Catch a falling silver knife - Notes on EJ's April 29 silver sell call

[Adeptus]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Ok I just found this Seeking Alpha article from a few days ago, that touches upon what I am talking about.
SOURCE: http://seekingalpha.com/article/2948...-metals-prices

Borrowed (and modified graph: orange elipses & green writing are mine) graph from above article.
Note the impact of margin hikes on silver.... Now show me a "fundamental" that impacts silver more than margin hikes, and explain how iTulip's future silver projections consider margin hikes (whether directly or indirectly).

[Adeptus]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Thanks Bart

Yes, thank you! And if I may ask, any chance you can show a graph showing the price of silver in USD overlayed with the Margin Hikes? The idea is to get a clear picture of what IS actually crashing the price of silver.

Feel free to overlay other inputs if you suspect there's other major factors at play (i.e. USD index, Silver Options Expiration dates, silver supply/demand, Timing of Fed/Gov Stimulus plans (risk on/risk off). It would also be interesting to see a similar chart for gold, because the initial theory was (paraphrase) "gold will not be affected by margin hikes nearly as much as silver, because gold is in 'strong & lard hands' aka: central banks".


I could see these type of charts potentially translating into a significant trading methodology into the next year or two. While it may be extremely difficult to project timing and size of future margin hikes, one thing is clear: There's some 80% left until margin = 100%, and there is no more leverage in the system. So if to get to ~17% margin we passed through 2 major margin hikes that crashed silver ~25 to 40%, then perhaps we can extrapolate that we are 1/5th of the way until we see 100% margin. In other words, at least several more major margin hikes are left. So perhaps silver ON AVERAGE until Q4 2013 may end up at below $30 as per iTulip, but a zoom in of what may happen may look something like the below (red line) which can offer additional trading opportunities. And if margin hikes are discovered to be the major catalyst pushing silver down, once we run out of margin hikes (i.e. margin = 100% = 1:1 silver price:contract), then why wouldn't price rocket up based on supply/demand or other fundamentals?


NOTE: My red line in the top/right chart with 'real silver price' was hand drawn, and is not based on any real data... just trying to show very roughly how I suspect margin hikes will impact the price of silver going forward.

Maybe that would tell us something, as it seems to me this jsut shows the CME playing catch-up to the 200% price rise.

CME isn't necessarily just playing catch-up. Margin hikes are being justified based on excessive speculation that seem to be occuring over recent short periods of time, not from 2001 to 2008.

[c1ue]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

I suspect that when QE4/QE5 is announced, you will get your new NASDAQ & DOW high. Unless you have less than 18 months to live, you might just see it.

Fair enough - you've put up a definitive statement and a falsifiability criteria. I've entered this into my calendar for verification in 18 months time.

Jim Rogers a salesmen, how many of us could actually purchase into one of his funds. List time I check, if I remember correctly, it was six figures to get in.

Unclear why this is relevant.

I will take the 4,000 plus years of silver being a store of value to someone who "long term investing" mind goes back to the NASDAQ bubble.

Um ok. As someone who sold a block of silver which my mother bought in 1980 - back at the last bubble - I'd say your definition of 'store of value' and mine are clearly thoroughly divergent.

Yes, the block had 'some' value, but an increase of 4.4% per year from 1980 to 2011 is hardly earthshaking.

And had I held on to the same block, the increase to date would only have been 2.9%.

Given that the BLS' own inflation calculator shows a 3.3% annual rise in inflation from 1980 to 2011, this is not an earth-shaking performance. Rather the opposite.

And finally, it really does not matter what I, you, Rogers, Sprott & or anyone else in the US thinks about PM's. What matter is what the creditors of the largest debtor nation in the wold thinks. Have you been to China in the last six months or spoke to anyone from India and asked them about your silver thoughts? I will take the opinion of several billion creditors to the thoughts of three hundred million people that have lived way beyond their means for decades.

A society cannot consume more that it produces over the long term (the "long-term" has been extended in the US due to $$$ reserve status).

I'm not sure again what your point is? That the Indians and Chinese will produce so much demand that silver will soar to undreamed of heights?

That may be, but it would be nice to have some kind of mechanism or proof beyond assertion.

Aren't bubbles supposed to result in price depression over a long period of time (i.e. Nasdaq, Real Estate)? Isn't that what EJ's updated silver chart to 2014 tries to indicate (although there is an intial rise in price)?

Bubbles arise from too much cheerleading from public and/or private sources.

Real Estate was not undervalued in the 3 decades before 2003.

Neither was the Nasdaq undervalued in 1997.

So this part of your thesis requires a lot more proof.

And that's where I disagree with iTulip. This idea that silver will decouple from gold. The only decouple event I would agree with is, related to the recent iTulip thesis that when the global SHTF finally happens, and a new reserve currency is created, silver is likely to NOT be part of it, where as gold is almost guaranteed to be part of it, and then gold will way out perform silver.

I would think the relative performance of gold vs. silver over the last 10 years, 5 years, or even 2 years would clearly indicate the two commodities are not closely coupled.

From an analysis standpoint, this is also clear: gold is still considered some form of money by Central Banks due to its presence in CB reserves. Silver is not. Silver in turn is an industrial metal - one whose single largest category of demand has gone into irreversible decline (photography). Other sources of industrial demand would almost certainly be affected by silver price increases.

Why are they raising margins AFTER the price goes down?

For one thing, margin hikes are a regulatory process and require time to go through the system. You're reading way too much into this - over time the margin hikes are irrelevant if the underlying factors are as strong as you say.

Why are they leaking information of margin hikes which results in the prices going down?

Because there are plenty of banksters speculating using margin for silver to go up - even as there may be Sith Lord Central Banksters or Sith Lord JP Morgan shorts speculating on silver going down.

Why a few months go did Western Exchanges increase margin hikes at the same time Asian decreased margin hikes on the same globally traded product?

There could be all sorts of reasons, including too much speculation in the West whereas there was too little speculation in the East.

Why do CFTC position limits apply to everyone EXCEPT the largest speculators of all? (i.e. JPM)

Because we're in a bankster world, my friend.

Why do the largest speculators get their borrowed money for little or nothing? The same reason.

[rtchoke]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

I just want to thank Adeptus and rogermexico for such an informative debate. It's impossible to get the right answers unless one first asks the right questions. These are great questions- I really appreciate the discussion.

+1 * 100

[tastymannatees]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

I am a simple guy, I had one economics course in college 35 years ago and probably the first basic concept I was introduced to was a supply/demand chart. Simple - plenty of supply price is low, short supply price is high.

It is a fact as far that I can tell from multiple sources 30-40 years ago there was 10 billion ounces above ground in silver = Plenty supply low price.

Today there is less than a years supply above ground as it is being used faster than it can be mined along with increasing annual demand= Tightening supply high price.

Despite several years of high prices supply is not increasing and in fact still declining (not meeting demand increases) coupled with small amount of increased investor demand and price should be? $5 or $50??? Lacking free market arms length transactions and only able to observe manipulated pricing with the objective of bringing the price down leads to the the conclusion the higher number must be closer to the REAL market price

So what is the real silver price without the market manipulation or "noise" ? EJ arrives at a price with past performance charts/data which as we all know is "no guarantee of future performance" but publicly ignores the supply/demand issue as regards to silver, for all I know it may be part of the secret sauce but for me I am skeptical of any analysis that fails to factor it in or dismiss it entirely.

CBs view gold as money and some % of the people on the street or other countries and cultures view silver as money as store of wealth and if that is the custom then that is what it is a store of wealth, not saying that gold is not the universal store as itulip defines it but silver has it's place and use. Offer me $5000 silver for my used car or equivalent paper money and I would take the silver for me it's money.

[shiny!]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

I just want to thank Adeptus and rogermexico for such an informative debate. It's impossible to get the right answers unless one first asks the right questions. These are great questions- I really appreciate the discussion.

[bart]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Thanks Bart

How about the same graphic that goes for 5 or 10 years instead of 10 months. Maybe that would tell us something, as it seems to me this jsut shows the CME playing catch-up to the 200% price rise.

And are we to believe that limiting leverage to merely 9:1 instead of 13:1 is why silver is now off 40%?

Not arguing with you here, as who can argue with a picture that has no comments attached?

Sure - if you have the historical margin data or a link, I'll extend the chart. I don't have data prior to late 2010 and am, as usual, time crunched.

One point that's frequently missed is absolute move size per day or short period of time. The daily move last Friday for example translated to about $34,000 which was way larger than the maintenance margin (not shown), putting the actual COMEX owners at substantial risk if the specs can't meet a margin call.

The basic reason I made the chart is to show that there are very real facts behind margin changes (which ZH and others don't always cover), not to say that there aren't any "special moments" with margin changes.

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Thanks Bart

How about the same graphic that goes for 5 or 10 years instead of 10 months. Maybe that would tell us something, as it seems to me this jsut shows the CME playing catch-up to the 200% price rise.

And are we to believe that limiting leverage to merely 9:1 instead of 13:1 is why silver is now off 40%?

Not arguing with you here, as who can argue with a picture that has no comments attached?

[bart]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Hi rogermexico,

Thanks for the rebuttal



Wrong question! The quesitons are:
Why are they raising margins AFTER the price goes down?
Why are they leaking information of margin hikes which results in the prices going down?
Why do position limits apply to everyone EXCEPT the largest speculators of all? (i.e. JPM)

OK, I am not saying there are no "anomalies" in this or any other market. With regard to "wrong question" let me just say that I take a completely pragmatic approach to investment and trading.

My indifference to the questions that you might ask reflects the fact that I don't ask questions I have never found profitable, not that I am naive about motives in the market.

being skeptical of individual companies and their management? useful.

investing based on theories about short term price manipulation?

I've never made a dime trying this in either direction. I am not saying no one attempts to manipulate prices, I am saying these efforts always ultimately fail and are not actionable enough to trade on even if they "work" in the very short term. Fears or hopes about price manipulation with large fungible commodities are just not very tradeable for any INVESTOR. There are exceptions for traders - the commodity bubble of 2008 is a good example, but as you can see that did not last - oil returned to a more fundamentally based price later on.

What IS actionable is when large actors drive prices UP, and they likely will fall later - a pump and dump - you can earn unexpected profits by selling at the top - silver.

But as far as long term suppression, just look at gold. How effective could price suppression be long term if gold has gone from 270 to 1500 in a decade???

Fair enough, and that is precisely what I am getting at. What exactly ARE those underlying dynamics. The ones I see stated strike me as too broad-stroke and may not continue to remain accurate going forward. Silver to remain below ~$30 until 2014? I have some serious doubts!

Have you read all of EJ's commentary? It seems pretty clear to me. Gold is held and accumulated by central banks as the fourth currency. The current macro picture, with an unpayable debt overhang as a legacy of the FIRE economy, makes it likely that there will be loss of faith in fiat currencies and eventually re-monetization of gold. Not silver, but gold. Silver was $7-9 in the last deflationary downdraft, so a price of "only" $30 in an inflationary environment seems plenty high if you think about it. Perhaps the bubble price of 48 has distorted your perspective?

The point is not that silver is going down ($9 to $30 in 5-6 years is not down), it is that gold is going up more for different reasons, and silver should have never been $48 in the first place

I didn't question gold. But I would ask the exact same questions regarding silver (except for the central banks accumulating it, which only china is rumoured to be doing so in relatively small quantities as compared to gold).

You can ask any question you want. But that does not make the answers useful. Silver is more towards the industrial metal end of the spectrum and has recently come down from a bubble high. I don't own any, but might look again in the low 20's. Even then, I would not likely buy silver unless the gold/silver ratio was very favorable on a historical basis - 60:1 or more.

Let me be more clear. I have to call iTulip on their *future forecast* of silver (not their past forcast ).
My congrats to you (rogermexico & iTulip) on all your excellent timing! :-)

Timing matters when time matters. I bought some more gold for the first time in well over a year at around 1750 - not too happy about that right now! But it's better than paying 1900 and if you think, as I do, that the long term price of gold may eventually be more than twice this amount, it makes very little difference in the long run. OTOH, with silver I sold it because it seemed likely there would not soon be another chance to do so - so time was important for silver in a way it was not for gold.

I would not view EJ's silver forecast as a trading tool so much as guide to allocation.

Yes, I do agree, and I do admit that the noise is affecting my judgement... however, I also think the noise seems to be getting louder and louder and after a while I am unclear as to which events/variables have the *MOST* influence over the long term trend of silver, and that is precisely what I am trying to get clarity on and am asking iTulip to clarify.

Cheers,
Adeptus.

Well maybe EJ will pipe in here, but I think he would just direct you to his forecast, which at least to me looks quite plausible as a guide to the relative investment attractiveness of gold vs silver.

[Adeptus]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Hi rogermexico,

Thanks for the rebuttal

But CME margins hikes merely adjust the leverage allowed to keep it constant and actually inhibit speculation. When have they ever raised margins not in response to a price rise? The CME is protecting counterparties and acting responsibly by doing so, if you think about it.

Wrong question! The quesitons are:
Why are they raising margins AFTER the price goes down?
Why are they leaking information of margin hikes which results in the prices going down?
Why a few months go did Western Exchanges increase margin hikes at the same time Asian decreased margin hikes on the same globally traded product?
Why do CFTC position limits apply to everyone EXCEPT the largest speculators of all? (i.e. JPM)

This just all reeks of manipulation. And you can call it 'noise', but over the long term trend, if none of this occured, just how much higher would silver be today? Let me tell you... a heck of a lot higher. ;-)

EJ's call worked because he understood the underlying dynamics driving silver vs gold. That he did not need to account for pseudo-events like margin hikes is precisely why it worked as it was not based on such noise.

Fair enough, and that is precisely what I am getting at. What exactly ARE those underlying dynamics. The ones I see stated strike me as too broad-stroke and may not continue to remain accurate going forward. Silver to remain below ~$30 until 2014? I have some serious doubts!

Look at the current situation and hand-wringing over gold. Do you think anything fundamental has really changed with gold? Are central banks no longer accumulating? Is the massive debt overhang that will be inflated away- eventually deflated against gold - suddenly gone?

I didn't question gold. But I would ask the exact same questions regarding silver (except for the central banks accumulating it, which only china is rumoured to be doing so in relatively small quantities as compared to gold).

Adeptus said: "I have to call you on it"
RogerMexico replied: And you can think I am full of it because I only used the "factors" of understanding the difference between gold and silver and using the absurd proletarian enthusiasm for silver as a contrarian indicator. I had no margin hikes or unknowable "black swans" accounted for in my model : )

Let me be more clear. I have to call iTulip on their *future forecast* of silver (not their past forcast ).
My congrats to you (rogermexico & iTulip) on all your excellent timing! :-)

Understand the fundamentals of what is happening and don't be distracted by the noise.

Yes, I do agree, and I do admit that the noise is affecting my judgement... however, I also think the noise seems to be getting louder and louder and after a while I am unclear as to which events/variables have the *MOST* influence over the long term trend of silver, and that is precisely what I am trying to get clarity on and am asking iTulip to clarify.

Cheers,
Adeptus.

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Depends on the context you use - I would be more impressed If he had called the 20% drop in gold as I have 25% of assets in silver and 75% in gold. Was gold overbought(bubble) relative to the current economic environment? If so then he missed the gold call completely.

http://www.zerohedge.com/news/shangh...lver-margin-20

Multiple margin hikes this year on both gold and silver especially with a margin hike with silver well off the highs along with discussion of actually closing the silver market makes it seem less of a fundamental market call and more of a call on market manipulation.

Perhaps the silver supply is not there? Ever increasing measures to control the price "to protect the investor" suggests to me the market is breaking down.

And this margin increase thing is just nonsense. Go back and calculate CME margin requirements relative to the commodity prices. No change.
Margins have to increase with the price and it can't be done in a daily continuous fashion.

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Depends on the context you use - I would be more impressed If he had called the 20% drop in gold as I have 25% of assets in silver and 75% in gold. Was gold overbought(bubble) relative to the current economic environment? If so then he missed the gold call completely.

http://www.zerohedge.com/news/shangh...lver-margin-20

Multiple margin hikes this year on both gold and silver especially with a margin hike with silver well off the highs along with discussion of actually closing the silver market makes it seem less of a fundamental market call and more of a call on market manipulation.

Perhaps the silver supply is not there? Ever increasing measures to control the price "to protect the investor" suggests to me the market is breaking down.

Your objection implies that the 20% decline in gold and the now 40% decline in silver have the same meaning. At the time silver was sold, gold was only 1500, so if you had swapped them out you would be UP 7% after avoiding a 42% loss - so could have preserved all your silver profits and added to them by 7%. If gold stays at 1600, silver now needs to go from 28 + to 51 for you to break even if you still hold it.

Perhaps it was important to predict the silver decline because it was predictable, and the same thing that made it predictable is the reason it was to be avoided - you would permanently lose money by not avoiding it.

With gold, maybe there is no need to predict it, and it was unpredictable - both for the same reasons. It was not a bubble, and unless you sell at the bottom of the correction, it is not costing you any money as it will come back and eventually go much higher.

Of course EJ did predict that gold could correct to 1100 earlier this year, so it seems foolish to assert that this is any kind of surprise.

I think EJ appropriately treated both gold and silver - the first is a long term hold based on fundamentals and the the latter was a trade that should have been exploited when it could have been.

I don't want EJ to waste time trying to trade in and out of gold, I want him to tell me when to sell all of it and buy something else. The fact that the silver opportunity was offered as a one-time bonus (whether anyone paid attention or not) should not attract complaints that you are not getting a gold trading service here. That seems unfair to me.

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

FRED, any chance you can explain which variables are considered when you generate these silver charts? I ask because, at this time, the governments/IMF/CME/Central Banks (etc) intervention in markets is so dramatic, that I'm left wondering how can anybody predict anything accuratly and *be right for the right reasons*?

For instance:

1) How does your model account for CME margin hikes (that by the way, happened again over the weekend in the Shanghai exchange) that have an immediate downside effect on PM prices (gold included it seems).
2) How does your model account for mass influential events such as the European crisis, when iTulip has written very little about it? Although you have written about the China and USA ones.
3) How do you account for influential events such as mini black swans? Or large market-wide black-swans for that matter.

Perhaps iTulip looks at these events as symptoms of larger influencial trends, rather than variables to attempt to include in calculations? If so, can you then share which influencing factors/variables you do include? You can of course, claim it as *iTulip Secret Sauce* and I would respect that, but if you can share parts of it, I (and others) would appreciate it. I have no time personnaly to try to figure out competing models, so my intent here is just to understand how iTulip understands the silver market so I can make a decision as to what degree I should consider your silver forcasting. I have a lot of respect for iTulip's forcasting capabilities in nearly every other area, in part because you guys write a mini-book thesis on how you arrived at your conclusions. For silver however, I'm not yet convinced of your projection capabilities. Being right once, isn't good enough for me. Especially when there are few details explaining your projecting thesis.

For instance, in your article in this thread you give 5 reasons: (paraphrased)

1) Gold/Silver ratio
2) Silver in a temporary bubble due to accelerate in price exceeding that of gold
3) Too many poorly informed investors in silver. The stadium is packed, it was empty ~10 years ago.
4) High volatility implies a turning point either down or up. iTulip bets on down.
5) (Ommitted, not related to silver price projecting)


If all iTulip uses are just these 4 factors (it seems very doubtful to me, considering every other detailed and well thoughout article you guys write), then I have to call you on it. It strikes me as over simplistic to use in creating price projection charts that will remain accurate over a longer period of time.

Thanks in advance,
Adeptus

It seems to me the premise in your question is that all these "factors" are things you see as ultimately determining the price of silver.

But CME margins hikes merely adjust the leverage allowed to keep it constant and actually inhibit speculation. When have they ever raised margins not in response to a price rise? The CME is protecting counterparties and acting responsibly by doing so, if you think about it.

(I have to say I find it amusing that the same internet writers who worry about "failure to deliver" at the comex think it is a nefarious conspiracy for CME to limit the leverage used in the same market, which helps ensure that positions are covered! Which is it??)

You might be spending too much time with ZH and Turd Ferguson ; ) And "events" are more often just post-hoc justifications for price action driven by real fundamentals. "Events", like TA, "work" in the short term because traders and other actors think they work or expect them to work.

EJ's call worked because he understood the underlying dynamics driving silver vs gold. That he did not need to account for pseudo-events like margin hikes is precisely why it worked as it was not based on such noise.

Look at the current situation and hand-wringing over gold. Do you think anything fundamental has really changed with gold? Are central banks no longer accumulating? Is the massive debt overhang that will be inflated away- eventually deflated against gold - suddenly gone?

It is indeed such a "simplistic" analysis, focusing on a few powerful if not deterministic factors that drive the gold price long term, that allows any of us who hold it to do so with confidence, and not freak out about trivia like margin hikes or the current correction which, whether driven by hedge funds raising cash, or even fed driven proxy price suppression, cannot be anything but temporary.

"I have to call you on it"

Well then I guess you can "call" me on it too, as I sold 100% of my silver at 48.50 based on an analysis similar to EJ's that it was a bubble. (I put most of the proceeds into gold at around $1495 - the differential is now 50%). And you can think I am full of it because I only used the "factors" of understanding the difference between gold and silver and using the absurd proletarian enthusiasm for silver as a contrarian indicator. I had no margin hikes or unknowable "black swans" accounted for in my model : )

Understand the fundamentals of what is happening and don't be distracted by the noise.

[tastymannatees]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

EJ explained his thinking in numerous threads. Everything else is hot air. It was a bubble.

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof."

Depends on the context you use - I would be more impressed If he had called the 20% drop in gold as I have 25% of assets in silver and 75% in gold. Was gold overbought(bubble) relative to the current economic environment? If so then he missed the gold call completely.

http://www.zerohedge.com/news/shangh...lver-margin-20

Multiple margin hikes this year on both gold and silver especially with a margin hike with silver well off the highs along with discussion of actually closing the silver market makes it seem less of a fundamental market call and more of a call on market manipulation.

Perhaps the silver supply is not there? Ever increasing measures to control the price "to protect the investor" suggests to me the market is breaking down.