Commercial Short Squeeze Underway
Elements of this commentary appeared on Treasure Chests for the benefit of our subscribers earlier this week. We share it here today for the benefit of the gold community. This is a very good time to be invested in precious metals, with some of the reasons discussed below.
While it may be a tad too early to say for sure, it appears market influences may have come together in precious metals to affect a rare event indeed, that being a commercial short squeeze. As you may be aware, it's not often the market savvy commercial traders are forced out of their positions in the futures, given the advantages they hold over speculators concerning market moving information, along with what appears to be an endless supply of paper to support their positions. This tells us grand cycle factors are now bearing down on the market, which could trigger an accelerated move higher in the metals, as we have been suggesting of late. Only time will tell in this regard, as there is still one more hurdle for gold to overcome before the majority of traders will succumb to the pressure. The coming week should be an interesting one.
As suggested last Friday, the Friday before last in actuality, we thought there was a very good chance based on a similar acceleration point found in the Amex Gold Bugs Index (HUI) marked during the summer, precious metals prices should head higher in an accelerated fashion last week, and sure enough, that is exactly what happened. And as suggested above, a point of view we did not want to introduce with just one week's Commitments Of Traders (COT) data to work with, it appears we may witness a commercial short squeeze at present, the force to continue driving prices higher moving forward, although again we do not have more than one week's confirmatory data to work with since Friday's releases were delayed. With the December Comex gold weekly closing above prior highs put in during April however (i.e. think de facto triple top break out), there is very good reason to think this coming week could bring some fireworks into the sector, where a cash gold close above the $440 mark remains a final hurdle to be overcome regarding long-term pivotal measures [i.e. think the point and figure chart (P&F)], with a closing basis breach of the barrier likely being the straw that will break the proverbial 'camel's back' concerning pace in the squeeze. (See Figure 1)Figure 1
In the gold chart above, possessing a very telling array of indicators I'm sure you will agree, one should take note of current potential breakouts as it pertains to long-term diamond structures that have traced out through the years, suggestive much pressure currently resides within the pipe. Of particular note in this regard, one should also notice that the Rate of Change Indicator (ROC) is building pressure right on diamond resistance, and that a break higher would likely cause a widening to develop in the Bollinger Band Width Indicator (BB Width), suggestive of a rapid and meaningful move on trend. With the MACD Indicator already broken to the upside, and the price confirming a de facto triple top breakout within the context of the tops in January and April respectively, where one of Gann's top ten trading rules is to always buy such occurrences, we cannot help but think a squeeze of mammoth proportions may be upon us very soon, potentially propelling prices right up to the Fibonacci resonance based target denoted in the $550 area, which just so happens to be 50 percent retracement off 1980 highs. This would be both a logical and expected point for the first primary advance in the gold price to rest for a period, as it regenerates force to push through the bull market defining measure.
Not wanting to count one's chickens before they are hatched however, where as mentioned above we have just one week's worth of COT data to work with in support of the above hypothesis, the current pace of ascent in the gold price should be comforting to the bulls irrespectively, especially if viewed through the eyes of our 'progressive interval system' in the measure. Accordingly, and working with the minimal 25-point intervals initially in anticipating an unexcited progression scenario, which of course is preferable from a longevity perspective, since gold has cut through the $425 mark easily, we know its heading up to the $450 minimally. Here's where it gets interesting. The P&F chart defined with standard settings has a three-box reversal price objective to $476 now, completely ignoring the double top breakout, not to mention the de facto triple top breakout, which is as you can decipher, is the next 25-point interval past $450, bringing the 50-point interval and $500 into play within the process. (See Figure 2)Figure 2
If the $475 area does prove to be another staging area within the process of gold's bull market, one would logically have to expect that if the $425 mark is not tested after a run to $450, it may be subsequent to a top of potentially intermediate term duration at the P&F target because the $500 mark would be put on hold, and the 50-point interval would be deferential to 25-point impulses. The long-term chart of gold shows significant resistance in the $475 area by the way, where a move to $500 any time soon would have to be considered a panic, but very bullish ultimately never the less. Under the less excited scenario however, one should not expect to see a $500 print until sometime next year, as the upwardly slopping resistance rail denoted below allows for a restrained move higher. (See Figure 3)Figure 3
Obviously nobody knows which scenario will prevail moving forward, but there is one thing I can tell you for sure, you want to hang on to your positions tight with a move in gold through the $440 mark closing basis, which may be this week. Much pressure exists in the pipe due to grand cycle secular influences coming to bear in the equation at present. At the moment, we are working on a macro-oriented study that will blow peoples socks off when they realize the future implications. Here is a glimpse into the future for you now, where factors such as price inflation in foodstuffs has been relatively subdued literally since the birth of modern US modeled finance, but where it appears technological gains in production are finally to be overrun by global demand side constraints, with the net effect being a potentially large catch-up move in prices commensurate to the monetary inflation that has occurred over the past 80 years. (See Figure 4)Figure 4
Source: The Chart Store
As you can see above, and for those trading in futures, corn, along with the rest of the grains complex, is very cheap at present from a historical perspective, especially considering nominal prices are trading at levels seen in peak instances back in the 20's. That is to say corn, wheat, etc. are trading at prices touched in the 1920's, and subsequently superceded thereafter as currency inflation skyrocketed into the war years. Further to this, with other commodities such as cocoa and platinum that tend to lead gold either putting in new multiyear highs or close to it, thereby signaling an inflationary price trend is here to stay, one should remain open to unbounded possibilities concerning gold and silver (Ag) from this point on. Here is long-term chart of platinum, considered by some to be a precious metal, suggesting on a ratio related basis gold should be trading north of $600 at some point simply to match the comparative price appreciation seen in the white metal thus far in the cycle. (See Figure 5)Figure 5
Source: The Chart Store
Rounding off our look at these grand cycle considerations that should soon come to bear on precious metals prices, and which should keep the pressure in the pipe at good head of steam, one has to wonder when existing price inflation will begin showing up more in official statistics, like the Producer Price Index (PPI), scheduled to be released this week. One would think oil in the $50 area is bound to impact these numbers sooner or later, statistical smoothing methodologies or not. As you will see below, gold has a non-lagged relationship to the PPI, where if we see an up-tick in the annual rate of change, the yellow metal should feel the benefit right away, as investors will continue to discount future resultant changes in the Consumer Price Index (CPI). This factor alone could cause trouble for the gold shorts if we begin witnessing hot numbers all by itself, not too mention the reaction to an accelerating CPI. (See Figure 6)Figure 6
Source: The Chart Store
Returning to our original thought process concerning a potential commercial short squeeze in the metals, a degree of clarity as to why this scenario is not impossible at this time should be gained with an understanding there are grand cycle factors at work presently, such as those outlined above, where it appears pressure in the equation is now being felt from previously dormant sources. That's what grand cycle events are all about, where even the most seasoned investors / traders / analysts have great difficulty rationalizing factor causes. The lights appear to be coming on for more of the commercial traders if recent trends in the COT data are any indication however, with the small traders fuelling the fire as speculators continue attempting to pick a top. It's important to understand both groups are looking at COT conditions in the currencies thinking the record high short position in the dollar must be covered at some point, which undoubtedly it will. In the meantime however, a 'wall of worry' environment has gripped the metals markets, and the speculative frenzy associated with this advent could keep the current trends in tact for longer than some think, as pain thresholds continue to be exceeded.
Again, things should be interesting this week, especially if the $440 barrier in the gold chart falls on a closing basis. The introduction of the World Gold Council's new Exchange Traded Fund (ETF), streetTracks Gold Trust, set to trade on the New York Stock Exchange soon has brought yet another source of speculation into the picture. Some think it will provide more paper supply into the formula, and that its very introduction whilst new highs in the metal are being printed is an indication a topping is not far off. The charts suggest other wise however, and the grand scale inter-market relationships reviewed above go further in this respect, so don't become a victim of short-term oriented speculation in primary trends such as in precious metals at this time, because this tendency can be hazardous to your financial health, even if monopoly money is the medium.
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