The battle raging in the gold and silver market just completed another chapter. The ramp up facilitated by investment banks and the sell side of the market lured investors in by providing the perception that the FED has no other choice, but to expand its balance sheet by implementing an asset purchase program. The problem with the sale side of the house is that most of those analyst are not able to take a holistic dimensional view of the market. In addition, the goal of the sell side is to get you to buy what they are selling so they make their commission. In many cases there is a conflict of interest between you and the sell side of the house that often results in you loosing.

June first was when the ramp up started and everyone had an opinion on where the market was headed. Weak economic data was used by the sale side to build a case for balance sheet expansion by the FED without taking into consideration the political element required for taking such action. This pitch also found its way to the DOW as it too took off on June 6TH. Many investors were convinced as if they were given crystal balls to see the future. What they got was sell side bait that lured them into the lions den for a serious mauling.

You see the FED cannot take any serious action until the presidential election is over. It will allow the economy to suffer serious pain before taking any action to expand its balance sheet. Central planning requires extreme circumstances and public distress in order to implement its master program piece by piece. Some of research analysts saw this coming and many others didn’t as Ben Bernanke did a simple wash, rinse, and repeat of a vague strategy with no clear direction and the same time giving direction. The direction was here is what the trade will be for at least six months and the FED will provide cover for the bullion banks to cover their shorts.

When the market does not get what it wants there is a price to pay and despite the growing open interest and other signs to support a bullish market prices fell. Here is a look at the silver COT (courtesy of Clive Maund and Silverseek.com)

With Gold the story is a little different ( courtesy of Clive Maund and Silverseek.com). The short side is growing, open interest is far from bullish, and support at $1,500 dollars is being repeatedly tested. If gold breaks through the $1,500 dollar support level it will take silver with it.

The FED stated it will continue twisting or flipping bonds short for long in order to push interest rates down even further. This means the rally in the long end of the bond market will continue to rally until the end of the year where the FED will find out it has to continue purchasing bonds.

We will also continue to see weakness in the market as the gamblers are shaken out of the market and strong hands continue to accumulate on pull backs. Silver needs to hold the line at $27 dollars to keep from falling to $20 dollars where there is very strong support. The chart below points to the possibility of a big move at the end of the year after the election cycle is complete as the lack of balance sheet expansion by the FED means that markets will not get juiced up on currency debasement.

The gold market has a different sentiment. $1,500 dollars is consider cheap by many and us seen as a buy opportunity. As the stock market declines over the next few months due to the global economy slowing down we will see more deflation and gold may fine support as more investors realize the US bond market is a ponzi scheme manipulated by the FED. Europe is also another close element to watch as banks run out of collateral to secure funding from the lender of last resort the ECB. The ECB is already dropping collateral requirements for banks so it can collect more trash in exchange for fresh currency. The fight for gold will pick up speed when reality sets in and the Euro implodes from collapsing debt markets. Gold may very well hold $1,500 until QE happens at the end of the year and the rally will be something to see and everyone will notice.

I would look towards the last quarter of the year for the market to start pricing in QE once again as markets stall and fall from relying on real economic growth that is not there.

SM21