Squeeze

234
Sat, Nov 24, 2012 - 11:48am

Well, that was fun, wasn't it? I had been expecting the pop to $1755 to come on Monday. That it came Friday, instead, works out just fine!

What a perfect setup that was for a short squeeze. The stars had aligned. We had:

  • The "Iron Dome" of Cartel resistance at $1735.
  • The 50-day moving average near $1743.
  • Plenty of $1750 calls (due to expire Tuesday) to exploit.
  • And a light volume, holiday trade.
  • It all exploded in a glorious five minutes. What great fun to watch!

    So, now what? As I've been saying for some time, the area around $1755 is the last area of real resistance before the final, ultimate challenge of $1800. Expect some stickiness here, especially with option expiration on Tuesday. However, the trend is definitely our friend here and gold is now above all of its moving averages. Look for money to continue to flow into the pit and prices to eclipse $1755 by later this upcoming week. From there, $1800 awaits and this time that level will fail. Above there and its straight back to the old alltime highs at $1920.

    Silver, on the other hand, continues to lead the way. Now above $34, it has already broken through its final resistance level (equivalent to the $1755 area for gold) and is headed back $35+. Though silver will also battle option expiration volatility early in the week, the stage is clearly set for the final push through $35.50. From there, silver will head toward stiff Evil Empire (JPM) resistance between $37 and $38. It may take a little work but, once through $38, the next stop is $44.

    A couple of other words about silver here. Like gold, silver is once again clearly above all of its moving averages. The closest ones are the 5-day and the 50-day, both around $33.20. This puts silver over $1 ahead of the nearest MA. This shows extraordinary strength and momentum to the momo-HFTs so there is at least some potential for things to get a bit disorderly. At the least, we are certainly entering a period of significant volatility.

    You can really see this on the Open Interest reports. As of Wednesday night, the total open interest in the Comex silver pit exceeded 150,000 for the first time in over two years. This is an extraordinarily important development and reflects a 50% increase over the OI levels of just one year ago. There was not a CoT yesterday because of the Thursday holiday. Look for it on Monday and expect it to be very interesting, particularly in silver. For the reporting week, price was up just 45¢ but total OI rose by almost 6,000. Last week we saw heavy Cartel buying as everyone but JPM seemed to be getting long. What will this week's CoT show? I can't wait to find out!

    Finally today, please allow me to take a stab at explaining in greater detail the "Guest Post" from Andrew Maguire. I posted it on Wednesday as we were leaving for Thanksgiving and I can see now where it caused some confusion. As you know, one of my favorite techniques for explanations is the chronological layout so let's give that a try. Additionally, I think I'm laying this out accurately. This is how I understand it. I'll check with Andy on Monday to ensure that this is at least close to being accurate. If it's not, I'll post some additional clarification then.

    1. The "Authorized Participants" have a special relationship with the fund whereby they issue metal, 100,000 ounces at a time, to the fund in exchange for 100,000 share blocks.
    2. This should function as a two-way street where the AP can get its metal back by redeeming shares and the AP can also supply additional metal in exchange for additional shares. THIS, HOWEVER, IS WHERE THE TRICKERY AND MANIPULATION BEGINS.
    3. On big UP days in paper price, there is often a big physical demand in London and a big demand for additional shares in GLD.
    4. This is a double whammy of demand. The Bullion Bank (and Authorized Participant) should have to not only supply metal at the London allocation but this same BB/AP might also have to deliver metal to GLD to cover all of the newly-issued shares.
    5. I think you can see where that's a lot of metal and, in an environment of limited inventories, rapid BB/AP supply depletion would lead to shortages and even higher prices.
    6. So, here's the trick they employ to manage the situation, even doing so at a profit: The GLD delivers the gold back to the AP without the AP actually redeeming their shares. The AP is considered to be "short" the shares, instead.
    7. These shorted shares provide the "offer" against the investment world "bid" for GLD shares that day on the NYSE. Since no new shares are needed to be created that day, no new demand for physical deposit is created, either.
    8. On the other side of this trade, GLD delivers metal to the AP as if it had redeemed the shares, though. The AP uses this metal to settle the physical allocations for that day.
    9. So, where there should have been two, separate demands for physical, the demand was met by short-selling GLD and then using this GLD metal to meet allocations in London.
    10. The effect is then chronicled by Harvey and others as "gold went up $20 but, mysteriously, GLD shed 2.72 tonnes".
    11. Here, then, is how they reverse these "trades" and return everything to where they were. The BB/AP that is short the metal to the GLD needs to put it back in at some point. The next time a paper price raid is effected on the Comex, the AP itself takes delivery of some metal in London.
    12. This metal is then returned to the GLD in exchange for a "covering" of it's short position.
    13. This, typically, takes place on a DOWN day where Harvey et al notice that "though gold declined $15, the GLD added 2.72 tonnes of metal today. Go figure."

    Anyway, I hope this helps explain the process. Again, the Bullion Bank that is also an AP of the GLD can "flywheel" metal into and out of the GLD and/or SLV anytime they need to in order to meet physical demand elsewhere. In the process, the BB/AP conveniently provides liquidity for GLD/SLV share demand, which negates additional GLD purchasing which would have otherwise been necessary. It's a true WIN-WIN-WIN for the BB/AP as they are able to cap and control price while appearing to have no problem meeting London demand and then they turn around and cover all the positions at a profit on the next bout of price weakness.

    Again, THIS IS NOT SUPPOSED TO BE HOW IT WORKS. The banks are supposed to supply metal to both the GLD and the London buyers. There is not, however, sufficient supply to make this happen at the current price levels. So, instead of allowing price to rise to the natural equilibrium of buying and selling interest, the BB/AP uses the tricks outlined in Andy's guest post to manage and cap the situation. On the bright side, THIS CANNOT CONTINUE FOREVER and, WHEN it fails, the reset in price will be spectacular to behold. BB/APs are now seen bidding against each other in London and competing for allocation with the sovereign funds and the central banks. I think you can probably see that the resolution of all of this will not result in price declining.

    I hope everyone in Turdville enjoys the rest of the weekend. Please be sure to return rested and ready come Monday, though. Next week is going to be very, very interesting.

    TF

    About the Author

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    turd [at] tfmetalsreport [dot] com ()

      234 Comments

    dgstage
    Nov 24, 2012 - 11:51am

    KWN

    Interesting audio post at king world news today ,weekly wrap up. Ron Rosen is filling in for Dan.

    Colonel Angus
    Nov 24, 2012 - 11:51am
    Bongo Jim
    Nov 24, 2012 - 11:55am

    @Grub

    It's not.

    dgstage
    Nov 24, 2012 - 11:57am

    Monday AG Low

    Anybody willing to guess the low Monday for silver? Welcome back Turd.

    Bollocks
    Nov 24, 2012 - 12:00pm

    dgstage

    You're supposed to say FURST!

    Jeez, you've now ruined EVERYTHING.

    and Colonel Angus and you're supposed to say SECOND

    DAMN, the whole world is falling apart.

    Grublux
    Nov 24, 2012 - 12:00pm

    First?!!

    I can't believe it's true...

    well Thurd will do!

    thanks for the gld summary turd. It makes a lot more sense now...

    Strawboss
    Nov 24, 2012 - 12:08pm

    Last year, the price of

    Last year, the price of silver dropped $2 in the 2 days leading up to Dec. option expiry. Lets see what happens on Mon-Tues.

    The Swedish Chef
    Nov 24, 2012 - 12:09pm

    OK, so we place the shorts at

    OK, so we place the shorts at $1805 then...

    The Swedish Chef
    Nov 24, 2012 - 12:10pm

    OK, so we place the shorts at

    Double post, sorry... Please delete.

    dgstage
    Nov 24, 2012 - 12:13pm

    Ok Bullocks

    Uno, I'un, Iner, 1, один, één, first

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