The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 14th, 2010.
You may remember my commentary entitled Paper Covers Rock from the end of July in which the game 'rock paper scissors' was employed to illustrate how at the time our bureaucracy's price managers (the bank cartel, etc., call them what you will) crushed gold (and silver) going into August options despite excessive bearish sentiment at the time to prove a point, the point being prices will be contained no matter what. The idea here is paper pricing mechanisms (they are not true markets because of heavy manipulation) the bureaucracy uses to price precious metals (COMEX in this case) were successful in keeping prices contained in July, hence the title 'paper covers rock' at the time to reflect the outcome. Again, this was the outcome despite lopsided bearish bets at $1200 and above in COMEX Gold open interest put / call ratios, a primary measure of sentiment, that was suggestive prices should have been squeezed higher going into expiry, not the other way around.
Why did this occur? For me, where I have been a student of precious metals investing for over 20 years now, there could have been only one answer, and we are seeing this thinking proved in recent backwadation and rising lease rate episodes, with more to follow if stubbornly firm pricing is any indication. And the answer is physical demand (rock) is finally crushing the influence of COMEX (the scissors), hence a change to rock crushing scissors in the game. (i.e. physical demand outstrips paper market shenanigans in price discovery.) This of course does not mean that the influence of the various paper pricing mechanisms (COMEX, LBMA, ETF's) will not be felt in the trade, however it should mean the negative influence these mechanisms have had throughout the years would be lessened, if not nullified at some point with physical delivery defaults, paper market trading halts, and possibly even catastrophic loss due to fraud in the paper markets that our wonderful bankers will undoubtedly attempt to pass on to the public in one way or another. (i.e. never hold your core positions in paper gold.)
So the question begs, are we at a point where the great inflation / deflation debate, which appears to be heating up at the moment, is finally answered with a decisive breakout higher in precious metals? (i.e. which would be taken as a 'buy signal' on system wide inflation.) Well, if money supply measures keep accelerating higher in front of the election, which on it's own has price managers watching price stability by the second; this is what we should get all right. Thus, the fundamentals, the ones that can tip the balance, and naturally include the demand / supply situation, appear aligned and appear positive moving forward. And, undoubtedly much to the chagrin of our price managing bureaucracy, technicals also support higher prices in the intermediate term, were once the present short-term consolidation is complete (this may have ended yesterday), prices should serge higher once again led by the shares. In this regard you should know that as long as small share to large share ratios are rising, little doubt exists in this regard.
What could cause such an important breakout higher? How about a commercial short squeeze just like the one witnessed in 2007 that sent prices zooming. We are in position for this right now with money supply growth notching higher set against an almost record commercial short position, as seen here in the most recent bank participation report that witnessed a $28 million increase in precious metals related derivatives. This is how they cap precious metals prices you should know, with what they perceive as a limitless paper currency supply that can be used to suppress gold and silver prices. There's only one problem with their thinking. Eventually they will run out of the physical commodity by keeping prices artificially low. This is a 'dream trade' for anybody who knows what he or she is doing because you are essentially arbing physical against a paper market that is out to lunch. This is of course why silver appears set to launch on the charts. (See Figure 1)
And what's worse for our price managing bureaucracy is even their paper games are catching up to them as well, with investor / speculator sentiment cooling towards the metals recently, which we have well documented. In this regard you should know the open interest put / call ratio (seen here) for GLD shot up to 1.08 in yesterday's reporting, where if this trend is maintained into ETF options expiry on Friday, would keep a good bid in gold. In fact, with the Gold / Silver Ratio at what will likely prove to be some degree of support, expect gold to outperform over the next few days or weeks, especially if stocks swoon post options expiry this week with the support of rising open interest put / call ratios. (i.e. you should know the ratios have generally been rising over the past few days accounting for the strength in stocks.) And as denoted above, this pushed silver to support on the Gold / Silver Ratio, which when viewed flipped around means silver is now in a position to breakout against gold. This can be seen clearly on the monthly Silver / Gold Ratio plot from the Chart Room, attached below for your convenience. (See Figure 2)
Further to this, once silver takes out the old highs at $21 on a sustained / closing basis it will be onward and upward from there, with the structural measure indicated on Figure 1 suggestive the present intermediate degree sequence will produce a move above $30. This is the target I would expect to see hit by Christmas as the strong seasonal period draws to an end. In the meantime however, which might be this week, as mentioned above it will need to better $21 on a lasting basis. The first stab at this metric could come quite soon considering overnight strength could panic the shorts in New York at the open. We may finally see a gap open on the New York charts today with the price management job yesterday such a failure, setting the stage for a squeeze aided by ETF buying. A close in gold above $1262 today or tomorrow would signal a move to $1300 this week, which is fait accompli given the sentiment backdrop in my books. Firm stock markets will provide the liquidity, and increasingly negative sentiment will provide the other necessary ingredient in a winning combination for higher prices. (See Figure 3)
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