Tuesday, October 5, 2010

A Currency Demolition Derby

I must look like the little boy that cried wolf. LOL! When an ardent Precious Metals Bull like myself sees the markets as "tired", and they continue to roar upwards, then we must be in one helluva short squeeze.

I am not the only one who senses these markets are tired. Technically they are. Traders see this and want to step infront of the "downside potential" by going short. But more "news" hits the markets that is bullish, and these "early" shorts must quickly cover their shorts [read: asses] to limit their losses, and the market jumps higher.

Precious Metals Bulls are not rushing in to buy these markets up here. They are either in already, or looking to get in at a discount [on a substantial dip in price]. In a short squeeze, markets can stay "overbought" for much longer than can be believed.

The RSI indicator on the charts is an excellent indicator of internal momentum in a market. If a market is making new highs in price, and the RSI is making new highs as well, the bull market is strong. If a market is making new highs, and the RSI is not and is trending lower, the bull market is losing steam.

Buying moves markets higher. Shorts must "buy" to cover their short sales. If the majority of the buying is coming from the short side, the market is actually weaker than it appears because their are no "real" buyers underneath it to support it.

We know that the Gold and Silver markets are swamped with shorts. But it is not the big commercial shorts that we bitch about all the time, the Rat Bastids at the CRIMEX, that are getting there balls squeezed like lemons up here. These are the little guys, the small "speculators" that are getting chewed up. The Rat Bastids are in the hole by BILLIONS with their shorts, but they have no care about their losses as they work at the behest of the US Government. They'll get theirs eventually. They know their is an "air pocket" just up ahead. It's only a matter of time. Precious Metals Bulls would be wise to keep their guard up here to protect their profits when that air pocket pops up on their charts. Once the air pocket comes and goes, the charts will reset, and the chase higher in the Precious Metals will begin again.

The overnight short squeeze that has pushed Gold to another new all-time high, and Silver to yet another 30 year high began when Bumbling Ben opened his mouth yesterday evening in a speech he gave. More asset purchase by the Fed with "money out of thin air" can only signal higher Precious Metals prices...and a short squeeze.

Bernanke says more Fed asset purchases could help
PROVIDENCE, R.I. (Reuters) - The Federal Reserve'sasset purchases lowered borrowing costs and helped the economy,and more buying could further ease financial conditions,Federal Reserve Chairman Ben Bernanke said on Monday.

"I don't have a number to give you, but I do think that theadditional purchases, although we don't have precise numbers,have the ability to ease financial conditions," Bernanke said.

The Fed bought $1.7 trillion of mortgage-related andTreasury bonds after cutting benchmark interest rates to nearzero to combat the financial crisis and help the economy pullout of a severe recession.

Financial markets expect the Fed to embark upon anotherround of asset buying to bolster a sluggish recovery as earlyas its November meeting, but policy-makers remain divided aboutthe effectiveness of further purchases.

Earlier on Monday, the head of the New York Fed's marketsgroup, Brian Sack, said arguments that further purchases won'taffect the economy were "overstated."

Bernanke said he was convinced that the Fed's purchases hadlowered borrowing costs, which in turn spurred the recovery.

The purchase program "increased the willingness ofinvestors to take a reasonable amount of risk and create somesupport for the economy," he said. "I think it was an effectiveprogram."

In September, the Fed said it was ready to take furthersteps if needed to help the U.S. recovery and lift inflation.

Late last night the Bank of Japan steps up to the currency debasement plate and drops a bomb on the Japanese Yen. This should have weakened the Yen and sparked a Dollar rally similar to last months intervention in the currency markets by the Bank of Japan. To no ones surprise, this currency bomb was a dud...and a short squeeze ensued as the US Dollar fell further in conjunction with Bumbling Ben's suggestion that creating more money will fix everything.

Bank of Japan Cuts Rates to as Low as Zero Percent
TOKYO — In a surprise move Tuesday, the Japanese central bank lowered its benchmark interest rate to a range of 0 percent to 0.1 percent, a tiny change from its previous target of 0.1 percent but a symbolic shift back into an age of zero interest rates.

The Bank of Japan also said it would set up a fund of ¥5 trillion, or $60 billion, to buy Japanese government bonds, commercial paper and other asset-backed securities amid concerns about weakening growth in the economy, the world’s third largest, after those of the United States and China. The bank also kept its credit facility for banks at ¥30 trillion.

With the interest rate cut, a bid to bolster lending in the moribund Japanese economy, the central bank effectively reintroduces a policy of a zero interest rate for the first time since July 2006. The decision underscores concerns that a strong yen and persistent deflation threaten Japan’s economic recovery.

In a statement, the bank confirmed that it would maintain its “virtually zero interest rate policy” until it achieved “medium- to long-term price stability”— or an end to deflation.

Hirokata Kusaba, an economist at the Mizuho Research Institute in Tokyo, said in a note to clients that the bank’s action had gone beyond market expectations. “The latest move gives off a much more powerful impression than past, incremental measures, which had sparked market disillusionment,” he said.

“Though there will be debate over the effects of the monetary loosening, I believe the Bank of Japan has done all it can at this time,” he said. But that also meant that the bank “had now depleted most of its policy options.”

The yen initially fell against the dollar after the announcement, but it later rebounded to ¥83.40 to the dollar, stronger than before the rate change. Ten-year government bond yields rallied on the news, while the Nikkei stock average rose 1.5 percent, its biggest gain in almost three weeks.

“The central outlook for the economy, and prices, have worsened more than had initially been predicted,” said Masaaki Shirakawa, the governor of the Bank of Japan. He called the measures taken Tuesday “comprehensive easing.”

He also said he would consider expanding the ¥5 trillion asset-buying program, depending on its effectiveness.


Moody's warns of Irish downgrade as recovery falters
By Paul Hoskins
DUBLIN (Reuters) - Moody's warned on Tuesday it may cut Ireland's credit rating again, saying additional austerity measures are needed given a huge bill for cleaning up its banks, a weak economic recovery and rising borrowing costs.

Ireland's deeply unpopular government says it could cost up to 50 billion euros ($68.5 billion) to unravel banks' property losses, driving the cost of Dublin's borrowing to almost three times that of Germany and prompting renewed jitters about debt elsewhere in the euro zone.


This had no effect on the Euro this morning. Somebody will just print some money and paper over the problem...not to worry.

It's official then: Japan, the US, the UK, and the Eurozone have effectively turned the money spigots on full throttle. The race to the bottom of the currency barrel is now a free for all, a demolition derby. Their may be no looking back for the Precious Metals markets now. Their will be "air pockets" along the way as Clive Maund decribes below, but they will be swift, and unlikely to be very deep. The short players in these markets may soon be an endangered species.

Gold Market Update
By: Clive Maund
So, we have a situation where gold is in position to accelerate away to the upside, but is at the same time critically overbought on various short-term indicators, but is nowhere near so overbought on intermediate indicators. What are we to make of this? The probable scenario here is that now gold has broken out above the resistance at the top return line of the Wedge, as described, it accelerates away to the upside, the advance being punctuated by brief "air pocket" reactions that could be increasingly violent. The current critically overbought state makes such a reaction likely either immediately or very soon. These reactions may be deeply unsettling for those long, but if the reason for them is known in advance and they expected, they can be used by traders to pyramid positions at better prices. The MINIMUM target for this advance is the lower parallel return line shown, which is currently in the $1500 - $1600 area, which is Jim Sinclair's long-standing target that looks not just easily achievable but actually quite modest - our upper parallel return line gives a MUCH higher target.

Silver Market Update
By: Clive Maund
On its 4-year chart we can see how silver has made a clear breakout to new highs this past week. This is an IMPORTANT BULLISH DEVELOPMENT that is believed to mark the start of a major uptrend in silver. However, the latest gains came at the cost of driving silver deep into critically overbought territory making consolidation/reaction very probable soon. This is evident from the RSI indicator at the top of the chart. Thus we have a situation where a major new intermediate uptrend has been signalled but where further short-term potential is limited by the extremely overbought condition. What we should therefore look for is consolidation/reaction soon to alleviate this overbought condition somewhat and restore upside potential. The current gap between the price and the 200-day moving average is about $4, but early in 2008 this gap widened to $7 which gives some idea of the medium-term potential for silver, and there is nothing to say that this gap cannot be wider. While the short-term overbought condition clearly needs to moderate, we should note that silver will be expected to maintain a generally overbought condition for weeks and possibly for months as it continues to climb.

The shorter-term 6-month chart shows that silver has been in a remarkably tidy, if steep, uptrend since it broke out of its Triangle in August. On account of its now being deep into critically overbought territory on its RSI indicator, failure of the steep uptrend can be expected to lead to a rapid convulsion as short-term traders suddenly hit the exits. However, any such sudden weakness can be bought into, as the medium-term trend, which is up, can be expected to suddenly reassert itself once the sudden correction has done its work of easing the overbought condition. We can expect numerous "air pockets" of this type as the price ascends, mostly minor and lasting perhaps a few days, with a few larger ones thrown in to keep traders on their toes. Any such sharp drops can be bought into aggressively. The now large gap with the 50-day moving average is making a "short sharp shock" increasingly likely.

It is obvious that the steep advance of the past few weeks has been fuelled in part by a short squeeze, but with regard to this it is thought likely that some shorts have held out up to now, in order not to book massive losses for the third quarter. Now that we are into October they may finally decide to "take their lumps" and their buying in coming days could force the price even higher, resulting in an even more overbought extreme.

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