One More Day

369
Thu, Aug 30, 2012 - 10:28am

Well, it's Thursday. This can only mean two things: 1) Just one more day until The JacksonHoleDown and 2) College football season begins tonight!

For all intents and purposes, here's the only thing that seems to matter right now:

8/31/12 Speech--Chairman Ben S. Bernank
Monetary Policy Since the Crisis
At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
10 a.m. EDT

I suppose I could wax philosophic and even poetic about momo algos and Cartel capping but what would be the point? For today, I'm confident that we will simply trade back and forth between 30.60 and 30.80 in silver and 1660 and 1670 in gold. <yawn>

Look, I don't have a crystal ball for Fed-speak. The only person who knows what The Bernank will mutter tomorrow is The Bernank, himself. (Well, and maybe his butt-boy, Hilsenrath.) However, I can tell you this:

  • The fundamentals for the metals are overwhelmingly positive
  • The charts look poised for another leg higher

Might I be wrong? Of course. However, I'm confident that any Cartel-inspired Fed gaming tomorrow will be met with considerable bids for physical metal at discounted prices. This unceasing physical demand will continue to provide a floor for paper price and, consequently, any dip tomorrow must be bought.

That said, they may not be a dip to buy. Look at these charts. First, here are the daily charts showing that, after the runup last week, prices are simply consolidating in the zone where you would expect them to:

But now look at these 4-hour charts that include the 4-hour Relative Strength Indices. Remember, RSI is simply a measurement that allows you to assess the degree to which a market may be "overbought" or "oversold", in the short-term. The sideways action this week, though enfeebling and frustrating, allowed us the time to work off some RSIs that had worked well into the short-term overbought area. Note that, on the charts below, the RSIs have now retrenched back to the levels last seen before the big blastoff two weeks ago. This is a very positive sign that the markets are poised to move higher again and I would expect that move to begin very soon.

Have a great day!

TF

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  369 Comments

Hawk
Aug 30, 2012 - 3:06pm

Benque - answer to your question

I will try to answer your question in as simple terms as I can, I don't know your understanding of futures and thus i will explain a little so you can see where this is going, bare with me if this is all obvious.

The gaming of the "rollover" i referred to in my previous post is a method the largest traders use to take advantage of the smaller margined guys. Futures on the metals and all commodities trade on multiple months, but there is always a front month that is the most liquid and thus the spreads between bid and offer are tightest on this month, as you can stand for delivery of silver or gold from the Comex shorts there has to be a cut off where delivery actually takes place, this comes shortly after options expiration begins with "first notice day"

thus you have a rollover period into the new "trading month" and anyone who wants to remain long or short move there existing positions to the new "front month" and close their old one, the net effect should be nothing, however this is gamed by the large shorts and the rest who stay long or short the old month either want to take delivery or make delivery of physical metal within 6 weeks after "first notice day"

The gaming occurs like this;

If you stay in this old month "Sept currently" you need to put up the full margin for the contract IE silver 5000*your entry price (for this example say your entry is $30.00, instead of the initial/maintenance margin of just $15,875 odd you need $150,000, the large shorts know this and know that most traders are leveraged and thus will roll there positions into the next liquid month "December" shortly after options expiration to maintain the normal margin levels, now what the large shorts do is go short December and delay buying back their September shorts thus for a short period of time they can exact extra pressure on the price and catch weak handed long stops or encourage fresh shorting, then they buy back their Sept shorts and keep the new December position, they can afford for their margin to increase to the full amount for a day or so whereas most others cant.

I would read very little into price action today, I'm my opinion this was easy to predict and I'm not just saying that in hindsight I was short from $1663 in gold and covered around $1655 and then flipped to long silver @ $30.28, now flat after bounce to $30.50 area, the game is no longer about technical or fundamentals,these things still play a part but much more important is the context and psychology of the largest players and what they are trying to achieve, its hard to disguise footprints as large as theres.

Anyway hope that helps you,

HAWK

The VetS Roche
Aug 30, 2012 - 3:11pm

The more they sell, the more cash they get...

I may have been unclear, but short sellers get a credit in their account equal to the selling price of the contract regardless of whether that contract was in or out of the money. This cash in part, covers the margin requirement and as the price of the short position drops, that margin requirement drops, freeing up more account equity to allow additional short sales, which can then add more credit, drops the price further and in turn allows more short selling.

While it is true that there must always be some free margin available to hold a position, the short seller, by virtue of the short sale gets added credit on every sale, but the long buyer must add additional cash each time he adds an additional long position. This makes the trade asymmetrical in that the short is increasing his cash balance the more he "piles on" short positions (with that money being supplied to him by the long who takes the other side of the trade) and the long buyer has to keep coming up with additional cash from an external source (which gets transferred to the short sellers account) to add to his positions.

At expiry the situation is even more unfair. The long MUST put up all the cash for the balance of the contract before he can stand for delivery. The short seller puts up nothing, not even the commodity he has sold short and he already has the money that the long buyers paid to buy the contract safely stashed in his account. As long as the short can substitute some other paper contract in place of the actual metal if the long does stand for delivery, there is little pressure on the short seller even if he has to deliver.

For example, the short can deliver shares of SLV, which he could have borrowed or even simply been created as naked shorts to meet the delivery requirement. Thus he has simply replaced one naked short position which had a time constraint, for another short position that has no time limit.

Terabyte
Aug 30, 2012 - 3:15pm

More on market movements

Earlier I posed a question as to why so many of the markets seem to move in tandem. Specifically, I have observed that when we see one of those abrupt vertical falls in silver we also see corresponding movements in several other markets, especially gold, the Dollar, Euro, oil and even often the DOW/S&P.

Unfortunately, I do not have the ability to check the exact timing between those moves. Has anyone here with that capability ever tried to do that? Could there be a trend indication as to which segment leads the moves, and if so does it indicate a pattern that could be used as an indicator, albeit an extremely short lead time indicator?

GroanerThe Vet
Aug 30, 2012 - 3:15pm
¤
Aug 30, 2012 - 3:18pm

Bohemian

Is that fairly recent? Haven't been to that site in about a week. Hard questions are going to be asked and the chorus will grow. The basis for my post is this....does it necessarily need to be a London failure to deliver to their customer in that commercial bullion system or will it take place under far greater and more sensitive diplomatic circumstances like a CB trying to take delivery via repatriation but is stiff armed or told it's....'not available'? I see that scenario being likely & inevitable. That would definitely reverberate loudly around the world.

Hawk
Aug 30, 2012 - 3:19pm

The Vet- your kinda right and

The Vet- your kinda right and wrong. what you refer to is an option short selling vs long call. the long call pays the premium to the short seller but that is his absolute maximum loss. If price rallies the margin will increase on the short seller, if price falls the short seller has limited upside up to the total value of premium paid. as a rule of thumb you might get between 15-20% of the cost of the margin of the short position from the long premium you take in.

In Futures neither have advantage both have to put up inital margin and then maintain "malignance margin" for as long as the trade is open.

HAWK

Hawk
Aug 30, 2012 - 3:22pm

Terabyte,  In answer to your

Terabyte,

In answer to your question there are algorithms that will take corresponding positions in vehicles with high correlation, thus if silver sells off the euro is likely to fall and vice versa, in fact this correlation was so tightly knit together largely due to algos up until the physical market in the low $26s caused this correlation to lessen as any extra euro related algo selling was offset by physical buying and COT short covering.

HAWK

ClinkinKY
Aug 30, 2012 - 3:30pm

deleted

deleted

Orange
Aug 30, 2012 - 3:33pm

@Hawk

The way I view it, and I suspect, many in Turdville, is holding fiat has the biggest risk. In 1960, the old French Franc was valued at 100. After revaluation, it took 100 old Francs to replace the new 1 Franc. There are many other examples, however as history seems to repeat itself, I prefer to learn from history and hold real money, not a promise to pay.

You are obviously very knowledgeable and can perhaps trade and succeed. I may buy and sell some of my pslv, in certainly keeps the blood flowing, but to be honest I am scared sh..less when I have sold.

Appreciate your insight and contribution to Turdville.

The VetHawk
Aug 30, 2012 - 3:34pm

HAWK - You are right of course....

but I was trying to simplify by treating options and futures as similar in effect, which is close, but not actually accurate. However there is one other question which I have never been able to answer.

Margin account balances must, according to the rules be maintained for all positions, both long and short. Now COMEX is not a bank, so where is that money actually held? My best guess is that it is probably put into a bank account with one of the major TBTF banks, the trading arms of which could also be the one or more of the big 4 shorts in the PMs.

So the cash put up to maintain margin by the trading arm, is effectively transferred into another pocket of the same firm. Seems like a pretty cosy arrangement if this is what happens, but I have never been able to verify exactly who ultimately holds the margin balances.

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