By Craig R. Smith
May 6, 2011
There is some buzz on the street that margin increases and subsequent margin calls have forced many invested in silver and gold ETFs to sell, causing a tremendous amount of pressure on the market. Margin requirements as of Monday, May 9, will be up 84% in the past two weeks. That is HUGE! Many experts are suggesting margin requirements may go up again on Monday. When these increases hit, small investors bail out fast. Goldman and Paulson will not.
The CFTC (Commodity Futures Trading Commission) wanted to "prick" the bubble. They also wanted to make it appear that Ben Bernanke's comments about inflation pressures being "transitory" were correct. So the pressure to force a sell off commenced.
The irony here is that only approximately 6 million ounces are actually leaving the silver ETFs. It was 464 million last year, went up to 606 million last week and now sits at 600 million.
Shortly thereafter (at approximately 3:00 P.M. EDT), comments from the European Central Bank's Jean-Claude Trichet led many to believe the ECB and International Monetary Fund might have to sell gold to shore up the European banks with cash. Thus, the drop in the Euro.
A closer look at his comments, however, does not give any indication they are considering selling gold. The drop in the Euro did subsequently boost the dollar. It also hammered oil by $11.00, dropping crude below $100 bbl.
This move on gold is not even close to a 10% correction. A 10% correction would put spot gold at $1408. We are currently at $1469. So any buys below that level are buys made during a very healthy correction.
When blood is running in the streets, people panic. Smart traders don't. They look at the fundamentals that created the run-up in the first place to see if they have changed. Clearly they haven't, with the world still swimming in trillions of debt.
Silver is the wild card. It has come off the highs by 29%. That is significant. I have never been excited about silver, and this is why.
I did, however, start buying silver again this week and will continue to do so in order to cost-dollar-average my position because again, I see no change in the fundamentals. The dollar has strengthened quite a bit in the last two days, but the trend for the dollar is lower and will continue that move in the next few days. No market moves in a straight line, and the downward move of the dollar must rally along the way before it drops further. Corrections work to the upside as they do to the downside.
So, IF the government balances the budget, starts to pay down the debt while at the same time Bernanke raises interest rates and stops printing money, we may see more downside for gold and silver.
IF Greece, Portugal, Spain and Italy get their sovereign debt crises behind them, and the ECB reduces rates, there may be downside for gold and silver.
If you see either of these scenarios being a remote possibility, call me. I have some very rare swamp land I want to sell you at $1 million/an acre.
The U.S. unemployment number out on Friday rose from 8.8 to 9.0%. Claims were up 43,000 to 474,000 last week. That does not bode well for a FED that wants to stop printing money.
Bottom line? Stay the course.
Nothing has changed other than the CFTC attempting to cool off a red hot market. As quickly as we watched this market sell off, we could see a rally. Parabolic moves after major corrections are very common.
