Silver at the COMEX : A Cyprian Tragedy

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By Joshua Enomoto, Founder of ContangoDown.com and FutureMoneyTrends.com contributor

The setup is the same: divert narrowing eyes from the cracking fissures of a chronically ill financial system and place them square on some other big problem, preferably some place far, far away. Connect a few spurious arguments, no matter how tenuous they appear on the surface level, and finally pepper the mainstream airwaves with mantra-like repetition of said arguments.

This strategy has worked wonders for the oil companies, who use everything from Middle Eastern terrorism to sightings of Sasquatch to justify street gas approaching $5 a gallon. And it will continue to work so long as everyday folks insist on drinking the Bloombergian-Kool Aid.

Allegedly, the precious metals sector declined heavily on the Friday before Tax Day as the European Union demanded the government of Cyprus to relinquish their gold reserves in order to mitigate their long-term debt obligations.

This tiny Mediterranean nation, which has quickly become the Greece of 2013, has been suffering through all the stages of economic collapse at an exponential rate: sovereign debt, communal panic, government intervention, government failure, and finally, gold confiscation. This confiscation supposedly created fresh supply in the open market, and thus drove prices down.

Whatever.

Let’s take a look at the technicals, specifically the silver ETF, SLV:

Below are three main takeaways:

  • First, the session-close below the $26 level is extremely significant, which immediately portends a more serious decline to $18. While traders may be tempted to initiate a short-position from here to profit from a -31% decline, there are two horizontal support lines to consider.The initial “stop-gap” is at $25.00, which was last courted in November of 2010. Expect strong support should a re-test occur. If that fails, the next level is $22.50. From there, an ugly drop awaits, one that could potentially cripple secular sentiment of the silver market.
  • The Relative Strength Indicator has effectively charted the cyclical pattern of the SLV as it relates to currency fluctuations: deflationary cycles of the US dollar has led to both prolonged and shorter-termed periods of silver weakness, with each negative repetition leading to reversals.Fundamentally, silver at $26 (or below) is not entirely unexpected, as both the dollar and the equities rose simultaneously amidst the backdrop of strong reflationary policies by Japan. However, with President Obama putting Japan on notice for currency manipulation and the United States’ own labor market failures belying record equities valuations, the Federal Reserve is certainly in no mood to increase reserve rates. Look for a weaker greenback, which should induce bullishness towards the metals complex shortly.
  • Finally, let’s note the volume trend: most of the large spikes in volume have been of the bearish variety, with the peak being the 300 million positions exited as silver’s parabola reached its pinnacle. Aside from that one aberration, peak volume has been in decline, starting from November 2010.While the recent correction has been steep, the overall volume was only 34 million, a far cry from the 90 million trades executed one year ago. What does this all mean? The statement has been reiterated many times over, but the weak hands are getting weaker. We can reasonably anticipate a short-squeeze movement to drive prices back up beyond $26.00 shortly.

Lastly, we will consider the 10-year monthly chart of silver priced in Yen (data courtesy of the COMEX):

With the U.S. being the world’s biggest currency manipulator by default, courtesy of its reserve status “honor,” it’s useful to observe precious metal prices in competing currencies, and right now, there’s no better choice than the Yen, which is the subject of Japan’s forceful 2% inflation target. The immediate discrepancy between Yen-silver and Dollar-silver is the position of sustained strength of Yen-silver for much of the second half of 2012 and going into April 2013. Despite the steep correction, Yen-silver is very much aligned in a bullish, long-term trend channel dating back to the financial collapse of 2008. Prior to that dark period, it was trading in a higher channel, which proves that even an extreme correction cannot kill a market with strong fundamentals.

Will we continue to see further volatility? It very much is possible, but the inverse sentiment of that question is also important to consider, meaning do you have the balls to short silver? Considering the weight of the evidence we have reviewed, not many would see enough margin to initiate a contrarian trade. The latest headlines and basic human psychology would dictate that American reflation is back on, setting the course for another reversal.

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