Big Moves in Precious Metals

It's a little bit difficult to make sense of the dramatic moves in gold and silver in the early hours of Monday morning.

As you can see in the chart above, silver fell all the way down to $26 from $31 in four hours of Asian trading on Monday morning, only to recover all the way back to $33 here at the open of US trading here on Tuesday.  That's a 27% move in 27 hours.  Gold had a similar panic and is also recovering very strongly.

There was a margin hike by both the US and Chinese metals exchanges on Friday, resulting in a number of forced liquidations on Monday.  Like the May takedown in silver, the logic of exchanges seems a little bit backwards.  If they are trying to keep the price stable, their tactics need some work.  Hiking margin rates right after at 15% drop...tends to result in a 30% drop.  Which is quite the opposite of stability.  However, if their goal is a massive collapse, then perhaps their tactics are right on.

The May action leaves open the possibility that more margin hikes may be in the cards.  But, this should be different, as we haven't had the same level of price appreciation that we saw in April.  The soverign debt problems are still here, and consequently I am still bullish on precious metals.  Though I'm already long silver (and taking a beating), I am using this dip to buy more.

Separately, there appears to be a multi-decade cup-and-handle formation on gold.  More on that later.


MONKEY BUSINESS:
Buying: AGQ @ $126.33,  UGL @ $91.00
Holding: AGQ ($159.70)

What Good is Operation Twist?

On Wednesday, the Federal Reserve announced a new program called "Operation Twist."  It is an open market action that involves selling long-term bonds and buying short-term bonds.  The effect of this that interest rates on long-term bonds fall, and interest rates on short-term bonds rise.  Visually, that leads to a flattening of the yield curve.

In the banking industry, you learn to HATE a flattening yield curve.  This is for two reasons. First, bank profitability is pretty simple.  Banks borrow money at short-term rates (savings accounts) and then lend money at long-term rates (consumer loans).  So, when the yield curve gets flat, the spread shrinks.  If you have any bank stocks, you should know that your bank's profits are about to get a lot smaller.  Secondly, the flattening yield curve is a precursor to an inverted yield-curve.  More often than not, that means a recession is ahead.  However, it's prone to some false positives.  I believe that the inverted yield curve has predicted 10 out of the last 7 recessions.  :)

I for one, don't see very strong benefits from Operation Twist.  But I don't think it's geared towards consumer behavior.  There is some possibilty that it makes long-term savings less appealling.  Combine this with the fact that short-term rates are basically still negative.  So if near-term savings are still worth zero and now long-term money is worth less, perhaps it will get people and companies that actually have cash to go out and spend it.  But for the folks that have no money (or REALLY need to hold on to the money they have) it doesn't really make much of an impact.

Again, I'm surprised that the Fed didn't announce QE3.  My guess is that there is enough dissention inside the board that they wont announce any easing action until this situation gets worse.  I can imagine that QE3 action followed by a European crisis would fuel the critics who believe that QE3 is not helpful.   So perhaps Bernake is waiting until AFTER the "Lehman Moment" to take action.  Politically, I can understand this...but I'm disappointed that politics has any more in this.

Oh well, it will be an interesting few months.  For better or worse, it is shaping up to be an echo of the fall of 2008.  Mostly for the worst.

MONKEY BUSINESS:

Holding: AGQ ($159.70)

Panic of 2011?

There was a headline yesterday what said we were on pace to be the third worst week on the Dow Jones in point terms ever.  I'm not sure where we finished.  But regardless of ranking, it wasn't a good week.

The sell off seems to have started in Europe on Thursday afternoon, just as the announcement of Operation Twist by the Federal Reserve was hitting the wires in the US.  I think it was an honest to goodness "perfect storm." Reports of bank runs starting in France and Italy, Germans making negative comments about the Greek austerity package, inaction by the US Fed, and then bad employment numbers.

I was really disappointed by the absence of QE3 on Wednesday and joined the stampeed on Thursday morning, selling many of my ETFs and trimming my silver position.  The selloff seemed a lot like panic, with nearly every asset class getting dropped in favor of plain old USDs.  No safe havens, just cash.  I saw a report that showed that margin positions have shrunk dramatically as well.  So, with gold and silver being sold off -- this was just an across the board "risk off" sell off.

The market action and price action feels a lot like the fall of 2008 again.  Everyone seems to be waiting for this time's "Lehman Moment."  Many people expect that it will come in the form of a European default...but sort of thing tends to go in slow motion...and I feel that a Lehman moment is more likely to unfold over 3 days, very unexpectly.  It is possible that it would a collapse in confidence in large bank, or perhaps the Euro itself.  In either case, this panic will turn into a bonefide crisis.

I think it will take several months for us to reach bottom.  There are too many icebergs in water for anyone to feel confident right now.

MONKEY BUSINESS:

Selling: FAS @ $10.38  ($12.70, $12.50), EDC @ $14.33 ($20.05), ERX @ $43.30 ($40.20)
Holding: AGQ ($159.70)