Monday, March 14, 2011

The Uncertainty Of Catastrophe

Forgive my silence...

We have all seen and followed the news since early Friday morning.  The earthquake in Japan is a MAJOR GLOBAL CATASTROPHE.  The effects of which nobody can be certain.  Silence seemed appropriate at the time.  But the past two days have allowed much thought...

"The next day we got the news of the San Francisco earthquake.  It was an awful disaster.  But the market opened down only a couple of points.  The bull forces were at work, and the public never is independently responsive to news.  You see that all the time.  If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish.  It is all in the state of sentiment at the time.  In this case the Street did not appraise the extent of the catastrophe because it didn't wish too.  Before the day was over prices came back."
  -Jesse Livermore, Reminiscences Of A Stock Operator, chapter six

I had the misfortune of being caught completely out of the Precious Metals markets on Friday...or so I thought, as the market suddenly bottomed and raced higher throughout the day.  I wasn't happy that my bid for Silver sitting at $34 was not hit, and that Silver appeared to take off without me. 

Opportunity missed?  Perhaps a quick trade opportunity was missed, but the euphoria in the Precious Metals markets after Silver and Gold's price reversals Friday may have been grossly misplaced.

After the markets had closed for the day, and the dust had to speak...I had an opportunity to get to my charts, ponder the days events, and think about what could be next.  I have been thinking all weekend.

The first thing I did was call my broker late Friday afternoon and predict that, come Monday, this "rally" in the Precious Metals was going to reverse, and that we would see prices lower than they were Friday morning soon.  That was my gut instinct. 

Prices in Silver and Gold had rallied back to the points they had broken down from earlier in the week  $35.93 in Silver, $1423 in Gold, and stopped.  In a tired and toppy market, a rally back to broken support is often an excellent opportunity to short that market.

"Perish the thought," you say.  Short the raging Precious Metals Markets?  Yes.  Strip away the emotion of being caught up in a Bull Market, and the "wall of worry" these Precious Metals have climbed of late becomes a "leap of faith".

If you have been following my blog lately, then you know I have been wary of chasing Silver at these prices up here since last Saturday's post When Things Look To Good To Be True... .  My focus has been on Silver, and not Gold recently because it has been in overdrive and outperforming all of the Precious Metals.  Historically, Silver runs it's hardest at just about the time Gold is reaching an interim top.  And Silver has been running so hard of late that it is bound to be out of breath.  Gold has been sluggish since it first broke $1440 at the beginning of March.  Recent volatility in the Precious Metals has also signaled an interim top may be forming here.

That being said, and after much thought and reflection the past two days, it would not be out of the question to see Silver fall here in the short to mid term by 15 - 20%.  Not only Silver, but Gold, Commodities, Equities...everything.  And wonder of wonders, see a rising US Dollar.  The Dollar is still the world's reserve currency, and global crisis tends to have historically lead to a strong Dollar during periods of "uncertainty".  And if ever there World were facing a period of uncertainty...O, MOMMA!

The weekly chart of Silver is looking suspiciously like the run up to the Bear Stearns collapse in March of 2008. That was a massive short squeeze in Silver that was stopped dead in it's tracks by the Fed and JP Morgan. Yes, things are different now, but the crooks rigging the game are the same...and they are in the midst of a massive short squeeze today.  --March 5th blog post

Yes, the fundamentals of the Precious Metals are what they are...the same is true in spades for the US Dollar.  But the same fundamentals where in play when Bear Stearns blew up in March of 2008, and Silver and Gold collapsed in the face of what should have been a meteoric rise.  Is Friday's catastrophe in Japan any different?  We are about to find out.

Quake to Test Japan's Economy, Markets
The history of rich countries recovering, albeit painfully, from large natural disasters is encouraging. The resilience of Japan after the 1995 Kobe earthquake is the most obvious—and encouraging—example.

The question hanging over Japan and the rest of the world: Is this time different?

Will physical damage, particularly the still-uncertain fate of nuclear-power plants, be more difficult to repair? Has globalization made the world more vulnerable to one big economy? Will the weekend's jarring videos and headlines from Japan, combined with unease about the Middle East and Europe, undermine financial markets already distrustful of global governments' ability to repay debts?

This post for Le Metropole Members from Bill Holter Served at The Dos Passos Table on this nervous Japanese weekend, titled, "What now? I am not sure.", offers some points to ponder as this week opens:

What now? I am not sure.

To all; the earthquake, tsunami, massive destruction and potential meltdowns of several nuclear reactors have back burnered Arab riots, monetary and fiscal bickering and drownings in Europe and the fiscal awakenings in several U.S. states and on the federal level. Of course Wall Street’s reaction on Friday was to levitate in the face of probably the worst natural disaster in 100 years or more (what else would you have expected?). Left on their own, markets will collapse because a very major link in the financial derivatives daisy chain has now broken. The fact that ALL markets are NEVER “left to their own” anymore, your guess is as good as mine as to how the markets will react.

My immediate thought process is that Japan will not be able to perform on many of it’s obligations meaning that “force majeur” and bankruptcy will be claimed in many instances. Oil may drop because immediate demand will slacken, copper, lumber, steel, cement etc. may initially drop in a deflationary wave but demand will eventually explode as Japan’s need for these products comes on line for rebuilding. The ramifications are mind boggling and confusing to me at this point. U.S. Treasury supply (read necessary purchases by the Fed) will explode as Japan will surely be a seller to repatriate necessary capital for rebuilding. Not that the Fed had any ability (pre earthquake) to stop QE never mind actually withdraw funds (actually tighten) but now global QE will need to ratchet up even more.

I am sure that bearish stories will abound for Gold pre market tomorrow and may persist for a while, please keep in mind that monetarily and financially the earthquake is a disaster on a global basis. What had been such a buzzword “globalization” will now be hidden from public view. Financially and monetarily the world is globalized and nearly everyone IS sleeping in the same financial bed, TPTB will do all they can to disavow this fact and spin Japan as the tragedy that it is but not one with far reaching ramifications. Don’t believe this if you value your financial life! When all is said and done, central banks far and wide will need to pump currency as hard as they can to cushion this disaster. GOLD BULLISH in the long run!

As I said before, I am confused. TPTB may “use” this situation as an “excuse” to allow what has been the inevitable, ie. collapse of the entire system. They may have no other choice. ANYTHING can happen from here, equities rally or collapse, the Dollar rally or collapse, the same for commodities. I am sorry for not having a handle on this but as fragile as the entire system was, it is now even more tenuous. I can envision nearly any scenario from here but as interconnected as the financial markets are I would expect “failures” of all sorts within a couple of weeks. Japan is a HUGE link in the western banking chain that has broken because of economic paralysis. Will we witness bank runs in Japan? Food is already being hoarded and shelves are emptying, gas and electricity are being rationed, does this go global because of a derivatives meltdown? In my mind the question is whether or not “failures to perform” by Japanese institutions (banks and insurance companies) will lead to more global failures.

As stated I don’t have a handle on this but my fear is that this will lead to financial failures at a time when the global population was already pissed off and ready to explode anyway. The best I can tell you is to be ready for anything, ANYTHING, no matter how remote it may seem. Make sure you are supplied to survive a financial disaster equal to the natural disaster that Mother Nature has just wrought. Remember, distribution does not occur if banks are not open. I will obviously write more on this as it becomes more clear to me. Regards and prayers, Bill H.

But the timely piece of journalism that really caught my eye this weekend comes from Adam Hamilton of Zeal Intelligence.  Few analysts have a more emotionless view of the markets than this maestro.  He has taught me plenty, and his way of "looking at the markets" is one of the main reasons I became so wary of Silver prices here at $36 an ounce last weekend. 

I am a die hard Precious Metals bull, but even the strongest bull must take a rest.  Friday's earthquake in Japan may be just the "catalyst" to allow our raging bull a much needed rest.  Yes, "everything" tells us Silver and Gold should blast higher here...but what if they don't?  We must prepare ourselves if they don't...  Adam Hamilton's perspective on the Silver market below is a MUST READ:

Silver Toppings 2
Adam Hamilton, Zeal Intelligence, Zeal LLC

After soaring 35% in just 6 weeks, silver has driven trader enthusiasm to a fever pitch. Naturally after such a magnificent surge to new multi-decade highs, silver bullishness is off the charts. Expectations for continuing near-parabolic gains are nearly universal, with ebullient commentators coming out of the woodwork to predict spectacular near-term price targets.

This exuberance is certainly understandable, traders crave big gains which silver can provide in spades. I’ve been a big fan of silver for a long time. Way back in November 2001 when silver traded just over $4, I started recommending physical silver coins to our newsletter subscribers as core long-term investments. Boy let me tell you, back then almost no one was bullish on silver as this secular bull was being born!

Since then, we’ve realized 108 silver-stock trades in our weekly and monthly newsletters. Across all of them, which include all losers and the brutal stock panic’s impact, our average annualized realized gains ran +45.3%. After this decade of successful silver-stock trading, a critical lesson dominates my mind. Like all bull markets, silver doesn’t march up in a straight line forever. It flows and ebbs. Though its bull indeed powers higher on balance, silver’s massive uplegs are followed by brutal corrections.

Now if you are crazy enough to subscribe to this theory that the silver zealots think is heretical, that silver is not going to soar indefinitely, then doesn’t it make sense to look for toppings? At some point after a massive upleg, silver is going to need to correct. Period. It doesn’t matter how bullish silver’s fundamentals may be, how greedy silver enthusiasts get, or what is going on in the physical silver market.

Silver corrected hard in the past despite bullish fundamentals, wildly-bullish enthusiasm, rumored supply shortages, tightness in certain coin markets, foreign buying, and every other silver-to-the-moon argument getting rehashed today. In fact, the more bullish, optimistic, and enthusiastic investors and speculators get, the greater the odds for an imminent sharp correction. These psychological conditions seduce in everyone interested in buying anytime soon. Once they are all in the rally burns out, and only sellers remain.

So how can we recognize dangerous topping conditions in real-time? By studying silver’s technical and sentimental conditions at its well-known past major interim highs. If you know how past silver toppings played out, then you can identify current episodes where the probabilities heavily favor a correction. And this is priceless knowledge to have, as silver’s corrections are wickedly fast, large, and unforgiving.

As Billy Joel once said, "I may be wrong, but I may be right."  It's very difficult for me to think negatively about the Precious Metals, and particularly Silver, but if the past has taught me anything it's that an emotional attachment to a market can be crushing.  IF the markets should turn for the worse here, "traders" should not be afraid to lighten up on their longs and go short.  Investors...the Precious Metals Bull Market is far from right and sit tight, and add to you positions if you can.  We may be on the verge of a great buy opportunity at sale prices...then again we may not.  That's why catastrophe ALWAYS has uncertainty tagging along behind in it's shadow.

The downside risk near-term in Silver is to $29 - 30.

The downside risk near-term in Gold is to $1332.

A move in BOTH Silver and Gold to their respective 200 day moving averages can not be ruled out in the intermediate term...particularly if the Fed tries to "telegraph" an end to QE2.  Do not forget the Fed meets THIS Tuesday March 15.  {The Fed will most likely wait until their April meeting to begin playing their QE mind games}

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