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How to use the Commitment of Traders Report?

Guest Post: QuantShare

The Commitment of Traders report (COT report) is a weekly report, which is issued on every Friday by Commodity Futures Trading Commission (CFTC). This report contains the details of the positions of all the market participants. Every report that comes on Friday contains the data as of the preceding Tuesday.

The role of CFTC is to Commodities Future & Options market what SEC is to equity markets. The COT is a very handy, reliable and important report as it has good deal of data related to the market positions and trends of various trader groups. It is very useful in understanding the current and future market movements.

The structure of the COT report is detailed and it provides data segregated into different trader groups. The three main categories being: commercial traders, non-commercial traders and non-reportables.

Commercial Traders: They are the main players of the Commodity future markets. They are essentially hedgers and their trades are for actual delivery of the underlying asset. They have the largest positions in the markets and are big entities like Producers and users/consumers. They have the best knowledge of demand, supply & market movements etc. and enter into contracts as per their requirements and forecasts.

Non-commercial traders: They are also generally big traders but unlike the commercial traders, their positions are mostly for speculative profits. They enter a position with a view to make money and exit the position long before the due dates.

Non-reportables: This is the smallest group of traders and consists of individuals or other small entities that trade on speculative lines. Their holdings are individually too small to be required to report to CFTC and hence the name.

Over the years, CFTC has been providing the report with the aforesaid three categories of traders. But in the recent years, it has started providing disaggregated reports, further categorizing the traders. The picture below illustrates the disaggregated trader categories.


In the above classification, Swap dealers represent the Pension funds, endowments etc. These funds rather than directly trading in the future markets, work through the services of Swap dealers.

Basics of COT report

The COT report is a very valuable source of information, which can be used to get an idea of the future market movements and accordingly device a trading strategy. Let's take a sample COT report of Gold Futures dated 11th June and try to understand the basic data sets and their implications.

A gold future contract is of 100 Troy ounces and the above report is a part of the COT report on metals issued by CFTC on 14th of June, 2013. The report shows the category wise positions as on June 11th. In each category, the long and short positions represent the number of contracts held. The total open interest shows the sum of all contracts (both long & short), that have neither expired nor settled. From the above data, we can get the following perspectives about the current market conditions.

The total open interest is 373,844, which is marginally up by 783 from the previous week. This indicates a bit higher market participation. The benefit of an increased open interest is that a higher number of transactions take place increasing the liquidity. At the same time it also indicates better market conditions for trading and may be a sign of trend reversal.

The net position of Producers/Merchants category is still on the bearish side but compared to last week it shows increase of 3,251 in long contracts. Remember that this group has the best knowledge of the markets and they are bearish with slight movements towards bullish side of the fence. This movement towards long position may be short term or long term. Now if we look at the data of past few weeks, we will observe that there is a gradual increase in the long position of this group. The total extent of their short positions has been decreasing over the time. This may indicate a positive outlook for gold in the future.

The swap dealers reflect the same approach as far as the net position is considered.

Managed Money traders have a contrarian position. This may be due to the longer time frame that they generally target, eliminating the reflection of short-term market sentiments in their position.

Other reportable and the non-reportables are generally market followers. They are mostly in a position opposite to that of commercials. One thing that you should always avoid is to follow the trend of non-reportables.

The current COT report can further be compared to the past data and more inferences can be deduced. For example, if you compare the open interest with past data, you would see that it has been falling and has dropped quite low. Also this drop has somewhat stabilized over the past few weeks and it seems to be bottoming up. This indicates that a strong level of support for the gold prices may have been achieved and there are pretty good chances of a trend reversal.

Some takeaways

Now since you have some understanding of how to use COT report, you must keep the following points in mind while using it.

COT report comes with a time delay of 3 days. This is a dampening factor to the uses of the report in framing intraday and very short-term trade strategies.

The data content is excellent and reliable. This makes it a great source of getting market insights.

Further derivations of the COT report in the form index creation or indicators etc can further add to its utility.

Use other tools in combination with COT insights to validate your analysis.

COT report as such is of great value. No wonders why CFTC has to give in to the demands of weekly reports from the market participants, rather than the bi-monthly report that it used to provide in the past. That's all as of now. Happy trading!!!

From quantshare.com

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Gold and Silver Speculator Long Positions Wiped Out

Small speculators, also known as individual investors, have had their net long positions in gold and silver completely wiped out over the last two weeks. As of last Tuesday, these small investors held a mere 133 net long gold contracts, and 2163 net long silver contracts. As recently as September, when we turned cautious on the metals, small speculators held over 60,000 net long gold contracts and 20,000 silver contracts. If the small speculators were to sell anymore gold and silver, they would become net short.





Typically commercial banks manipulate prices on low volume to set the price and then trade at the newly set price in volume. The recent crash in gold and silver began after hours on a Friday, and was hit further by large sell orders Sunday night to take out the well known technical support lines of both metals. Most small retails investors were probably not even contacted by their futures broker. By the time they checked their account the next Monday Morning, either their protective stop orders were triggered or the margin clerk forcefully closed their position. The snowball effect in margin calls and stop loss orders was great enough to last several days.

None of this is surprising. However, we were quite surprised to see that net short positions of commercial traders rose substantially during this period. Typically they would be expected to cover their short positions at lower prices, mopping up the losses of retail investors.

This reveals several important changes to the gold and silver markets:
1) It took an enormous number of short positions added to move the market even on a weekend.
2) The gambit failed, as they were not able to cover these positions in volume after the dump. Nevertheless, as we have been expecting for several years, the commercial traders will be net long before the metals make new highs. But if they can't cover at lower prices, they will begin covering at higher prices as we saw when silver rose from $20 fall 2010 to $50 in spring 2011.

We suspect that the failure of the gold gambit is largely due to the unexpected surge in GLOBAL demand for physical metal. Premiums on bullion products are higher than they were during the 2008 crash, with even junk silver selling at $5-$6 over the paper spot price. This is unprecedented.





The consolidation in gold and silver over the last two years has been painful, especially for mining investors. However, with the prices of the metals at or below production costs, along with shortages of retail bullion products, and zero net long small investors, we are struggling to identify any more sellers. The summer season is typically weak for precious metals, and they could easily back and fill a base over the next six months, however the risk in accumulating physical metals in this price range is very low. We also believe that producing miners with cash holdings represent substantial value at this time.
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Caution Advised in Gold and Silver

Gold and especially silver have succumbed to a long a demoralizing correction over the last 12 to 18 months. The summer doldrums likely marked the bottom of this correction, and the metals have turn the corner higher. However, both gold and silver investors will likely have their resolve tested once again in the coming weeks before the metals are able to break higher.

Precious metals (GLD, SLV), and mining equities surged from their 2008 lows to their 2011 highs in reaction to massive monetary intervention, and an initial surge in inflationary expectations. Although interest rates have remained near zero, and real interest rates are clearly negative, precious metals investors have been disappointed by the ongoing global stagflationary wealth destruction, and the failure of further intervention by policy makers. The Federal Reserve has admitted that the US economy is weaker than desired, yet it has also continually disappointed in announcing a new quantitative easing as it seeks political justification.

The last two years of global policy makers kicking the can down the road, in conjunction with weaker demand from India, has created the environment for a severe correction in gold, silver, and miners. While it hasn't been the most severe in terms of percentage loss, it has likely been the most severe in terms of sentiment. With Europe, India, China, and the US all decelerating at a rapid pace, and the US fiscal cliff returning the political forefront, we believe that we are months away at the most from a turn in monetary policy. Verbal intervention has run its course, and real monetary intervention is a mathematical certainty.

Gold miners(GDX) bottomed in May, and are leading the metals. They are now overbought and could face a sharp correction before breaking out.



Gold and silver may already have begun pricing in future intervention, however commercial banks are not yet on board with the breakout in gold and silver. Net commercial short positions in both gold and silver, at a time when prices are near resistance levels and overbought are indicating that a short and severe correction could be imminent.



Silver has had an especially large spike in commercial short positions over the last three weeks.







The current commercial short positions in silver and gold must be reduced before the metals can break higher. In other words, commercial banks must cover the majority of their short positions. While they could cover as prices rise, history suggests that the most likely scenario is for the commercial banks to take down the price and cover at lower levels. This correction will likely coincide with the realization of a global recession/depression in 2013 and end with the realization of further monetary intervention.
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The Purpose Of Wealth

All too often I've heard someone say "What do you need money for, you can't take it with you when you die." To which, I rebuttal; that is the point. You leave your wealth here when you die.

"There are really only two good reasons for having a significant amount of money: To maintain a high standard of living and to ensure your personal freedom." Writes Doug Casey who goes on to state that other reasons such as to leave a legacy or perpetuate your genes are psychological foibles in The Point of Being Wealthy. While some degree of personal freedom is the prerequisite for all other advancement, I'd argue that it is only the middle tier in the individual economic hierarchy and that Casey and others are missing the larger picture.

In 1798 Thomas Malthus theorized that life in its natural environment will reproduce exponentially until it over consumes its resources (food) causing starvation to reduce populations below a sustainable consumption level. This pattern can be observed in the growth of everything from bacteria to deer populations; however it has yet to be witnessed on a grand scale in human population. While the Malthusian concept has reemerged into theories of peak oil, peak resources, and even the environmentalist movement, others have argued that the reason why the human population has continued to increase exponentially over the last 5000 years is its species' unique practice of economic and technological advancement. In other words, rather than simply consuming, reproducing, and dying as other creatures in nature do; humans develop, save, and pass on knowledge and tools to support their subsequent generations.

Or at least they used to save, develop and pass on better tools.

It's worth noting that both forces of Malthusian starvation and economic advancement are real and powerful forces. In order for the population to grow, wealth must not be just maintained it must be increased. When growth slows, people starve and die. When growth increases, people prosper. Thus the true purpose of wealth is to create capital which produces more than it consumes and eventually improves the lives of not only yourself but of all those that follow you.

Many people of Western culture including many wealthy people and outspoken billionaires believe that each generation should create their own wealth from scratch. However, it is only the act of inheritance that separates human prosperity from Malthusian catastrophe. Without inheritance of both capital and knowledge, a much smaller human population would be still living in caves. The taxation, confiscation and elimination of inheritance threatens to undermine the progress of human kind.

It is natural to desire a high standard of living and enjoy the comforts that wealth can buy. However, you can only consume so much Champaign and caviar. You can own many cars and many homes but only sleep in one bed and drive one car at a time. The overconsumption of resources beyond productive means threatens to squander wealth and opportunity. It is unfortunate for all of human kind that many of the world's wealthiest people including Buffett and Gates have chosen to squander their accumulated productive wealth not just on themselves but on futile social programs which arguably do more harm than good. If you teach people to fish they can use the knowledge to sustain many generations of life. If on the other hand, you give free fish to people so that they become hopelessly dependent, as soon as you run out of wealth to squander, they will starve and die. For this reason, most charities are immoral. But the choice to voluntarily give charity is still better than having one's wealth coercively stolen for someone else's agenda. Interestingly, the shareholders of Berkshire Hathaway and Microsoft have also seen no gains since Buffett and Gates abandoned their productive posts to squander what they took lifetimes to accumulate.

For successful capitalists with more creativity than Buffett and Gates, I'd like to offer the achievements of Thomas Edison as inspiration. Not only did Edison create wealth for himself, as a founder of General Electric one of the largest companies in existence today, he also can be credited for literally enlightening the world. The wealth that he created through the development of the light bulb not only increased the standard of living for his children, it raised the yardstick of economic advancement for virtually everyone on earth.

Make no mistake in confusing wealth with money. Wealth is capital with the means to produce, whereas money is a means to exchange capital with other people. As such, in the long run the majority one's savings should be allocated to capital reproduction and growth rather than a nonproductive or depreciating means of exchange such as fiat currency. In an economic environment such as the current one, it may be necessary to hold precious metals as a store of value in order to preserve wealth, however income producing capital investments are necessary for growth over the long run.

Whatever your field is, you can add value. Acquire a rental property and provide someone with a home. Start a small business and provide one other person with a job. Create self replicating machines. Decode proteins and cure cancer. Create sustainable controlled cold fusion. Not only will you create thousands of jobs, if you are successful you'll bring wealth and a higher standard of living to every human being.

If only today's leading capitalists had the same virtues, the economy and world would be much better off. Today's knowledge and technological advancements are of such complexity that significant amounts of labor, capital must be levered in research and development. Capitalists with the means to create life changing wealth, not only have the potential to make the world better; I argue that they have the moral responsibility to do so. Elon Musk, the founder of Paypal who parlayed his wealth to become the founder of Spacex may be one such potential capitalist. Over the coming decades, Spacex has the potential to make space travel affordable for the common person and facilitate access to the abundance of resources in space.

While the implementation of new technologies such as space mining may seem laughable to some, the development of technology and capital is a matter of life and death. In order to sustain an ever increasing population of people with increasing standards of living, more efficient capital and technology is required.



Naturally, a person born without an inheritance starts their economic advancement from zero. Initially they are unproductive until they learn a skill used to earn income usually as a laborer for another capitalist but sometimes as an entrepreneur. Over time they accumulate wealth by producing more than they consume. At this phase they merely may want a better standard of living or more personal freedom. Once they've saved enough wealth to sustain their consumption they are economically free. Most people at this stage retire, and live off of what they've saved for the remainder of their lives. However, those seeking economic enlightenment become great capitalists. Think of people such as Andrew Carnegie and Steve Jobs. They create more value than they ever could consume by creating jobs, and increasing knowledge and the implementation of technology. These capitalists measure their success not by how much they've taken and consumed over their lifetimes but by how much they've given to the world. That is the purpose of wealth.

As Andy Dufrense of Shawshank Redemption said, "Either Get Busy Living or Get Busy Dying."

Finding a Floor for Silver and Silver Miners

Since silver reached our target of $50 last year it has been in a treacherous downhill descent. The depth of the decline in precious metals is approaching 2008 levels, and many mining stocks are at 2009 price levels. While it has been painful for bullion investors, it's been even more disastrous for silver miners and their investors. Now we must revisit our analysis to determine if silver and miners are near their trading floor.

We've seen a lot of bearish reports on silver including a comparison to the Nasdaq bubble crash, which overlays a projection of silver to continue falling to the $6-$8 range. Is it possible for silver to reach or hold at those levels?



Using earnings data for PAAS, SSRI, EXK, and AG from the first quarter of 2012, we divided earnings by actual silver produced, giving credit for gold and other base metals, in order to determine the actual break even cost of production. Gold sales averaged $1700 and silver averaged $33 for the first quarter. Despite this SSRI wasn't profitable. EXK had the lowest breakeven point of $14.68 per ounce of silver, followed by AG at $18.33 and PAAS at $23.87. The average breakeven production cost was exactly $24 per ounce. Even excluding SSRI, the average was $21.50. Over the past 11 years, silver has risen by nearly 10 fold; however production costs have almost risen just as much. Silver's price is approaching its long term cost of production level, and given the depletion of silver stockpiles of the last 3 decades, we don't anticipate silver's price holding below that level for long - if at all. If you're somehow able to buy silver for less than $21.50 to $24 an ounce we'd argue that miners are literally paying you to buy it. Given that over the long run miners need a healthy profit margin as an incentive and buffer against their depleting resources, we'd argue that $26 to $30 is the long term nominal floor for silver.

Interestingly, when we began accumulating silver positions at the onset of the bull market in 2001; our target price was $30. A lot has changed in the last decade. At that time silver was in the $3 range and its production costs were in the $3 to $5 range. We anticipate that this nominal $30 range will be the floor not only for this bull market, but also for the aftermath of the expected silver bubble in coming years. Just as $3 was the floor after the hunt brother debacle, $30 will be the floor of silver's next secular bear market.

We're unable to generate a realistic scenario where the cost of production significantly declines from current levels. Wage costs aren't expected to recede, and materials and energy costs will remain near these levels as their own production costs have increased. Furthermore, we're confident that governments won't stop regulating, and taxing mine output. As such, we believe that unleveraged, allocated silver below $30 has very little risk, and its upside potential remains.

Another significant change since the bull market began is the health and profitability of silver miners. When the bull market began silver miners were breaking even at best, and for many years these companies had to resort to dilution in order to raise capital for development and ongoing operations.

Now, the leading primary silver producers have significant cash reserves, mature developed properties generating sizeable earnings, and many are giving back to their shareholders via dividends and buybacks. Over the last year the prices of miners have declined, however their earnings and financial stability has increased substantially - which has led to a shocking compression in PE ratios. Typically, silver miners have traded at premiums in relation to base metal producers however they are now at a discount. The expected forward PE ratio for 2013 from analysts is 7.2 for PAAS, 12.1 for SSRI, 6 for AG and 6.9 for EXK, giving an average PE ratio of 8. This has setup a scenario where these companies could increase by multiples if silver tops its high of $50 and PE ratios expands to match the S&P.

Given the limited downside potential, and our inflationary expectations that we don't believe our priced into the market, we believe that silver and silver miners are very close to an important floor with substantial upside.

For more precious metals analysis visit tradeplacer.com

PAAS Acquisition of MFN is Highly Dilutive

As long term shareholders of Pan American Silver, who've held it for more than a decade, we were surprised to hear that its management has decided to purchase Mine Finders – whose PE ratio is roughly twice that of PAAS's. We've taken a closer look at the proposed financials, and the deal does not add up.

On August 26th, 2011, PAAS shares were low enough that the company initiated a stock repurchase program for up to five percent of the stock. At the time it was stated that "in the opinion of its board of directors, the market price of its common shares, from time to time, may not fully reflect the underlying value of its mining operations, properties and future growth prospects." The price of PAAS closed that day at $31.72. It's rather dubious that a stock price which was considered cheap at $31.72 is now considered well priced to use as buying collateral at $23.

Generally, acquisitions are accretive when a company with a large cash balance uses it to purchase a profitable business in cash, or when a fair to highly priced company trading near the highs of its PE range uses its stock as collateral to purchase a business with a lower price and higher growth rate. In the case of PAAS buying MFN, neither of these conditions apply. PAAS has proposed to make a stock purchase using its shares with a PE in the 7-8 range of MFN whose PE is in the 15-16 range. Furthermore PAAS earnings are projected to grow faster than MFN.

PAAS MFN Combined
total shares MM 107.3 96.3 160.265
price $23.18 $14.40 $23.18
mkt cap $2,487.21 $1,386.72 $3,714.94
2011 e/sh $2.3 $0.86
2012 e/sh $2.85 $0.95
2011 pe 10 16.7 11.27
2012 pe 8.1 15.1 9.35
2011 total e, MM $246.79 $82.818 $329.608
2012 total e, MM $305.805 $91.485 $397.29


Based on the data above, we estimate that due to the proposed acquisition of MFN, PAAS shareholders will suffer an immediate loss of $1.11 per share for the cash payout, and an additional 15 percent dilution in earnings. We estimate that instead of trading at $23.18 today, PAAS would be trading at $27.77 implying a total dilutive loss of 20 percent. It is worth noting that PAAS's massive Navidad project in Argentina is not currently priced into either the earnings projections or price of its stock. As a result, Navidad is an effective call option which could potentially double the production from roughly 22 to 44 million ounces of silver per year. Since this isn't priced into the stock, the dilution of current shares could prove to be even more folly pending approval of Navidad by the Argentinean government.

At the end of 2011, Bill Fleckenstein resigned from the board. While we don't know the reason for sure, we now know that this directly preceded PAAS's dilutive bid of MFN. Perhaps Mr. Fleckenstein opposed the dilutive action.

It's difficult to buy and hold a stock which is underpriced by the market. It's even more difficult to learn that management of the company attempts to justify the low price by diluting the company's value. We expect PAAS to underperform its peers going forward as it consolidates the dilutive loss.

The largest winners of this deal will be the management teams of PAAS and MFN. The largest losers will be PAAS shareholders. One year ago, MFN stock was trading in the $11 range and PAAS was above $40. Had they purchased MFN then, it would have been far less dilutive. Now, PAAS shareholders are paying almost twice the price for the same acquisition. We plan on voting against the acquisition, and would support an effort to replace current board management.
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Precious Metals Investments Have the Most Bullish Fundamentals than Anytime During the Entire Bull Market

2011 was a volatile transitory year for most markets as the primary monetary concern shifted from asset inflation to asset deflation. Sentiment in gold and silver trended lower throughout the year as speculative positions were liquidated and money managers poured money into US government treasuries yielding record low interest rates both nominal and real. This trend can easily be seen in the under performance of platinum, which price has fallen below the price of gold despite the fact that it is 30 times more rare.



Gold has been up every year since its bull market began in 2001. Gold is the most stable of the precious metals. Takedowns are limited as central banks compete in bidding to accumulate it.






Silver had an intermediate top in the end up April, and suffered from several massive engineered hits. In addition, nearly 600,000 ounces of silver was stolen from small investors by MF Global, and transferred to JP Morgan. The result has been a collapse in open interest, as investors abandon the idea that paper silver can protect them from pending global hyperinflation. The default by the COMEX to protect investors using the exchange has proven that money invested in futures and even exchange allocated gold and silver is not safe.





As of last December 20th, the well documented net commercial short silver position was a mere 14,825. As we anticipated earlier this year, the commercial short banks have covered nearly all of their short position in the $26-32 range. They will soon convert to net long in anticipation of the next round of dollar devaluation.

Silver is not the only market that commercial traders have dominated. The commercial banks were massively short the Euro this spring prior to its collapse. Now that the collapse has occurred, commercial traders are now massively long the Euro as dumb money piles into the US dollar and treasuries that pay zero or even negative interest rates. The prevailing belief is that a further collapse of the Euro will lead to a deflationary crisis in which the US dollar trumps all assets. Commercial banks, which almost always win, are strongly betting against this belief as they pile into the Euro and precious metals.





While physically owned precious metals have held their value, leveraged speculators in futures and options have been demolished. If three-day take downs and volatile price movements didn’t ruin them, outright theft of their assets from MF Global and the COMEX did. Silver and junior mining stocks suffered a similar fate and are now swinging in the desert wind. If mining itself wasn’t risky enough, 2011 proved that everything from government confiscation of mining assets, illegal shorting selling attacks, naked shorting, to outright theft qualify as categorical risks. Producing silver miners such as PAAS, SSRI, and SVM lost roughly half their value during the trading year. PAAS and SSRI were plagued by socialist policies of Argentina including new capital controls, and an illegal short selling scheme lead by an anonymous trader known Alfred Little attacked SVM. In the meanwhile actual earnings and cash flow for these companies grew at double and triple digits. The result has been a massive PE compression in which companies growing at double and triple digit rates now have PE ratios of less than 10 – which are based on the current low metals prices. Many of the miners are also using part of their cash flow to increase dividends and stock buy backs in addition to their operational expansion programs.

  PAAS SSRI SLW SVM AUY
EPS 2.68 0.03 1.63 0.56 0.98
Revenue Est 894M 181M 767M 271M 2.2B
year ago revenue 632M 112M 423M 167M 1.7B
2012 Est 3.11 1.06 2.43 0.72 1.27
price 22.33 13.46 29.58 6.42 15.08
pe 8.33 448.67 18.15 11.46 15.39
pe 2012 7.18 12.70 12.17 8.92 11.87
yoy earnings growth 16.04% 3433.33% 49.08% 28.57% 29.59%
peg 0.52 0.13 0.37 0.40 0.52


While the timing can’t be predicted, confidence in the global financial system continues to wane. Guaranteed negative interest rates for at least the next two years, also guarantees positive fundamentals for precious metals. Gold and silver are clearly in multi-month consolidations, which is natural given that they were the best performing assets of 2010. The inevitable further devaluation of global currencies will continue to facilitate a bullish environment for the metals. Investors with a long-term outlook have an excellent opportunity to accumulate gold, silver, and especially profitable dividend paying gold and silver producers that must increase by multiples to fulfill their potential value.

Silver Shorts Cover Nearly Half Their Position In One Week

As we anticipated earlier this year, commercial shorts including JPM are finally within grasping reach of covering their positions and transitioning to net long. For more than a decade, the large commercial trading banks have been trapped with an enormous short position in silver as the price has risen from its lows near $3 to its May high of nearly $50. Most analysts expected the commercial shorts to be broken in a short squeeze, likely launching silver above $100. However, this short squeeze will not occur.

In September 2010 these traders began to aggressively cover their short positions. Since then, commercial net short positions in silver have been reduced from over 65,000 contracts to 24,262 as of September 27, 2011 - and falling from 40,708 just one week earlier.



The large September take down from the $40 price level to the $30 price level has completely wiped out the small leveraged speculators, which saw their net long positions crash from 18,170 the previous week to 8,837. Meanwhile, open interest is threatening to break below the 100,000 level - indicating that speculative money has abandoned silver and sentiment is extremely low amongst investors. The combinational one-two punch of the May takedown and September takedown served to transition contracts from speculators to the commercial shorts at a much lower average price than most analysts ever expected.



The bullish trend line in silver that began in 2009 remains intact. However commercial shorts are now within a few weeks of trading their way out of an impossibly large short position to go net long. We expect the remaining positions to be covered within the $26 to $32 price range under the guise of bearish speculator sentiment.

This is extremely bullish for silver's long term trend, as the commercial banks will capture more profits from the bull market in precious metals than any other trading group. Once the commercial banks have a net long position their financial incentive will reverse from using takedowns to take-ups. This will likely coincide with the next round of monetary intervention by the Federal Reserve and the beginning of the third phase in the silver bull market - in which waves of retail investors push silver to its destined triple digit price level.

For more news and analysis visit TradePlacer.com

Commercial Banks to Cover Their Silver Short Positions

After an extended period of consolidation, the price of silver launched from $17 in August 2010 to just under $50 in April 2011. The fuel behind this move was not speculative buying, but instead short covering by large commercial short traders including JP Morgan.

As short covering buyers pushed the silver price up to its all time historic high of $50, several factors led to the large selloff in May. A breakout of $50 would remove technical resistance and attract fast money speculative traders that could quickly spike the price of silver to $100. Knowing this, JP Morgan likely hit the panic button. Readers can fill in the blanks, but what is public knowledge is that the CME embarked on an unprecedented series of increases in margin hikes which forced a liquidation of leveraged traders positions before they had the chance to put up more capital. One round of margin hikes was actually made on a Sunday.



Smart money investors who had purchased the majority of their long silver positions below $10 anticipated this move and aggressively sold into the short term peak. The $50 level is a key pivot point in silver because it represents a 10x gain in price for early investors who purchased below $5 prior to 2005. Silver was also 70 percent above its 200 dma which has defined silver spike peaks historically. Even most silver analysts who have been long term bullish on the metal sold large tranches of their positions. This profit taking was natural and healthy.

These paper silver contracts that were sold went directly into the hands of the commercial shorts. The resulting consequence is that the open interest in silver has collapsed from a peak of 158,000 on October 2010 to 114,000. Meanwhile the banks that were trapped in their large commercial short positions have been able to successfully cover more than half of their short positions at an average price of less than $40. As of last Tuesday, the net commercial short position in silver stood at a mere 29,166 in the fundamental vicinity of silver's major low in 2008 when it was in the $8-$9 range. If the trend continues at this pace, the commercial shorts will be able to successfully cover their positions and go net long by the end of the year.



We expect this likely scenario to occur, mostly due to the fact that even smart money investors are afraid to stand and take delivery. The implication is that the commercial banks will indeed profit more than any other group from the rise in silver. This is extremely bullish for the long term price of silver because once the commercial banks are net long, there will no longer be a financial incentive to cap the price. A similar, but not as powerful, pattern occurred in oil before its run from $50 to $150 during 2007 and 2008.

Silver will likely remain week for the remainder of the summer while it consolidates down to a major support level at $30, and its 200 dma near $31. Clearly, the selloff in positions from smart money investors to institutions shows that silver is in the mid to later stage of the second phase in the silver bull market. The next push to and above $50 will not see the same resistance, and will likely be launched with the next round of quantitative easing as the US fends off its own bankruptcy.

For more information visit TradePlacer.com

No Sign of the Top in Silver

Silver is finally getting some attention in the 10th year of its bull market run - mostly top callers who are calling the recent move to nearly $50 an ounce a sign that it has already peaked. Interestingly, these same analysts were nowhere to be found when we made the logical argument that it would reach $50 an ounce this year. There have been many excuses in the past 10 years why investing in silver was a horrible idea, but the most recent is that it has already went through its "parabolic" spike phase. Notice that this is always backed up with a well chosen linear chart, that fits the author's linear thinking.



Of course that looks scary. However, any chart with a linear growth rate will appear geometric when compounded. A true parabolic move must be measured in logarithmic notation to be properly detected.



Using the above chart, all we see is an asset catching up to its original trend line. Silver was already headed to $50 in 2007, but was suppressed in 2008. To compensate, the angle of the trend line increased simply because silver has had so much catching up to do. If there was a parabolic move, it was from 40 to 49, and is typical of short term tops as it became overbought on a short term basis.

For anyone looking for a real parabolic move to worry about, they may want to consider the following chart of US Gross Federal Debt.



Another common argument against silver that we've heard lately is that it's been driven up by speculators in a manic bubble of epic proportions. This pattern would be driven by speculators bidding up prices in anticipation of even higher prices. However, the commitment of traders report shows no sign of speculation at all. In fact, speculators have been selling into the market rise! In addition open interest is lower than it was last August through October.



The most alarming factor to the silver market is that fact that even after the recent move upwards it has remained in backwardization. This implies that there is a real shortage of physical silver, which has not been mitigated even after the substantial rise in the price. Traders are paying nearly a dollar more an ounce to buy it now rather than later.



Normally, gold and silver are in contango with a correlated relationship to the yield curve. We don't anticipate it, but if gold ever enters backwardization it would likely indicate imminent hyperinflation.



So what has really happened to silver? It has simply begun the generational process of reverting to the mean valuation in comparison to gold and other assets. The gold to silver ratio has fallen from 100 to 30 on its path to the natural mean of 16 where it has held steady for 5000 years of history. This means that over the long term, silver is still expected to nearly double the performance of gold.



Silver may have seen a near term local top, however it has not seen the top in its ongoing bull market. It's in severe backwardization, speculators are selling, commercial shorts are unable to cover their positions, and major bullion dealers are struggling to meet increased investor demand. All the while, sentiment has already shifted to be bearish as almost everyone is expecting a huge correction in price. In fact, the structure of the silver market could not be more bullish.
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Risk Externalization is Moral Hazard

In recent years, several large man-made disasters have been witnessed with widely felt negative effects due to the externalization of risk by entities claiming limited liability. The concept of limited liability was engineered to protect businesses from losing more than all of their capital, but it is now being abused by corporations and governments who use it to externalize excessive risk. The net effect in a financial model is to convert a natural forward contract into a call option for the risk taker. The profits are kept by the risk takers. However, when risk is externalized, the losses are realized by innocent bystanders. This is the definition of moral hazard.



The pattern has become so great, and so prevalent that entire civilizations are now at risk of severe alterations. While limited liability may be necessary to protect businesses and entrepreneurs, risk assessments be should made for worst case scenario outcomes, however improbable, and risk taking entities should be forced to insure or reinsure externalized risks. In a financial model, this would be the equivalent of purchasing a put option for externalized liabilities. The cost of insuring should be considered in profit and loss projections for risk taking entities, not externalized.

The cost of BP's oil spill is still being added especially now that criminal charges have been made. However the cleanup cost was recently estimated at $42 billion, excluding further litigation claims. While BP is paying a share of the cost, the question remains as to whether the Gulf of Mexico could ever be properly cleaned up and business owners fisherman, and others impacted are every properly compensated.

The Fukushima nuclear plant in Japan was required to carry $1.5 billion in insurance. However, the insurance doesn't cover natural disasters even though the site is on the ocean shore over a known fault line. The Japanese government will pass the cleanup costs onto its taxpayers. The cost could be more than $300 billion and take decades. In the US, the nuclear industry maintains a $12 billion reinsurance fund. However, analysts estimate that if a nuclear meltdown occurred at the Indian Point station north of New York City, it could make the city inhabitable for years and cleanup costs could range from $720 billion to $1 trillion or more.

While the Fukushima disaster costs are unimaginably high, nothing compares to the risk externalization of financial products which have been monetized by the US government since 2008. Gross Federal debt has increased by roughly $4 trillion, and the Federal Reserve balance sheet has increased by almost $2 trillion. Other costs that are harder to measure include the loss of interest income due to zero percent interest rates, and the loss of purchasing power due to the fall in the value of the dollar.

With the onset of peak oil, and continuation of globalization, some risks taking is necessary to meet global energy demand. Nuclear plants, and deep water drilling may be part of the solution, however the true risks should be insured. Likewise, financial risk takers and governments should not accept excessive risks without purchasing proper insurance. If the costs are prohibitive then they aren't economical in the first place. The real risk is moral hazard itself.

Silver Miners Are Much Cheaper Than Internet Stocks

With gold and silver prices surging higher, some investors are questioning whether mining companies are entering their own valuation bubble. Despite the fact that some silver miners are up three or even ten-fold from their 2008 lows they are much cheaper on a relative basis to popular darling Internet stocks.



Amazon.com currently sports a PE ratio of 69, with a 2012 expected PE ratio of 38 – which is quite high considering it has had negative earnings growth over last year. Another Internet favorite, Apple, has a PE of 17 and 2012 expected PE of 14 with earnings growth of 58 percent.



Silver mining companies on the other hand are seeing year-over-year revenue and earnings growth rates well north of 100 percent. With such rapid growth rates, one might expect their PE's to also be enormous, yet they are fairly low. Pan American Silver has a current PE of 18, and Silver Wheaton has a PE of 26. Projected estimates of silver miners are using lower prices, so if the price of silver rises further these companies will dramatically exceed estimates for next year and beyond.

Despite a large run-up, investors are discounting the earnings power of silver miners especially when compared to other sectors. There are still opportunities to accumulate positions on pullbacks of quality companies that are expanding their ounce production while precious metals prices appreciate further.

Is This Time Different for the Dollar?

The recent correction in precious metals and miners has led some investors to question whether they missed the ultimate top in the bull market for gold and silver. Conversely, this would lead to the question of whether the dollar and other fiat currencies have bottomed.

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. 20 percent failed through hyperinflation, 21 percent were destroyed by war, 12 percent destroyed by independence, 24 percent were monetarily reformed, and 23 percent are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British Pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5 percent of its original value. In other words, the most successful long standing currency in existence has lost 99.5 percent of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. Fiat currency bulls will probably not argue with this fact, but the remaining argument to hold fiat cash is that the decline of fiat currencies is manageable to such an extent that the loss in purchasing power will have a minimal or unnoticeable impact. The purchasing power of the British Pound has eroded by a seemingly manageable 3 percent average annual rate.

The US Dollar was taken off of the gold standard in 1971 when it was 1/35th an ounce of gold. At 40 years old, it has already lost 97 percent of its value. Yet it has lasted longer than the average fiat currency so perhaps its performance should be labeled "better than expected". The US Dollar has fallen by an average 9 percent annually over this 40 year period when measured against gold. As such, investment advisers may want to readjust their inflation expectations when projecting dollar based investments. The S&P 500 appreciated at 7 percent over the same 40 year period - not even keeping pace with the decline in purchasing power of the dollar.

Gold and silver have outperformed the S&P 500 and held their purchasing power since the inception of the US dollar fiat currency. Despite this excellent track record, the question remains as to whether this trend will continue. While investors can be confident that over a lifetime, precious metals will hold their value most are wary of volatility in the markets that may take gold and silver years to recover from. The obvious example of this is the commodity bear market that began in 1980 with gold peaking at $800 and falling to $250. This leads to the only remaining argument against precious metals investing based on the premise that currency flaws can be prolonged into the future:

Yes, the dollar will continue to lose substantial purchasing power and is terribly flawed. However it will bounce for several years through austerity measures and in the process push precious metals prices lower for an interim period. After all, currencies have bounced as they stair step lower over the years.

In order for such an event to occur Federal budgets would have to be reduced by $1 trillion annually and Paul Volcker, or a new version of him, would have to raise nominal interest rates above inflation rates such that real interest rates are positive by multiple percentage points. In 1981, federal funds rates exceeded 19 percent. Since the US dollar and economy is much further along its terminal decline it would take even more extreme action to create a recovery for the dollar. Considering that Volcker has resigned from being an economic adviser to the White House, and that the federal funds rates ate flat lined at zero, the odds of any such action are astronomical. The financial industry and economy clearly could not sustain such an interest rate shock today. Any rise in interest rates would exponentially increase US debt carrying obligations pushing it even further into insolvency and have the reverse effect on the currency by devaluing it at an even faster pace. Europe is a living example of this.

The implication from the above is that the worst case scenario for gold and silver would be a 2-5 year correction followed by even higher prices. The fiat currency decline will become increasing pronounced until a resolution event occurs such as a replacement of the dollar or reinstatement of an asset backed currency.

Is this time different? We don't think so.

9 Market Predictions for 2011

The bear market in bonds will be confirmed globally. While interest rates likely bottomed in 2010, a significant rise in rates during 2011 will confirm a bear market trend for smart money investors. This bear market will continue until the global currency market is restructured.

Precious metals will surprise on the downside in the first half and surprise on the upside in the second half. Gold will top $1650 and silver will top $50. This will confirm the third phase of the bull market in precious metals.

A return to the energy sector in a big way. Energy companies have disappointed since 2009 due to a softening in US demand and the BP disaster. Oil will exceed $100 and capital will start flowing into energy investments as it did in 2007 and 2008. Natural gas and alternative energy will also rebound.

Global stock markets will correct in the first half but end higher for the year. June and July will be a pivot point for stock markets. Capital flows from bonds to equities will accelerate and investors will begin to view the stock market as an inflation hedge rather than value proposition. The S&P 500 will top 1400.

Increase in political rhetoric and class warfare leading up to 2012 elections in the US. Capitalists will continue to increase their wealth while laborers in developed nations will suffer from stagnate wages and rising expenses.

QE3 will be announced at the rate of at least $100 billion per month. This will continue indefinitely in order to finance trillion dollar deficits.

The dollar and US investments will outperform other currencies for the first half of the year lead by a fall in the Euro. However, by the fourth quarter, the dollar will begin a slide to new lows as it becomes evident that the Federal government must bail out state and local governments.

A retirement trend will begin to become mainstream in baby boomers looking to reduce costs. Instead of taking on a second job to live in retirement, some will look to retire in cheaper counties. Mexico, Costa Rica, and Panama will be the primary beneficiaries.

Proposed tax overhaul including legislation for a VAT tax along with an extension in the reduction of social security taxes. There will also be additional capital controls and asset reporting legislation.

Take Down Tuesdays - What's the Best Day to Buy Silver?

Usually every Friday, the Commitment of Traders (COT) report for precious metals including gold and silver is released to the public that accounts for position data ending on the previous Tuesday. Although specific traders aren't named, the report is considered key in understanding the structure of the market. For this reason, some traders in the silver market expect increased volatility and large market declines on Tuesdays and Wednesdays - and the data supports this notion.



Using year-to-date data of the Silver ETF (SLV), we found that indeed Tuesday is the most volatile trading day for silver with a price range of $0.45. While There was downward bias, it's worth noting that this volatility went in both directions. With silver up 75 percent year to date, every day of the week had a positive average return for 2010. While there were some take-down Tuesdays, there were take-up Tuesdays as well. The majority of these price movements are seen in seconds or minutes - many times with daily downward or upward gaps.



In measuring daily changes from the previous close, Tuesday also had the most volatility - with an average price change either upwards or downwards of $0.31.



Interestingly, Mondays had the largest average gains with an average gain of nearly $0.12. Tuesday and Wednesday had the lowest returns of $0.03 and $0.01 respectively.



The average week for the Silver price had a spike higher on Monday, followed by a correction starting on Tuesday and ending Wednesday with a renewed uptrend into the weekend. On average, the best day to buy silver was Wednesday - especially if after a Tuesday takedown. The best day to sell silver was late Monday. Interestingly this pattern strongly corresponds to the COT report release cycle.

For more trading and investing insight visit TradePlacer.com

What Was the Top Performing ETF and Sector of 2010?

Contrary to popular opinion the inflation trade came back with a vengeance in 2010. Year to date, the ultra silver ETF ranks the highest performing ETF up 88 percent. Second place? Cotton, up 65 percent. The silver mining ETF, SIL went public in the summer, so it is at a disadvantage when comparing year to date returns. Using its holdings to project year to date returns it would have been the second best performing ETF up about 81 percent year to date.

Not surprisingly, precious metals were the best performing sector, as quantitive easing acts as rocket fuel for hard assets. A dubious runner up was real estate which benefited from an increase in farmland, forestry and raw land values as well as higher rental rates with lower purchasing costs. In line with themes which TradePlacer has focused, the other top sectors were agriculture and Latin America led by Colombia as a top performer. Latin America will become a leading exporter of agricultural products and other natural resources in the coming decade.

ETF
AGQ ProShares Ultra Silver 88.05%
BAL iPath DJ-UBS Cotton TR Sub-Idx ETN 65.28%
BHH B2B Internet HOLDRs 64.53%
GXG Global X/InterBolsa FTSE Colombia 20 ETF 62.26%
DRN Direxion Daily Real Estate Bull 3X Shrs 55.04%
IIH Internet Infrastructure HOLDRs 53.64%
THD Diversified Emerging Mkts 52.38%
JJT iPath DJ-UBS Tin TR Sub-Idx ETN 51.70%
DGP PowerShares DB Gold Double Long ETN 48.64%
UGL ProShares Ultra Gold 46.21%
SIVR ETFS Physical Silver Shares 46.00%


Sector
Commodities Precious Metals 33.44%
Real Estate 26.50%
Latin America Stock 24.54%
Commodities Agriculture 20.40%


Mainstream money managers and analysts continue to ignore the inflationary trend at their own embarrassment. Investors may review these performance numbers and ask their financial advisers whether they have investments in gold, silver, and agriculture and if not, Why? Most don't have any. Investors should consider working with money managers that actually anticipated these trends rather than acted as bystanders.

The Federal Reserve has two buttons on the money printing machine. The Off button - which will lead to immediate economic meltdown, and the On button which will push capital into the inflation trade led by precious metals, agriculture, land, other commodities and emerging markets. There is no third button and using either button ensures that a currency breakdown is inevitable.

The power of the bull market in precious metals has steadily increased over the last decade. Gold has appreciated every single year for ten years and silver has begun a powerful move with intent on visiting its all time highs. The final phase in this raging bull market is approaching as the greed of making returns in dollars turns to absolute fear of holding any fiat currency in any amount.

To Learn how to invest in gold, silver and agriculture visit TradePlacer.com

TradePlacer.com Launches CapitalSlice.com for Alternative Investment Projects

In a move to expand its services, TradePlacer.com is pleased to announce the launch of CapitalSlice.com, a platform that matches investors seeking alternative investment vehicles with projects. Leveraging revolutionary TradePlacer technology, CapitalSlice.com enables investors to coordinate investment projects with larger capital structures with the goal of obtaining returns higher than 10 percent. CapitalSlice.com lists unique projects focusing on real estate and emerging markets such as a solar power project in India with a government contract and a timber plantation in Panama where trees grow a little in value every day. Other projects may include farms, mines, and rental income properties.

CapitalSlice matches investors with alternative investment projects allowing them to pool their resources to take advantage of business opportunities. Business owners and project managers of such projects often have opportunities to expand investments but lack the capital or credit to do so even if returns are likely to be in the higher than normal. Traditional bank loans for small business projects are scarce due to tight credit standards. Meanwhile investors are seeking higher returns than fixed deposits, and the opportunity to diversify into projects that have been traditionally unavailable to them. CapitalSlice brings investors and project managers together for mutually beneficial projects.

The aim of CapitalSlice is to increase transparency, pricing, and liquidity in alternative investment projects where capital slices are shared amongst investors. CapitalSlice also assists in educating investors and obtaining due diligence information.

To facilitate further education and communication between investors and project managers, TradePlacer.com has also introduced several new features such as a forum, charts, and analysis.

Trade placer.com is a real-time marketplace where you can buy or sell items such as gold, silver, platinum, wine and other collectibles. It is the next step beyond an auction, because both buyers and sellers can set their desired price and quantity in real-time.

For more information on how to list your projects at CapitalSlice or to learn more about the investments please visit http://www.CapitalSlice.com and http://www.TradePlacer.com or email info@tradeplacer.com

Are You a Capitalist?

It is a common misconception that a capitalist is someone who believes in the process of capitalism as an economic model. This definition, like many others, is designed by the western education system to misinform. The belief based definition is a non-sequitor and is used to enforce the participation in Hegelian dialectic distraction from reality and promote a breakdown in thought. Facts remain true whether one can comprehend them or not.

The term capitalist was first used by several economists such as David Ricardo in the 18th century and later on by Karl Marx who understood the process of capitalism thoroughly. When Marx wrote the Communist Manifesto in 1848, it was clear that a capitalist is a private owner of capital. Capitalism refers to the economic relationship in which capitalists invest in capital such as land and equipment and pay laborers to operate the means of production to generate economic output. The incentive for the capitalist is potential profits, and the incentive for the laborer is their wage.

As an example, a capitalist could build a manufacturing plant to stitch clothing and hire 10 people that used to hand stitch clothing. The laborers would earn more than they could by hand stitching, the capitalist would earn a substantial profit, and more clothing would be available to consumers at lower prices. Everyone gains, and because the relationship is voluntary, it is difficult to argue otherwise.

While this relationship has existed throughout history it become prevalent at the onset of the industrial revolution because productive innovations were created that provided an explosion in economic value but required the division of labor and capital investment beyond the reach of most laborers. Without this relationship, most innovations of that industrial revolution and beyond would have never materialized. From the year 1000 to 1820, the world economy grew by 500%. However, the world economy has grown by more than 5000% since 1820.

Marx's criticism of this relationship was notably that unskilled laborers have little negotiating room and therefore suffer from stagnant or falling wages through natural competition. Marx also observed that unskilled labor ends up with more routine and less enjoyable work. While these points are true, it is important to note that laborers enter into agreements to work on their own free will. If workers believed they would be better off providing value another way then they are free to do so.

There are only two ways to amass an abundance of wealth. The first way is to take more value from others than you provide - essentially by stealing. Those who use this strategy view wealth accumulation as a zero sum game. Madoff, Ken Lay, many bankers and politicians have proven this strategy successful however it will never be as successful as the second method. The second way is to create and add more value than you consume. The more value you create for others the more capital you will accumulate. While this is a simple concept, it has been largely forgotten by laborers in the developed world - and to their own detriment. Capitalists must understand this concept in order to be successful as their income depends on it. Bill Gates, Warren Buffet and Steve Jobs have all amassed incredible wealth in their lifetimes by creating even more value for the world.

Because capitalists create most of the value in the economy, they earn larger incentives through financial gain than most laborers. That being said, some laborers such as athletes and actors have created immense entertainment value and been compensated greatly for it. But they are still laborers. This demonstrates that wealth alone doesn’t make you a capitalist and laborers can out earn capitalists especially if they are particularly skilled.

What does it take to be a capitalist?

Clearly, a capitalist must have a capital investment with a profit motive. It should be noted that a capitalist without any capital is a laborer as a capitalist is a synonym for investor. However, it is possible to create capital to become a capitalist. Many notable examples of this come from the technology industry where college students starting from nothing have created billions in value. A much more common way of becoming a capitalist is adding excessive value as a laborer until enough capital is accumulated to invest as a capitalist. Retired laborers who invest in rental properties or dividend stocks are capitalists. Small business owners, landlords with rental properties, land owning farmers, and stock investors are also capitalists.

While the purest definition of a capitalist is one who derives all their income from capital investment, many people assume the role of a laborer by working for an employer and also as a capitalist by owning other investments. This is an important realization because it means that laborers do have the ability to transform themselves into capitalists.

Many capital investments are beyond the resources of individuals however it doesn't mean that smaller investors can't participate in profitable projects. The risks and costs of capital investment can be shared amongst pools of investors with capital slices.

Conclusion:

The more value you create, the more wealth you can amass for yourself and others. Capitalists add a massive amount of value to the economy by creating jobs for laborers and innovating. Laborers and small investors can pool their resources to become larger capitalists, enabling them to create even more value as a group than they would have alone. A breakdown in this relationship would create a breakdown in the economic growth and development witnessed over the last 200 years. Governments don't create jobs or profits, capitalists do.

Precious Metals Patterns

Precious Metals Patterns Gold and silver markets have finally reverted to their normal behavior as the CME has announced additional margin increases and commercial shorts have increased their buying on the downside. This is good news because the federal government and banks are financing excellent opportunities for investors that are paying attention.

At first glance it seems that the commercial traders are the best on the street as they have reduced their net short positions to 50,000 contracts in silver - about 25 percent off their peak short position two months ago. Indeed this is impressive. However a bigger picture view shows that the net commercial short position has fallen to levels seen in late July. During that time, silver has risen from $18 to $25 created an estimated loss of $1.75 billion for the commercial shorts and an equivalent gain for counterparty long investors. While these traders can be commended for their tactics, their strategy of thrashing has proven to be pointless.



On the other side of the trade, bulls have won on multiple points. The recent correction has unwound sentiment and overbought technical indicators, yet gold and silver remain much higher than they were even two months ago. In addition, those wishing to buy more have been given another chance. It is much easier to accumulate profitable positions during corrections rather than while chasing prices higher. Silver could easily correct to $22 or even its breakout level of $20 before resuming higher. Gold could correct to $1320 or its breakout level of $1260 before resuming higher.





Traders that follow the actions of banks and governments rather than words and positions can see pristinely clear opportunities. Over the last two months, the Federal Reserve has begun to monetize treasury debt, and banks have increased their efforts to consistently buy as much gold and silver as they can. Nothing could be more bullish.

Why Silver Margins Should be Higher

There has been a lot of confusion over the announcement by the CME to increase the margin on silver futures contracts by 30 percent. Several articles have claimed that it was the cause of the recent selloff in silver because it forced buyers to cover their positions. This notion is completely false, and in fact the market would be better off with higher margins.

While a 30 percent increase in margin requirements sounds like a lot, the truth is that the increases was $1500 per contract where each contract is currently valued at $136,500. On the day that the price of silver was up over $1, the margin maintenance was increased by 30 cents. This means that no long holder would have had to put up any more money (until the selloff) and any investor that was holding long positions from before September is still holding gains of $8 per contract. If anything, raising margin requirements should have squeezed short positions more since the price has increased substantially in recent weeks.





Even now, the margin requirements of silver are 4.7 percent of the contract value. That means that a trader's equity will be completely wiped out in a 4.7 percent move. Professional metals traders are well aware that this is too low of a margin and any successful trader will hold much more capital per contract than required. The result is that investors self-impose their own higher margin requirements by reducing leverage far below the theoretical exchange defined requirement.

Margin requirements should be higher on silver contracts, especially for short sellers because silver has already increased by more than 5 percent in a day and is at risk of gapping higher at any time. This introduces the risk of default by a large trader that fails to meet margin requirements and makes the entire exchange less stable. Exchange risk is not priced into the precious metals markets, however it eventually will be when it is understood that the probably of default is approaching 100 percent. The margin increase is a reminder that the exchange can and will change the rules when commercial shorts are squeezed into default.

For more precious metals analysis and charts visit TradePlacer.com