“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Thursday, April 21, 2011

A BRIEF CONSIDERATION OF SILVER'S OPEN INTEREST

Time permitting, I hope to have more on this later but wanted to throw a brief comment or two about silver's rocket move higher.

This has been a strange market to read with what I consider to be confusing CFTC COT reports and various changes in the daily open interest as well as all manner of rumors surrounding the delivery process. If I had nothing to go on but price action, I would say that a large short or shorts are in serious trouble and are attempting to get out but are not being allowed to by some very big and committed buyers who are going after them. I have seen enough cornered shorts being hounded by wolves who smell blood in the water during my trading career to be fairly confident that this is behind some of the price action in silver.



However, based strictly on the changes in open interest it is unclear if this is actually occuring. The sharp push from $34 to $42 was accompanied by a rather sizeable increase in open interest indicating that it was not primarily driven by short covering. If anything, fresh shorts were piling in, each of them attempting to pick a top or with other purposes in mind and kept on coming in as silver moved an incredible $8 higher in less than a month's time.

From $42 to $44 there was short covering occuring as some of the shorts were throwing in the towel and giving up leaving a lot of blood on the floor of the pit as they departed. However, once again the open interest has stabilized and actually ticked up some Wednesday as price soared above $45. Clearly some new shorting is occuring as top pickers are once again trying to strike what they think is paydirt. I am especially eager to see the numbers from today's sharp push through $46.

At some point the top pickers are going to get it right but as long as they keep coming in and the determined buyers keep showing up, we should see more bouts of this sort of change in open interest - namely - it increases as these fresh shorts take on the new buyers only to see the same shorts run for cover and close out their short positions with large losses as the market buying pressure forces them out. The process can then repeat with open interest rising and then subsequently falling and then repeating again.

If we do indeed get a serious short squeeze, and I mean one in which we see a total capitulation of the large short that has ruled this market for many years previously, we are not going to see any increases in open interest but rather a sharp fall in the total OI as they finally and completely give up. Whether that happens is anyone's guess. I would have thought it would already have commenced seeing the enormority of the paper losses that are accruing to those on the short side of this market. The margin calls and the need to constantly raise more cash to maintain these deeply underwater short positions must boggle the mind at this point.  Just the run from $34 to $42 was a loss of $40,000 per single contract! Imagine holding hundreds if not thousands of these!

Having been on the wrong side of a market at various times in my career I can tell you from firsthand experience, the emotions that one deals with run the gamut from fear to despair to panic and total desperation. It is a horrid thing to live through mainly because the losses mount at such a rapid clip. What makes matters worse is that you keep waiting for a setback in price, any setback, to try to buy back those shorts and it never seems to come. Prices just keep going up and up and up and up. You learn very quickly the terrible, awful power of leverage gone awry.

We will just have to wait and see how this all ends but for now, with so many apparently eager top pickers coming in, it is difficult to say that this thing has run out of upside just yet. They are providing the firepower to take it higher as they are forced into buying it all back at a higher level and taking their losses with them. Perhaps when we see an end to efforts to pick a top, this thing will actually top out. Either way, it has been one helluva ride already. The thing is that if you look at silver in inflation adjusted terms, the gray metal is still cheap by comparison to where it was in late 1979, early 1980.

US Dollar posts the lowest Weekly Close in 32 Months

Not much more needs to be said about the US Dollar than this headline. They managed to push it just barely above the support level ahead of the long holiday weekend but it certainly looks weak heading into next week. The problem is even though the "short Dollar" trade is crowded, there does not yet exist a fundamental reason to buy the Greenback.

That bodes poorly moving forward, oversold, crowded or extreme bearish sentiment notwithstanding.


CMEGroup (Nymex and Comex) markets closed for trading tomorrow

Gold and silver will not be trading on the Comex tomorrow in observance of the upcoming Easter Holiday according to the CME press release. They will reopen Sunday evening.


Thursday, Apr 21
NYMEX & COMEX® and DME Products on CME Globex
1615 CT / 1715 ET – Regular CME Globex close for trade date Thursday, Apr 21
Friday, Apr 22 CME Globex is closed
Sunday, Apr 24 1700 CT / 1800 ET – Regular CME Globex open for trade date Monday, Apr 25

Silver - 30 Minute chart

Here is a 30 minute chart of Silver noting the current support and resistance levels at this time.

A push through the region near $46.25 should let it run towards $47. A breach of $45.50 would imply a drop towards $45.10.