", commodities themselves, to temporarily drive out the speculators who had been bidding up prices. Signalling the probable degree of advanced preparation and warning for informed players - some call them insiders - Goldman Sachs Group Inc. added its own weight to the rebound. After forecasting the plunge and adding its weight to it in the days preceding April 29, it was predicting price recovery for commodities (announced as "a possible recovery" by GS Group Inc.) exactly one week later, on May 6.

WHAT HAD CHANGED ?

Through March and April in a process dating from the start of 2011, investment funds made near-record bets on commodity price gains, pushing indexes like the Rogers RICI, the CRB, CMCI and the S&P GSCI to their highest levels since late summer 2008. Commodities beat stocks, bonds and the dollar to the end of April, the longest winning streak in at least 14 years. Behind the euphoria was the spectre of penury, with relentless industrial growth in China and India, and other Emerging economies pressuring natural resource production capacities and stockpiles.

More realistically and carefully excluded from market-correct explanations, and even closer behind the euphoria, the continuing fall of the US dollar's world value - the dollar being used to price and transact more than 72 percent of the world's total commodity trades - can only intensify any fundamental factor levering up commodity prices. Retreat of the Eurozone-16's money, the euro, from its current unsustainable highs (measured against the structurally weak dollar) will also tend to bolster commodity price gains against stocks, bonds and currencies, due to the euro now being used to transact - if not price - increasing volumes of physical commodity trades.

THE DOLLAR REMAINS WEAK

To be sure, the Obama team's hunting-and-shooting triumph in Abbotabad followed by a fishing trip to the Oman sea could only drive up the world value of the dollar, but long-term trends and economic reality show the true trend. The US dollar index, measuring the dollar's performance against 6 other currencies, but weighted to give the dollar's performance against the euro some 58% of index weight shows long-term decline as the only main trend - until and unless the euro falls.

Taking performance of the US dollar index July 2010 we have this read out:

The Abottabad adventure is signalled by the 1.2% upward blip on the chart's right hand edge, above, but rather little in this chart allows us to believe there can or might be a longer-term upward recovery in the dollar - although the index will improve considerably when or if European Union monetary disorder goes into higher gear, and the overvalued euro moves backward.

OIL FRENZY

Oil prices best reflect the weakening US dollar and the onrush of central bank "injections" - rather than hits and misses on presidential palaces in Tripoli, and hits on demonstrators in a range of countries from Bahrain and Yemen to Syria and Tunisia, with the largest focus always on possible civil unrest in Saudi Arabia, potentially affecting oil production and exports. Oil prices also reflect claims by the OECD's International Energy Agency and large oil companies like Total, claiming Asian oil demand is very strong, while the US Energy Department's TWIP shows relatively high US oil inventories, and European oil consumption is in many countries still 5% - 10% below 2008 demand level.

The one-liner marketspeak for this context of fundamentals which can be read any way, and unknown geopolitical trends is that the balance of risks and fundamentals still points to a supply-constrained world, not only for oil but almost all other commodities, except US-only shale gas. The financial and monetary risk of a sudden plunge into steep recession, as in 2008, driven by national debt funding crisis, also generates so much new liquidity on financial markets, including commodity markets, that until the global economy crashes commodity price must rise.

Taking estimates for Quantitative Easing by the US Fed, Europe's ECB, Japan's BOJ and other central banks as 20 trillion dollars since end-2008 we can relate this to the world value of the physical oil trade at a year average barrel price of US$ 100. The issued money and near-money covers more than 12 years of world total traded oil supplies. Oil is by far the world's biggest traded commodity, priced and transacted to a dominant extent in dollars - so the real question, here, is how can its price not rise ?

The unnatural fall in oil prices during the Apr 29 - May 6 crash is shown by the US benchmark West Texas Intermediate falling nearly US$19, and the rest-of-world benchmark Brent falling US$ 21 in the 5 days of last week. From the bottom point of the "V", rebound could only be as much as 3.5%-per-day in a technical rebound offering zero risk gains for the best-informed market makers and players.

THE REAL GATEKEEPERS

To be sure there is no watchdog in a mass speculative bidding spree that favours commodities more than equities, but the very small size of most commodity markets makes for self-limiting feedback. This size limitation applies firstly to value and turnover, relative to vastly bigger equities markets, and to the special characteristic of commodity markets: physical deliveries and transactions.

Silver is the best recent example - despite the fantastic drubbing taken by silver prices during the Apr 29 - May 6 crash, the largest global silver market, the Comex, is in permanent physical shortage of the metal. Several of the food commodity markets are highly vulnerable to cornering and to physical under-supply. With rising prices, soothsaying of the Goldman Sachs type will give way to physical rigging, producing what many analysts already claim is happening: market movements with no relation at all to underlying fundamentals.

The twist is these analysts usually judge commodity prices as overpriced and likely to fall back 10%, or 20% or even 30% from current levels, without warning. The opposite is also possible, and more likely under current conditions: that is massive unexplained price rises in a few days of frenzied trading.

The gatekeepers are the precious metals. When or if gold prices rise above US$ 2000 per ounce, and silver prices attain some level above US$ 65 per ounce, this is a deadly challenge to the US dollar, and its fiat friends and also-rans, starting with the euro, which is already seriously overvalued. From high and sustained gold and silver price levels, the gates of inflation will very surely open wide - making panic rises of interest rates, and slump into global economic recession almost inevitable.

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Commodity Bounce Likely In The Short Term

by Dr. Joe Duarte

Markets Are Headed For Crucial Week 

 

Traders are clearly bent on testing the resolve of those who sold commodities off last week, setting this week up to become pivotal for all markets.

Last week’s nearly 9% pullback in the CRB Index was impressive, especially when key components, like silver and oil are considered individually. Yet, if you step away from the drama, the pullback falls within the realm of an intermediate term correction in what may still be a long running bull market.

Chart Courtesy of StockCharts.com

The key to the selloff was the presence of computer trading. So, in fact, what we saw last week was a repeat of the “Flash Crash” in the stock market, which happened just twelve months ago. As sell stops got hit, the computer programs began to sell, then the margin calls came in, and more sell stops got hit, setting up a vicious cycle. Silver and oil clearly took the brunt of it. Oil may have been moved by the death of Osama bin Laden. Selling in silver accelerated once the news that the Soros funds were sellers hit the mainstream press.

According to The Wall Street Journal, the cascading selling in crude oil on Thursday came as a result of “sell orders” which had been set in place to protect profits by traders (sell stops). And “once the liquidation gained momentum, each successive price drop triggered a wave of these automatic sell orders, sending crude sliding further—and starting another round of selling.” The selling was described as a “panic.” One trader told the Journal that at one point “the orders (to sell) were just pouring in.” The Journal added: “Much of the selling, however, wasn’t carried out by traders, but rather their computers, which were programmed to sell once the price of oil hit certain levels—$105.50 and $102.70, for example. Investors, not companies that produce and consume oil such as refiners, are the primary users of such sell orders.” So, the selling was speculator or trader driven, which should come as no surprise to anyone as “Those speculative investors were present in the oil market in near record numbers on Thursday. Open interest, or the total number of open contracts, of the Nymex’s main oil-futures contract surged to a record 1.65 million.”

Chart Courtesy of StockCharts.com

So the key to success in this market now is to remain patient. Crude oil and silver will have their bounce. West Texas Intermediate has support as far down as the $92 area, its 200 day moving average, while resistance is in the $100-$105 area. It will take a few days for this situation to sort itself out, but at least we have some parameters. And yes, what happened on the way down, could also happen on the way up, as computer related buy stops could get hit and the market could melt up.

Chart Courtesy of StockCharts.com

Silver, on its own right, also has support near the $30 area, with resistance in the $35-$40 price range. Silver bulls are more like bulldogs, with plenty of them shrugging off the selling last week and reaffirming their support for the metal. One set of bulls in the silver market that won’t be coming back soon are likely to be small investors who got in within the last two weeks as prices were blowing off.

Conclusion 

The markets are in the midst of a very risky period which is being exacerbated by the presence of mechanical, computer driven trading, in stocks, and commodities. There has been little evidence of the bond or currency markets being as vulnerable to this kind of activity, as of now. But it makes sense to consider that as another possible event in the future.

The key difference between bonds and currencies and stocks and commodities is that the two former markets are much deeper in their liquidity and their size. That means that smaller amounts of money can get lost in the bid and ask process of the bonds and currencies while stocks and especially the often relatively small commodity markets are much easier to move.

What’s the best recipe for success right now? Patience. Stick with stocks that are working and let the commodities do their thing for the next day or two. As those key resistance and support areas, listed above, are approached start considering your trades. We’ll be monitoring the markets and updating as needed. We suggest monitoring our Twitter feed regularly as we’ll be updating changes there as soon as they are updated on the web site.

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