Look Out Above?

When too many investors are rushing for the doors at once and everyone is looking down, it usually marks a turning point for a market that has been dropping pretty quickly.  The precious metals and mining stocks have been in a sharp decline since September 21 for the miners per the HUI and since early October for gold and silver.  This week I've witnessed several seasoned metals and mining stock investors capitulate and either exit their positions completely or put on hedges.  The time to put on a hedge was a 3-4 weeks ago.  Although this isn't necessarily the absolute bottom, the probabilities are that - barring some unforeseen exogenous event that hammers all the markets - we've seen 80-90% of the downside movement.

Brief interruption here.  I've been saying for weeks now that Capitol Hill would figure out a way to avoid the Fiscal Cliff by kicking it down the road.  It turns out that the can is sitting in front of the White House and Obama's leg is in a backswing:  http://www.zerohedge.com/news/2012-11-16/fiscal-cliff-can-about-be-kicked-2013  This means more debt, more printing and higher prices for gold and silver...

At any rate, with regard to the current price correction in gold and silver and hammering of the mining stocks, I'm not saying we've bottomed, but I will go on record saying that the worst is over based on indicators I've observed over the last 11 years in this market.  I'm cutting and pasting some comments that I sent earlier to Bill "Midas" Murphy at www.LemetropoleCafe.com:

The most significant indicator is the number of seasoned and unseasoned metals market participants who have either bailed on their positions or put on fear hedges. Just yesterday a long time silver futures trader I know, who recently began trading the mining stocks and who goes by fairly sophisticated technical signals, announced she had bailed on her stock positions on Wed. Another fellow I know announced that he had hedged his bullion with puts on GLD. Quite frankly, I can see getting scared out of the miners, but it's clearly late in the game to be buying puts on gold and he clearly does not have the access to information which shows that India has been buying gold in the low 1700's and China buys hard anytime gold below $1700, thereby putting a floor under the gold market (we pay a lot of money for this particular research).  If you are going to hedge positions, you need to do it BEFORE the top is in, otherwise the drop happens so quickly you miss at least half the move before you capitulate and hedge near the bottom - been there, done that.

Finally, I'm getting several comments on my blog of newer gold market players who are pissed off, taking shots at guys like Embry and Turk and dumping their positions. This is usually a perfect indicator that a bottom is near. I usually don't post most of these comments because they are abusive and profanity-laced, but if you're curious at a sampling, I posted one from last night along with my response.

I also sent Bill this:  Part of the action this week in metals has been influenced by it being the "roll" period, when the front month longs either have to sell, take delivery or roll to the next front-month. Usually during the roll period the open interest declines and the cartel uses this as an opportunity to hit the market. Yesterday, however, was different. Yesterday was an unusually large roll from Dec gold to Feb gold, 17,212 dropped from Dec but 17,281 added to Feb. In addition, another 1,330 added to June gold. A big drop from the front month accompanied by an outright increase is rare - beyond my recollection when the drop from the current front month is this large.

Same deal in silver. 4,268 silver carts dropped from Dec and 5,386 added to March, silver's next front month. The silver o/i increased to 1,263. The open interest in silver is 145k. As Dan Norcini pointed out the other day, something different is occurring right now. Despite the big cartel-led sell-off in silver over the past 6 weeks, the silver open interest has persisted in the 140k area. Historically the o/i has been liquidated down to 100k or less in pullbacks like this. Furthermore, for those intimidated by the 140k o/i, my partner pointed out that the high in open interest since we've been keeping track of it - going back to around 2003, was 189,151 back on 2/19/2008 with silver at $17.53. That leaves a lot of room for the specs to add longs and drive the price a lot higher.

So before anyone gets worried about what seems to be high open interest in silver and that big COT liquidation run is coming, they better examine the facts. I really get sick and tired of all of the misinformation between tossed around, especially by gold/silver site aggregators, bloggers and blog commenters. As I said earlier, I'm not officially saying this pullback is over, but it sure is starting to smell like it could be...

As always, the market is governed to a large degree by random probabilities. Measuring the past is a function of math - a science. But taking those results and projecting them forward is where the "art" of money management and market speculation takes place. Based on past market behavior and the probabilities associated with those behaviors, I would bet that the risk of getting short/hedged right now and missing a big upside move is greater than the risk of the bottom "falling out" from here. Have a great weekend!