Today In Silver

On Friday silver went on a tear starting around noon Eastern time, eventually adding a dollar per ounce and recovering much of the losses suffered earlier in the week. In the meantime gold remained steady above $1,200 per ounce after having caught very impressive flight to safety action while the Greek debt inferno continued to blaze. The fact that silver would have risen strongly on Friday should not be surprising as it was merely recovering its follower status behind gold, which surged pretty much all week and came within a whisker of making a new record high. What is surprising is the nearly vertical lift-off by silver around noon Eastern, and Karl Denninger thinks he knows why:

You don’t think that GOLD was being speculatively shorted beyond intraday position limits, do you?  That oval, by the way, is right when the announcement was made.

Or shall we look at SILVER?

Actually Karl, it is very doubtful that gold and silver were “being speculatively shorted beyond intraday position limits”. The reason is simple. As of the Disaggregated COT of May 4, 2010, there were a grand total of 8,627 speculative short futures positions in the reporting category (by definition a non-reporting position cannot exceed position limits). Since the speculative position limit in silver is 6,000 contracts (1,500 in the delivery month but there were only a grand total of 600 contracts outstanding and 418 contracts traded in May COMEX silver on Friday so that limit could not have been exceeded) that means one trader would need to hold the vast majority of speculative short positions. Yes, I know the CFTC warning is about intraday positions but still there are 30 large reporting traders in COMEX silver futures. It is simply inconceivable that a single or even a group of large speculative traders could have each been short more than 6,000 contracts of COMEX silver on an intraday basis especially when we look at the charts and note the trading volume that occurred in the active July 2010 COMEX silver contract during and after the price spike:

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silverax Windbag Wisdom

A picture is worth a thousand words. This was so embarrassingly obvious, too bad we didn’t get a chance to put together an option play on it due to how fast it went down.

UPDATE: Perhaps this is a good time to mention that there is a wealth of information in the comments section of the Metal Augmentor website (most of it accessible only by subscribers) in addition to the official posts. You should get into the habit of reading those comments and maybe even participate yourself. In any case, here is a little comment from Tuesday:

May 4th, 2010 at 16:39

You are probably right, perhaps some puts in the USD although it had a beautiful chart today for such a supposedly ugly currency! I was looking earlier at July COMEX silver call spreads because when volatility is high the straight spreads (bull or bear) can sometimes be “affordable”. Nothing doing so far, however, and I’m actually tempted to look for outright long calls in COMEX silver JUNE in the 18.50 - 19.00 range. Yes, June is not an active month but we are in an interesting period and whatever is going to happen (follow-through, reversal) is probably going to happen in 3 weeks or less. I doubt we flatline here but of course that is the risk.

And then on Wednesday there was this one:

May 5th, 2010 at 14:39

[David makes a point]: I still think the July contract would be better for Silver because I do not see it bouncing right back especially if we get to 16. The damage is done. And with gold breaking below 1160, it will be that much harder for gold to climb back to 1200 range soon.

Crude is looking attractive at 79ish here. I took a lightly long position at 79.19. I’m looking at adding if we get below 79. The positives for crude are 1) continued signs of economic recovery (or at least the repeated drumbeat that we are in an economic recovery), 2) the upcoming peak summer gasoline demand season, 3)potential for the Gulf oil leak to disrupt imports and refinery output, and 4) Opec’s desire to keep oil in the 75 range meaning not down to 60 any time soon. Negatives are fear that demand and economy will remain weak and supplies high.

Sorry, I know this is not Oil-augmentor, but I don’t mind speculating in oil at these prices, but I am timid about silver and gold.

[silverax responds:] Au contraire, silver did jump back up when gold diverged last time and today we are seeing another major divergence with gold actually up but silver still down over 40 cents. I bought a June 18.50 silver call for $700 just in case we get a repeat of what happened last time. Should we we get just a slight recovery in silver back toward $18.00 I will try to sell a 19.00 call for $700 to set up a risk free trade.

As a postscript, I just went ahead a few minutes ago and sold the call option (a bit early I might add) for a tidy $1,500 profit after commission. Probably one of the easiest 1.5G’s I’ve ever made.

silverax Windbag Wisdom

Today was one of the wildest days in the market that I can remember and zurbo and I had the fortune to be on the phone discussing the market the moment that the bad craziness went down. We watched the Dow and other stock indices dive about 10% in the course of a few minutes and then recover to 5% losses immediately. We quickly scrambled to fill some orders on positions we’ve been eyeing to accumulate at lower prices, but with only moderate success due to the fast and furious price movements. We do think that some weakness will carry over to the next couple of days so we will be looking for more buying opportunities to present themselves.

There were some important lessons learned today.

One. Gold showed today that the next time there is a flight to safety amid a crisis of confidence, we can expect the gold price to be firm and even strong while other markets are crashing. Clearly there is a different group in charge of gold today compared to the Fall of 2008. The last couple of weeks I have felt that gold could make a tiring move to $1,200 but the Midas metal easily slashed through that level today to reach a high slightly above $1,210 spot. Gold continues to hang above the $1,200 level as I write this. Importantly, the basis measures are indicating that the price rise is being supported by bouts of BOTH paper AND physical buying. For example, at several points today June COMEX gold reached a $10 contango (normally around $1 with about 3 weeks to first delivery notice). As I write this, the contango continues to spike momentarily into the $6 range, which is more than 5 times its normal level. What this means is that there is periodically a wave of buying pressure in COMEX gold as compared to the physical market. But the physical market is no slouch either, there having been a number of trades today with gold in backwardation. Moreover, the Gold ETF Basis has seen some spikes in the NAV premium as well to above normal levels, indicating that even while investors were dumping stocks in general, they were buying the gold ETF GLD. The basis indicators don’t show off very well on a crazy day like this but I will try to post some charts later for Metal Augmentor subscribers.

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silverax Windbag Wisdom

The media is reporting that the BP oil spill in the Gulf of Mexico may turn into one of the worst man-made ecological disasters with thousands of miles of Gulf shore being threatened by potentially tens or even hundreds of millions of gallons of leaking oil. In a worst case scenario, the Gulf spill will make Exxon Valdez look like a stage adaptation of “There Will Be Blood” by kindergardners. On the other hand, the leak might be sealed off in a few days by some miraculous and desperate application of modern technology or it might even shut down by itself.

Either way, several things are certain. One, BP and the rest of the oil industry are not going to live this down for a long time especially if the allegations prove true that no contingency plans had been made to deal with oil spills at BP deepwater rigs (and if that is the case for BP rigs we can pretty much assume it is the industry standard). There are also reports that BP may have decided not to install, due to cost saving considerations, a five hundred thousand dollar remote shutoff valve that might have stopped the leak before it got this bad. If true, I bet nobody would have thought that Goldman Sachs could be dethroned so quickly from being the world’s most hated corporation!

Two, offshore oil drilling in the United States is effectively dead on arrival ironically just one month after President Obama disappointed some of his supporters by including “responsible” offshore oil and gas exploration as a necessary component of America’s future energy policy. It seems the definition of responsible has just made a quantum leap in the direction of  impossible while the mantra of “Drill, baby, drill!” has been discredited as the shortsighted bit of careless idiocy that it has always been. Not because offshore oil exploration itself is a bad idea but because the very soul of the drill-now-and-drill-everywhere crowd is infected by a callous, reckless, cavalier and yes, even maverick, disregard for sound science and business practices. Lest you mistake us for some tree-hugging-Earth-hippie hypocrite, we’d also like to point out that any American who is dead set against offshore oil exploration yet consumes a single drop of oil either directly or indirectly is an A-hole of the first order, the reason being simply that we Americans consume plenty of oil produced off the shores of other countries. Worse than people who don’t care about polluting their own shores are people who are willing to pollute somebody else’s shores in the pursuit of selfish liberty and happiness.

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silverax Crazy Market Thoughts

We have followed the work of the “Optimist” for quite some time especially the unique way that he looks at gold and silver. In his latest update, the Optimist makes the point that measured in terms of value instead of price gold and silver reached new highs last week (all time record high for gold, bull market high for silver). Here it is according to the Optimist:

The value of silver and the value of gold reached new all time highs this week.  The Gold & Silver tab at the top of the page discusses the concepts of value (which is independent of currency) instead of price (which depends on the currency unit the price is measured in).  A typical price chart shows a combination of changes in the value of the silver or gold and the changes in price that are caused by the currency that the chart is priced in.  The change in value is what would result if one buys (long) silver or gold futures in US$ and simultaneously buys (long) an equivalent amount of the USDX US$ exchange rate futures.  Then the USDX long futures will cancel out the silver or gold price changes that result from currency variations, and the combination will leave only the changes in real value which is independent of any specific currency.  (Note that I have not actually done that futures spread trade, and I do not recommend it to anyone else.) The current charts of the value of silver and gold are copied below.  I update those charts each week at the links below:

MoreAG charts the value of Silver

MoreAU charts the value of Gold

Now for some thoughts on the above.

First, these Optimist “MoreAG” and “MoreAU” charts are great for getting a very good overview of the bull market in gold and silver in terms of solely their “real” price increases instead of the price increases that have occurred directly as a result of the bear market in the U.S. dollar. Kitco among others have attempted to do something similar. The approach utilized by the Optimist is simpler yet more aesthetic and more useful at the same time.

Second, these charts are probably as close as we are going to get to an international “standard” that allows investors across the globe to speak the same “language” in terms of gold and silver prices. Some of our subscribers have complained that we, like many others, have a U.S-centric focus on the gold and silver markets especially when discussing price action. Although we feel such focus is entirely reasonable given that the vast majority of global precious metal trading is still done in U.S. dollars, the criticism at its heart is valid because most individual investors don’t engage in “global precious metal trading” — they buy and sell precious metals in their own countries of residence where pricing is in the local currency. To them, the gold or silver price in U.S. dollars is at best an interesting abstraction that has no relevance to their own investment position. Therefore going forward we will be much more broad-based in our gold and silver market analysis and we hope to utilize charts such as those provided by the Optimist.

Third, we should be careful not to take technical analysis too far given that charts such as “MoreAG” and “MoreAU” are not widely followed by traders. Technical analysis works for the most part as either a reflection of trading psychology or a self-fulfilling prophecy. Esoteric yet useful charts like those created by the Optimist may have great value in providing a technical overview of a market but applying indicators, patterns and other technical factors to these charts would be quite useless. That said, we wouldn’t consider the trend lines and channels drawn by the Optimist on these charts to be technical factors but rather part and parcel of a “technical overview”. For example, one might generally discern from the MoreAU chart above that following a big rise in the “value” of gold, a new uptrend appears to be established and this uptrend is not only shifted upwards from the previous uptrend but it also appears to have a steeper slope.

There are certainly more than three useful observations to be made on these charts but let’s stop here for the sake of brevity and relevance. We’ll follow up on these charts periodically and in the meantime let’s see what some of our readers have to say.

silverax AG Wisdom Links