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Hourly Action In Metals From Trader Dan

Posted: Dec 06 2010 By: Dan Norcini Post Edited: December 6, 2010 at 2:50 pm
Filed under: Trader Dan Norcini
Silver was the star of the precious metals complex today as it shot higher in the face of a stronger Dollar and a mixed performance by the overall commodity sector. Its strength helped to pull gold higher particularly when it cleared $30 for the first time since many moons ago.
I have been receiving emails from some detailing the efforts to squeeze Morgan. If you track the daily open interest figures without looking at the larger picture, it can be oftentimes a bit unclear as to what is going on, mainly because the actions of spreaders can cloud the short term picture. It is revealing, however, when you look at the weekly silver chart and compare that to the COT chart over the same timeframe.
The big commercial-end user- producer class peaked its net short position in early September as did the net long position of the managed money (hedge funds). Since that time silver has rallied nearly $9 excluding the last few trading days (Monday included). Yet the net short position of the big commercial class has been steadily dropping while the net long position of the managed money class has been moving lower. Only in the last two weeks has this process been halted with a reversal in the size of both the net short commercial position and the net long managed money position. Ditto for the other class known as the Swap Dealers.
Apparently there has already been some sizeable short covering occurring in the Comex silver market that only recently has come to an end as the three groups mentioned above have gone back to their normal status quo. One group of buyers has been operating somewhat under the radar screen and that is the class known as the other reportables. These are large traders such as private individuals or locals or sometimes CTAs. They have been steadily buying since $22 and as of yet show no sign that they have had enough. While not the largest force to contend with in the market, they are also not to be ignored. Those who trade in reportable size in any market are generally not your typical, uninformed speculator but are those who tend to know their market fairly well. After all, large private traders are not risking client money – they are risking their own and that makes for no tolerance towards ignorance.
Oddly enough, it is not the small speculators who are in there buying. They have been steadily selling out the last few weeks even though overall as a group they remain as net longs.
What appears to have happened is that some of the large shorts apparently did not decide to roll to March on out shortly after they began exiting in front of the delivery process for the now-expired September contract. They seem to also have been hesitant to carry some of their December silver short positions. They might have opted to get out of the December earlier than normal to avoid some delivery pressures and then sat on the sidelines waiting for price to move higher before plying their craft of establishing new shorts once again. It also helps them avoid having to deliver if they avoid the front month. If that is the case, it explains the air pockets above the market which thus far have allowed Silver to shoot higher so rapidly.
What I am particularly interested in seeing now is whether they will attempt to rebuild the size of that short position or will look for ways to draw it down further. Based on what I can see of the last few days worth of open interest, they are adding to, not drawing down shorts. How this plays out is going to be extremely entertaining especially now that the metal has pushed to the $30 level. For guys who think watching prices change second by second is exciting this is all rather novel. For normal folks, what this simply means is that we have already seen what silver can do when it is experiencing some significant short covering. If it gets another round of this… well you can fill in the blanks based on what has been occurring. One thing is certain – more than a few call option writers have gotten slammed.
I mention all this because it is having an effect on the gold market. There are some guys playing the silver/gold spread and leaning on gold a bit as they load up on silver. Even at that, gold is still moving higher but it cannot yet clear its former all time high in US Dollar terms and move past that. It has however bettered its all time high in terms of both the British Pound and the Euro and continues moving strongly upward in terms of the world’s major currencies including the Yen where it is at another fresh 27 year high lacking only a relatively small gain before it posts a 29 year high. Once again gold is sending signals that there is a great deal of nervousness towards paper currencies globally.
It needs to clear resistance above $1420 to push on up towards $1440. There are a few bearish divergence signs but that is normal after a period of consolidation after which a market shoots rapidly to a new high. Bearish divergence signs mean nothing if they are not accompanied by a breakdown in price below a support level. This gold has not done. That being said, gold needs to continue to push higher in US Dollar terms to keep the technically-driven momentum funds from casting away their fleeting allegiance to the yellow metal. Initial support lies down near $1384-$1380 followed by better support close to $1,365.
The Dollar is higher today – YAWN! The Euro is lower – YAWN again. Big deal. It has become a game of what is worth less than the competitor. Both of them stink as does the Yen which more and more investors are wising up to and is the reason behind the strong climb higher in gold.
Bonds are higher today because Bernanke is worried about the economy. What a shock! Who would have ever dreamed that? Sure sounds like a great reason to buy more paper IOU’s especially given the fact that Ben said he could always buy even more of them if QE3 were needed.
Crude oil looked like it was going to make a run past $90 at one point in the session today but it faded from its best levels and is down a bit as I write this. It still looks to me like it has intentions on that level, however. We’ll see.
The HUI is outperforming the broader S&P 500 but it needs to get through 590 and leave that in the past for another leg higher. Trapped shorts are praying for a double top but would need a close way down below 530 to have a realistic shot at that.
Wheat keeps moving higher with weakness in corn and the beans pulling it back a tad. Palladium was down today but is trading above $750 which is amazing considering the fact that it was trading at $424 at the end of June this very year.