Thursday, March 15, 2012

Use This Sell-off To Prepare For The Next Big Fundamental Move Higher

A good hockey player plays where the puck is.  A great hockey player plays where the puck is going to be.   - Wayne Gretzky
The reason this sell off in gold and silver doesn’t particularly concern me is we have seen this pattern now for more than a decade.  Hedge funds buy paper gold and silver, pushing the prices higher on momentum and the bullion banks or commercials are on the sell side, building up a sizable short position.

That quote is from Dan Norcini's interview on King World News Blog  LINK.  Dan has been trading the futures market for twice as long as I have and, while I may not always agree with his analysis, I have to pay attention to what he's willing to share with the public and he knows the mechanics of the commodities markets as well as anyone out there.  I may not always be right when I think he's wrong, but I know that his latest commentary is 100% correct.

I have traded and observed every single manipulated Comex paper gold/silver open interest liquidation sell-off since this bull market began over 10 years ago.   This open interest liquidation sell off started last year at the end of April.  At this point in the cycle the percentage size of the correction is not as severe as a couple of the past liquidation cycles.  We are getting near the end.  The open interest peaked last April at over 160,000 silver contracts.  The o/i bottomed in December around 90,000.   The o/i bounce quickly to around 118k.  A lot of this was momentum money and this is the open interest long position that JP Morgan makes an illegal living off of.  This latest hit is JP Morgan's manipulated hit on the market working off the latest round of "hot" money jumping in the market to try and get the ride in silver from $31 to $34.  Those traders are losing money on their long positions and - based on my reading of yesterday's o/i - have started to short the silver market.  This is when JP Morgan will cover and the market will move higher again.  Likely much higher.

How can the CFTC and SEC regulators allow JP Morgan to do this repeatedly over 10 years?  You don't believe it?  Well then I guess you don't believe MF Global was product of corruption and Government enablement and disbelievers are therefore okay with the MF Global tragedy.  But the fact of the matter is that the Government entities that were supposed to regulate and prevent - and prosecute in the event of broken laws - MF Global from happening are the same Government enforcement agencies that regulate the Comex.  Ultimately the market will prevail, as it has for 5.000 years.  

In the meantime, I know these illegally manipulated sell-offs can be gut-wrenching, but you either have to start scale-in buying after the initial big market stop-loss driven drops occur or just look the other way for awhile and hold on tight.

On another note, here's a chart that should scare the crap out everyone who has faith in the U.S. dollar:

The price of the 30-yr Treasury bond looks like it could go into a freefall.  Yesterday's 30-yr Treasury auction was very ugly.  The primary dealers had to swallow 56% of the all the bonds issued.  With current Fed QE policy still in place - i.e. operation twist - we can assume that in some slick accounting maneuver, the Fed is ultimately the back-stop on the bonds taken down by the PD's.  I spot-checked the last 10 long bond auctions and there was only 1 in which the PD's took down more than 56%.  In most them, the PD's were taking down less than 50%.   Why is this significant?  Because China, Russian, and now Japan are starting to reduce their participation in U.S. Government bond auctions.  In fact, Russia has outright reduced its holding by over 50% in the last year.  Japan announced the other day that, in a move to diversify their dollar reserves - they bought $11 billion in yuan-denominated Chinese Government bonds. 

This is not a one-time event.  This is becoming a systemic trend with large holders of U.S. dollar reserves. This is a very ominous sign for the massive U.S. Government budget deficit spending program.  Either the Fed has to figure out a way to induce our large foreign financiers back into Treasuries/dollars or the Fed is going to have to print even more money to make sure the Government gets its spending heroin without sending bond yields into outer space.

On that note, since mid-December the yield on the 30-yr bond has gone from 2.80% to over 3.40%.  This is a 22% increase, signifying a 22% increase in the cost to the Taxpayers of funding spending deficits with 30-yr. bonds. This is a very bad trend.  Even worse, the flagship mortgage finance index, the 10-yr Treasury, has shot up from 1.85% to 2.30% - a 23% increase in the cost of 10-yr paper.  At some point this higher rate will funnel through to the mortgage market.  It's probably why mortgage refi applications took a nose-dive over the past couple weeks.  It will place further stress on an already fragile housing market. 

What the hell happened to the intended interest rate of Bernanke's "Operation Twist?"  like ALL Government intervention programs it is starting to fail badly, perhaps tragically...


  1. Could the recent take down of the Precious Metals have anything to with the eventual coming Attack on Iran. Seems that all the Stars are alining . . . . . Arrival of the 3rd U.S. Aircraft Carrier in the Arabian Sea, possible U.K./U.S. Release of Strategic Oil Reserves to blunt the resulting spike in Oil prices, best weather in the Arabian peninsula from now until mid-june for an attack, the continued take of the Precious Metals which would surely rise in the event of such an action, and the need by the Obama Administration for such an attack to occur now rather than closer to election time . Could this all be a coordinated move rather than a bunch of radom happenings ???

  2. Nice review of developments in the Treasury market, sir; thanks!

  3. Jim Sinclair had predicted many European countries would want their
    gold back, which is being stored by the Fed in the US. This movement
    is beginning to take hold in Switzerland and Germany as well as other
    countries. When asked about his prediction beginning to take place,
    Sinclair responded, “It had to happen because we all ask ourselves the
    question, ‘Where does the gold come from on these attempts at
    intervention?’ Because it’s not simply paper gold, it’s also in the
    cash market. There is a concern that the gold that’s being used to
    intervene might not be our (US) gold.

    Basically they (Germany, Switzerland and other countries) are now
    asking the question, where is the gold coming from? There are two
    possibilities, Fort Knox or the Federal Reserve seller, in the cash
    sense. Fort Knox, nobody knows what’s there.

    Everybody knows what’s at the Fed, other people’s gold. The trend
    that we discussed a long time ago which is really turning into a
    modest torrent, is to take back gold. I mean the truth is what do the
    Germans need the Fed to store their gold for? Are they afraid France
    will invade? It doesn’t make any sense.”

  4. you spelled gretzky wrong

  5. When the Treasuries are sold off, Dollar gains worldwide and gold along with other metals drop like a rock and will drop for some time until someone prints again, i`m afraid to say that gold will drop, probably a lot.

    I`m extremely bullish on gold for the long term.

  6. It's an easy time to bash gold. Just read the latest blog entry from Doug Kass...

    Fool's Gold
    Mar 16, 2012 | 7:39 AM EDT
    Stock quotes in this article:PG
    Gold doesn't produce profits and, as such, fails to provide a stream of income.

    The second major category of investments involves assets that will never produce anything but that are purchased in the buyer's hope that someone else, who also knows that the assets will be forever unproductive, will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century....

    This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future....

    The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.

    -- Warren Buffett, 2012 Berkshire Hathaway Letter

    The revival in animal spirits has lifted most risk markets this month, with the exception of the gold market.

    Gold continued its free-fall overnight and is down another $12 per ounce.

    In theory, gold is a great asset class in a world of too much cowbell, where fear is a constant and the integrity of most currencies is waning (as an outgrowth of addressing fiscal imbalances with monetary solutions).

    As I once wrote about gold, however, there is no way to calculate intrinsic value. When it drops by $100 or $200 per ounce, an investor has little bearing as to whether the precious metal is cheap and at what price level it provides intrinsic value.

    As Oaktree Capital Management's Howard Marks has written that gold is a lot like religion. In religion, you either believe in god or you don't. In the gold market, you either believe in gold or you don't.

    In essence, the gold market is a state of mind. It neither represents a corporate franchise that increases over time as profits are earned and retained -- such as, say, Procter & Gamble (PG), with a protected moat -- nor is it a productive asset.

    On the latter point, gold doesn't produce profits and, as such, fails to provide a stream of income.

    Its future price is simple dependent upon someone willing to pay more for the asset class compared to its price today.

    The bull market in gold has stalled, and it might not return for a while.

  7. Doug Kass is one of the biggest ass-clown fucktards out there. Talk about re-writing history when he publishes his market performance. I'd love to see a bona fide independent audit of his investment results. Kass is one of those guys who would be selling used Chevy Volt's if he didn't get win the "be in right place at the right time" Wall Street "guru" Powerball ticket.

  8. I tend to agree with you about Doug Kass. He grades himself very generously when evaluating his top surprises list in retrospect. And he is full of himself.

    However, does that make what he wrote above something to be summarily dismissed? I'd rather you attack the message than the messenger. In fact, it would be a worthwhile future blog post for you to take the above Kass commentary and pick apart the fallacies of his argument, point by point.

    1. Ya it would be fun to write a post picking him apart. I'll think about it, but I have some good material in backlog that I wanted to write about.

      Thing is, the whole premise of the Kass/Buffet argument lies on the belief that gold is an investment. It's not - it's a currency.

      Buffet is self-motivated to bash gold and pump paper investments. If we switch to a gold standard, a very large portion of his paper wealth will be wiped out instantaneously

  9. Buffet and silver.....LOL
    When did he sell all those tons of silver he had bought for around 4 bucks? I think that was around 2003 or 2004.
    At 30 plus dollar wonder he hates G/S. On top of that....Mr. Buffet how's your stock doing over the past ten years?
    Dave, don't worry about the bonds, Ben said they will stay low until 2014.
    So is this why Mr. Gold is saying June of this year for the dollar starting to crack? Will this be like going from the deer in the seeing printing presses forever....LOL It's all about "Keep printing or die".
    And about the... "What the hell happened to the intended interest rate of Bernanke's "Operation Twist?"
    It's called the step to lower rates. "Sterilization" you know that new word, same as all the other words they use to make it sound more user friendly for all the sheep. "Sterilization", it should mean no one touch my printing press, we have enclosed this press in a sterilized room, from all who try to contaminate our way of thinking.....LOL
    Dave, Thanks again for the work you put out every week.