Taking Candy From A Baby

How many have noticed the technical damage in the U.S. Dollar market recently?

U.S. Dollar ETF


The unfolding of yet another massive weak to strong hands paper transfer in the precious metals markets suggests no many. Selective media coverage, intensive, repetitive focus on obvious areas while important areas receive total blackout, reinforces the importance of the money flows and technical setups discussed below.

The break of the down trend in early 2011 suggested a change in trend for the U.S. dollar.

U.S. Dollar Index and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest


The paper transfer in gold can only be characterized as “taking candy from a baby” - it’s simply too easy. This paper blitz by connected money is already the fourth largest since the bull market started in 2001. Moreover, the panic liquidation that ensued after 1/18/11 has yet to be recognized in the chart below. The ‘control’ still displayed in precious metals while a tidal wave of liquidity extends to every corner of the economic globe is truly amazing.

Gold London P.M Fixed and the Commercial Traders COT Futures and Options ZScore Weighted Average of Net Long As A % of Open Interest:


Paper control, however, has it limits. As James Turk recently pointed out in a commentary entitled “Silver in Backwardation, Set to Explode”, that spot price is higher than the futures price in silver (backwardation). It’s not only higher relative to the short-term but also twelve months forward.

Turk goes on to make the following observations,

Backwardation happens regularly in most commodities, but it is rare in the precious metals. The last time this happened Eric was in January of 2009. Over the next few weeks silver rose from about $10.50 to $14.50, a roughly a 40% move higher. The key to understanding backwardation is that the price must rise to entice holders of physical metal to sell and accept a national currency in return. I think we can expect a similar event to repeat over the next few weeks.

Turk's observation about the growing strain in the silver market is confirmed by extreme reading in London PM fixed (physical price) and silver ETF (paper silver) ratio. The last two extreme readings, an indication of extreme strain between physical and paper markets, were March and September of 2008.

Silver London PM Fixed to Silver ETF ratio:


In other words, what the markets are trying to say is that there’s a limit to paper control. The sheeple will always be slaughtered, but the market forces that drive price cannot. This implies that paper price, despite the best efforts of the sheeple to comply into fear, cannot be pushed beyond the limits of credibility as a reasonable price marker for physical it’s suppose to represent. If that happens, there will be no market left to control.