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Silver and Gold – the imploding bubble

3 Jun

The gap between fundamentals and pricing continues to widen as value investors awaken to the speculative potential of silver. Instead of irrational euphoria and widespread participation, there was irrational despair in the form of generally poor sentiment from the outside looking in.

Recent trading in silver and gold has shown the inverse of patterns consistent with a speculative frenzy.

Instead of retail investors buying into a rising market, steady and massive accumulation has been noted on dips.

This was happening long before the April crash in precious metal prices. This is the strongest form of accumulation, because it is mostly free from emotion.

No Fear or Greed, Just Buying

The emotional nature of the market is unusually strong. No panic selling out of fear arose. Instead, the price takedown in the paper futures market was blatant and commonplace.

No greed factor was noted, as buyers continue to come into the physical market at the lower prices, despite relatively high premiums for buying physical metals.

The gap between fundamentals and pricing continues to widen as value investors awaken to the speculative potential of silver. Instead of irrational euphoria and widespread participation, there was irrational despair in the form of generally poor sentiment from the outside looking in.

Again, those who accumulate at this stage are the strongest hands, made up of users and value or contrarian investors who see through the enormous facade of the paper silver market with mostly dispassionate eyes.

These investors are a testament to silver’s tendency to remain a monetary asset, a fact that continues to worry central bankers.

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Is the CME Fueling its Own Demise?

The CME and its big commercial traders have been cheating the rest of the market in the name of liquidity.

In a real blowout, most of the selling happens in a frenzy at the bottom. The lower the price goes, the more metal will become available as the weak hands panic. The problem with this is that the weak hands just do not have any physicalto sell, as the strong hands stand ready to buy it up.

Some physical buyers will unload some or all of their holdings, but most long term precious metal investors will see the latest sell off charade for what it is: just another opportunity to add to their positions.

All of the reasons they bought these metals to begin with continue to be confirmed. The only real danger to the fundamentals (and the situation is probably past the point of repair in that regard) are fiscal changes that negate the necessity of money printing. This is highly unlikely to happen in the present situation.

For the first few years of Quantitative Easing, one could perhaps have argued that the money stayed locked up in the banking system. Now the huge amount of money being created is being spent on food stamps and the like, feeding right into the economy.

The result is a decoupling at the very least, in the absence of an outright currency collapse.

Maintain Two Markets

Two markets now seem to be operating, and the pricing difference between them may ultimately widen considerably. One is the paper futures market for the traders, while the other is the physical market for the users and retail investors.

Could this paper-physical price divergence happen without the imposition of capital controls, the banning of silver and gold ownership or other forms of confiscation?

Well, it is already happening. The big futures market players have been orchestrating the most egregious, uneconomic, selling cascades at will almost daily in front of everyone without any obligation to deliver physical metal, but no one seems to care.

This has brought the paper futures market just a flap of the proverbial butterfly’s wings away from default and panic. Controls imposed in the midst of such a crisis would only serve to further inflame the panic. A black market would develop immediately.

Just think of all the investors who bought their metal with cash, or who otherwise went undetected. It would be a nightmare going after these people to take away their metal. The relatively small silver market would be only be $500 billion in sizeeven at a price of $500 per ounce if silver inflated by more than a factor of ten.

To put this in perspective, that vastly inflated silver market would still be far less in size than the annual Federal budget deficit and is not even as large as the big bailout from 2008.

The Key is Dealers and Producers

Producers must be willing to hold back their stocks to see the prices really start to rally.
Miners are the last holdout, and they have largely remained silent about the manipulation of their product, at the expense of their shareholders.

Perhaps they are bought and paid for by the very banks that provide their cash flow accounts and financing, since it is these same banks that also profit from the ongoing price suppression.

Ultimately, these big dealers and their purported non-for-profit customers will have to pay higher prices to cover their massive shorts.

What would move Gold, Silver today

30 May

Two key data releases are awaited for the day and yes, it is from US. Both releases—US GDP QoQ and initial jobless claims—are scheduled for around 07.00 PM IST.

The US GDP is forecast to have grown by 2.5% in the first quarter of this year (January-March). If the reading turns out to be a positive surprise i.e. to the upside, it would strengthen US Dollar and thereby weaken bullion prices.

The other data release scheduled for the evening for 7.00 PM IST is US Initial Jobless Claims. The data measures the number of people who have applied for unemployment insurance for the first time during the past week.

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If the data released exceeds the forecast of 3,40,000 in numbers, then it would give a fillip to dollar and weaken the precious metals gold and silver.

Besides, the data would also be tracked by US Federal Reserve’s FOMC (Federal Open Market Committee) as the debate on whether or not to continue with QE measures rages on.

The FOMC, responsible for initiating Quantitative Easing measures that involves bond-buying to the tune of $85 billion a month, has tethered the termination of the program to job market recovery and healthy inflation.

Both gold and silver have been plagued by correction and are entrapped in a stalemate condition ever since news arrived that George Soros has liquidated his holdings in SPDR Gold Trust, world’s biggest ETF of gold. While physical demand of gold has picked up recently, it has failed to buoy prices beyond a point.

“Physical buyers have helped to limit declines but they have also become more price-sensitive and tend to stay on the sidelines near $1,400,” said Yang Shandan, a senior trader at Cinda Futures Co., in China to Bloomberg.

Total holdings in ETPs have dipped to the lowest level since June 2011, shrinking by 5.4 percent this month, according to data compiled by Bloomberg.

Barclays notes:

“Market sentiment remains negative towards gold with non-commercial Comex gold positions at their lowest since December 2008 and ETP outflows showing little sign of slowing down. Net redemptions have hit 94 tons in May thus far (as of Saturday), and once again negative interest is skewed towards the US listed products, with GLD down 58 tons and at its lowest since February 2009.

On a regional basis, US listed products have suffered the largest outflows of 341 tons for the year to date, followed by UK primary listed products at 48 tons and the Swiss listed products at 47 tons. Metal held in trust across the 55 physically backed products we track are now at their lowest since July 2011 with year-to-date outflows of 443 tons, almost the equivalent of the net inflows over the past two years (476 tons).”

Gold on the Comex for delivery on August 13 was seen trading at $1,394.25/oz, a gain of $2.45 or 0.18% as of 10.39 AM IST. Silver on the Comex for delivery on July 13 was seen trading at $22.433/oz, a loss of $0.020 or 0.09%.

Commodity Sources