Big Squeeze Is On In Gold and Silver

By: Rick Ackerman
Rick’s Picks
Tuesday, December 7, 2010

Gold and Silver swept all obstacles aside Monday, pushing already steep rallies into hyperdrive. Even a firm dollar failed to check the buying spree. At the opening bell, we were looking for Comex February Gold to surge to at least $1425; however, by day’s end it had done even better, rallying $24 to peak intraday at 1429.40. And although March Silver fell 11 cents shy of our minimum projection of 30.465, there was such power behind the nearly $1.00 rally that the target seems all but guaranteed to be reached during the night session. All of this must have come as bad news to technically oriented bears who saw a head-and-shoulders top forming in February Gold. Look at it now (in the chart below) and you’ll see that the last two days’ price action have transformed the pattern into chopped liver.



We hesitate to break out the bubbly at this point, however, because the steep pitch of bullion’s ascent is manifestly unsustainable. This implies that it won’t be pretty when the move swoons into a correction. Even so, in the days ahead, Rick’s Picks will try to provide Hidden Pivot benchmarks that long-term investors and swing traders can use to hedge bullish exposure in precious metals. We are somewhat exposed ourselves via an 800-share stake in Silver Wheaton (SLW) that was showing a paper profit of $21,376 at yesterday’s high, 40.99. Our forecast has been calling for a minimum 41.65 in the stock, but it has gotten there more quickly than we’d expected, requiring a likely adjustment today or tomorrow. Still, certain widely followed gold stocks appear to have room to move, assuming a 622.78 projection for the Gold Bugs Index (HUI) materializes. The index topped yesterday at 591.71, driven by a 10-point rally, but the Hidden Pivot target at 622 implies a further five percent before HUI is due for a rest.

Bullion’s Anti-Bulls

Bulls should keep in mind that there are some powerful players with a compelling interest in seeing gold throttle back. Chief among them are bullion bankers who make billions of dollars by lending gold that they themselves have effectively borrowed for nearly nothing from the U.S. Treasury. These players have always been able to keep a lid on gold by manipulating “paper” gold in futures markets. However, with the buying frenzy starting to feed on itself, odds are growing that some very large buyers, including such sovereign entities as Russia, China, India and Saudi Arabia, will be eager to take delivery on futures contracts rather than simply rolling them forward. The futures exchanges, presumably at the behest of the U.S. government, have been known to change margin rules in mid-game to put the kibosh on uppity buyers. In this case, however, the buyers are not mere speculators; rather, they are central banks and sovereign funds with enormous exposure to dollars. For that reason, we shouldn’t expect them to be come discouraged merely because U.S. futures exchanges have increased margin requirements for precious-metal contracts.

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Dan