Posted at 3:40 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Short term profit taking did not last very long last evening and early this morning as dip buyers wasted little time in making their presence felt. Technically, this is quite positive as it indicates growing confidence on the part of the bulls and growing apprehension on the part of the bears. Last evening it had appeared that the bears were going to beat gold back down towards $780 but the upward surge in the Euro and the rally in the equities over the CITI bailout news was too much for the gold shorts. Amazing what a few billion dollars sprinkled hither and yon can do for a reflation trade.

I should note here that gold priced in terms of British Pounds shot to a new all time high today. The PM fix came in at 546.875 – that was not only the highest PM fix ever, but it was also higher than the previous high AM fix. Is it any wonder that at 3:00 AM, CST, when London traders were fully awake, that Comex gold exploded higher shaking off the early profit taking that occurred in Asian trading. I will try to get some charts up this evening of gold priced in various currencies as a point of reference as it has been a while since I have done that.

Open interest in gold did see an increase in Friday’s strong upside day; however, given the size of the move higher and the huge volume, the change in open interest of an increase of a bit more than 3,000 contracts suggests that my thoughts on Friday were correct – namely – a huge amount of shorts from the spec side were squeezed out. The move above the $780 level took out their buy stops and also brought in some of that money which has been sitting on the sidelines. Long side specs need to make sure they do not forget that a winning strategy to beat the commercial shorts in this market is to stand for delivery and not just play the paper game. Take the gold away from the warehouses if you want the real metal in possession as well as depriving the bears of their ammunition. They came back to play about 30 minutes prior to the close of pit session trading and bopped it down $6.00 just to make a statement. Don’t forget where their Achilles’ heel lies. Without the physical metal in the warehouse to back them, they are huffing and puffing and can only bluster.

Technically, gold has smashed through the 50% retracement level from the October peak in very convincing fashion. There looks to be some light resistance in place near the $830-$835 level. Above that is even numbered resistance near $850 and then $880. Downside support is light near $810, stronger support following that near the $790 level and much more significant support now moving up to $770.

The HUI and the XAU are showing much improved looking price charts at this point in the trading session. The HUI’s 50 day moving average has been hit in today’s trading and is serving as upside resistance. The 50 dma must be taken out to turn the technical pictures firmly in favor of the bulls. If the HUI can then go on to break downsloping trendline resistance near the 250 level that should seal the deal and put the bulls back in charge. First it needs to close above horizontal resistance near 225.

The delivery picture for November gold continues to show Bank of Nova Scotia as the main stopper of size. There were a total of 75 deliveries issued early this AM with BNS taking 46 of them. Morgan issued another 20 with Prudential being the largest seller today and issuing 51. The December contract will soon be entering the delivery period, so if you want gold in December and do not have a long position, you will  be able to enter Monday of next week.

Regarding the Dollar – the USDX had been showing signs of negative divergence for some time now as all of the technical oscillators were showing definite signs of waning momentum with the move higher in the USDX not being confirmed by the indicators. Selling resistance has proven to be quite fierce near the 89 level with the Dollar unable to take out that level and maintain its footing above there for long. The breakdown in the Dollar in today’s session confirms that divergence has been valid; however, I would want to see two consecutive closes below the 85 level to confirm that a top is in the USDX. The broad Dollar Index that I track has not been as weak as the USDX. That might change however with today’s general failure. I prefer to see both indices confirming the other.

With the kind of wicked volatility we have seen in these markets, confirming much of anything in these markets is at best a bit tricky and at worst, a fool’s game. Simply put, news of another failure elsewhere could prompt a whole new round of liquidation all over again with the Dollar getting another temporary lift as a result. Still, with everything going in its favor from a deleveraging standpoint and  redemption-related repatriation from abroad, coupled with massive Chinese purchases of US Treasuries, the fact that the Dollar could not plow through the 89 level and on to 90 is most telling.

The weakness in the Dollar is providing the lift across a broad spectrum of the commodity markets this morning. All of the grains are getting a very strong boost as shorts cover and new longs move in on the idea that the weaker dollar will provide a desperately needed boost to our ag markets. While some have been cheering the surging dollar, US exporters have been cursing the rally coming at a time when they really needed the business from abroad. A stronger dollar combined with credit tightness has been killing US grain and farm exports of late.

Crude oil has put in a nearly $6.00 swing from its session low to its current session high with the liquid energies of course seeing corresponding moves higher in price. Nat gas is higher as well with the cold weather helping to further buying from specs already in the mood to buy tangibles. Copper, platinum and palladium all putting in decent sized gains today with silver in particular having a banner day. If silver can clear 10.80 and maintain a price above that level, it has a chance at making a trending move higher.

Bonds are getting dumped today with weakness associated with the surge in the equities. Interestingly enough, gold has been outperforming bonds as the safe haven play for the last couple of trading sessions. In my opinion, this is because the yields on treasuries are simply too low for those looking to protect their wealth given the fact that the US is cranking out immeasurable sums of paper to throw at all the problems breaking out like a good case of Poison Ivy.

The Euro-Yen cross is as expected, strongly higher today, with “risk” back in vogue as the Japanese Yen gets dumped. How fickle are thy lovers Oh coin of the rising sun! the first sign of trouble they will come running back to you however.

The rally in the US equity markets has brought the emini S&P into the 10 day moving average. While the rally from the recent low  has been quite impressive, in the larger scheme  of things, a rally in a bear market back to the 10 dma is not really saying much. The 20 day stands near the 895 level with the 40 day at the 939-940 level. To have even a prayer at turning the longer term chart pattern more friendly, the S&P would need to take out the 50 day near 992. 

Click chart to enlarge today’s 12 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

November2408Gold1230pmCDT

Posted at 2:00 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

1. The bailout begging bowl program will continue to grow according to the US Federal Reserve using the plural of trillions. 
2. The financially Democratic approach, which taxes the haves and uses fiscal stimulation, will be building roads, schools, and financially securing major employers.
3. The combination is out of control while it will produce lower tax revenues. Increase taxes on the haves only means more attorneys to reduce the taxes of the haves. The real taxpayer in the US is the average family.
4. Confidence will be lost as all plans FAIL.

U.S. Approves Plan to Help Citigroup Weather Losses
By ERIC DASH
Published: November 23, 2008

As part of a rescue agreement with federal regulators, Citigroup will effectively halt dividend payments for the next three years and will agree to restrictions on and review of certain executive compensation, it was announced on Monday. The bank will also put in place the Federal Deposit Insurance Corporation’s loan modification plan, which is similar to one it recently announced.

Federal regulators announced late Sunday night that the government had approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank. President Bush said on Monday that more such rescues could be arranged if they became necessary.

In pledging similar assistance, President Bush said, “We have made these kind of decisions in the past, made one last night, and if need be we’re going to make these kind of decisions to safeguard our financial system in the future.”

Speaking from the steps of the Treasury Building with Secretary Henry M. Paulson Jr. beside him, the president said Mr. Paulson was working closely with the transition team of President-elect Barack Obama, and that the new president would be kept informed.

More…

Posted at 1:52 PM (CST) by & filed under General Editorial.

Dear Friends,

I am repeating this small missive because with the trillion dollars worth of more funds promised to financial institutions this morning by the Fed (which means the Obama Administration) plus the upcoming huge Fiscal Stimulation to create jobs, hyperinflation cannot and will not be avoided.

The spin is that in order to transmute hyper liquidity into hyperinflation you must have an improvement in business conditions. This is totally FALSE. History declares that hyper inflation comes from a loss of confidence followed by a sequence of events as outlined at the close of the missive.

Prior Article:

1. Hyperinflation takes birth and is currency-visible during major economic upheavals. There is NO historical truth that business recovery is a necessary criterion to transmute massive increases in money supply into hyperinflation.

2. What has been the major cause of the transmutation of massive liquidity into hyperinflation has been one form or another of Quantitative Easing combined with a loss of confidence in the inflator.

Quantitative Easing does not sterilize its offspring – violent inflation. We will see this offspring not in the far future but in 2009, 2010, 2011 and maybe much further.

It is akin to the Japanese Sci-Fi out of the 70s titled “The Green Blob That Ate the Earth.” It just grew and grew until it consumed everything.

For the moron financial TV hosts claiming that major inflation is well down the road because inflation requires a business recovery to occur, tell them to review:

Angola 1991-1999
Argentina 1981 – 1992
Belarus 1993 – 2008
Bolivia 1984 – 1986
Bosnia – Herzegovina 1992 – 1993
Brazil 1986 -1994
Chile 1971 – 1981
China 1948 – 1955
Georgia 1993 -1995
Germany 1919 -1923
Greece 1943 – 1953 At the high point prices doubled every 28 hours. Greek inflation reached a rate of 8.5 billion percent per month.
Hungry 1944 – 1946
Israel 1971 – 1985 (price controls instituted)
Japan 1934 – 1951
Nicaragua 1987 – 1990
Peru 1987 – 1991
Poland 1990 – 1994
Romania 1998 – 2006
Turkey 1990 – 2001
Ukraine 1992 – 1995
USA 1773 – not worth a Continental
Yugoslavia 1989 – 1994
Zaire 1989 – present (now the Congo)
Zimbabwe – 2000 to present. November of 2008 – inflation rate of 516 quintillion percent

From http://en.wikipedia.org/wiki/Weimar Republic

The steps to hyperinflation are and have throughout history always been quite simple:

1. This is it.
2. It is now.
3. It is out of control in terms of the size and constancy of fiscal and monetary injection in world liquidity.
4. Loss of general confidence in paper assets.
5. Hyperinflation

Please understand how important it is for your knowledge of economic history, and therefore why this missive is repeated and emailed to those who have expressed their interest in closer contact.

Have you really considered the following:

I have no doubt that $1650 will come. My concern is not that it will not happen, but that I am much too conservative in my long-term price objective held since 2000.

If major banks can be torn apart how can we have faith in the small local institutions that hold most of your ready cash?

When I said "It is Out of Control," it is not something that I take lightly. Never in 49 years in finance have I seen a set of circumstances so challenging to the man in the street.

What I am getting at is a simple question. Are you prepared? You have heard us talk repeatedly on removing financial intermediaries between you and your assets, but the time has come for us to recommend going one step further:

Do you have a true-custodial-ship account?

Even if you think you do has your counsel read the agreement and blessed it?

Hold enough cash at your household to last you a month or two. It may be largely unnecessary for the majority, but what do you have to lose?

If your bank should fail this will save you a lot of grief in the short term. If they do not, you still have all your cash that can easily be deposited back into your account.

Respectfully yours,
Jim

Posted at 8:41 PM (CST) by & filed under In The News.

Dear CIGAs,

Major banks don’t fail, they just fade in another.

Plan to Rescue Citigroup Begins to Emerge
By ERIC DASH and GRETCHEN MORGENSON 5:12 PM ET

Federal regulators were considering a new rescue for Citigroup on Sunday, a step that could mark a third leg of the government’s broader efforts to bolster the nation’s financial industry, according to people briefed on the plan.

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup. The banking giant has been brought to its knees by gaping losses on mortgage-related investments.

If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue. The Treasury Department initially proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions.

The plan for Citigroup was still under discussion on Sunday afternoon, and it was unclear exactly how the arrangement might work. One question is how Citigroup and the government would determine the level of losses that the bank itself must bear before the government steps in. Another is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or the Federal Deposit Insurance Corporation.

Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, which are instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders, since they would not immediately dilute the value of their investments as much as preferred stock.

More…

 

Jim Sinclair’s Commentary

All that is required is the reinstatement of the up trick rule and enforcement of the rules against naked short selling.

New push to curb short-selling
Miriam Steffens
November 24, 2008

COMPANIES whose stocks came under heavy attack last week from short-sellers are hoping that a meeting of international sharemarket regulators will bring some respite, having so far unsuccessfully lobbied Canberra and the market watchdog in Australia.

The chairman of the US Securities and Exchange Commission, Christopher Cox, said on Friday he would convene a telephone conference of international regulators tonight to discuss "urgent regulatory issues" dealing with the sharemarket meltdown, which sent America’s S&P 500 down 8.4 per cent last week and prompted a 7.5 per cent slump on the Australian sharemarket.

"In addressing turbulent market conditions, it is essential not only that regulators act against securities law violations, including abusive short-selling, but also that there be close co-ordination among international markets to avoid regulatory gaps and unintended consequences," Mr Cox said.

The talks would also look at whether recent steps to reduce manipulative short-selling, such as temporary bans, were effective.

The meeting comes after industry groups and companies targeted by short-sellers in Australia started lobbying the chairman of the Australian Securities and Investments Commission, Tony D’Aloisio, and the Minister for Corporate Law, Nick Sherry, last week.

More…

Jim Sinclair’s Commentary

This is the definition of out of control.

Obama readies with massive US rescue package
Anne Davies, Washington
November 24, 2008 – 7:49AM

President-elect Barack Obama is considering a possible $1.1 trillion economic stimulus package in a bid to create or save 2.5 million jobs as soon as he takes office on January 20.

Senior Democrats today revealed they were pushing Mr Obama to massively up the ante on the $US61 billion rescue plan already rejected by the Senate and President George Bush.

The emergency package is being worked on by Mr Obama’s economic team and senior members of Congress, as economists warn that America now risks the far more serious prospect of a very deep recession and falling prices, similar to the Great Depression.

A formal lannouncement on the package is expected today on Monday US time.

Over the weekend several senior Democrats delivered broad hints about the scale and scope of the new President’s plans, in a round of television interviews designed to reassure the US markets before they open on Monday.

Charles Schumer, the senior Democrat from New York and Joint Economic Committee chairman, told US ABC television that the stimulus package needed to be between $US500 billion ($800 billion) and $US700 billion ($A1.1 triillion).

More…

 

Jim Sinclair’s Commentary

Recall your history classes and "Manifest Destiny." These early tests of the new President can get ugly.

Russia president, warships to Venezuela to counter U.S.
Sun Nov 23, 2008 2:24pm EST
By Frank Jack Daniel

CARACAS (Reuters) – Warships, nuclear power, arms sales and perhaps cooperation on oil prices — Russia’s President Dmitry Medvedev is in Venezuela this week with an alarming sounding list to wave under Washington’s nose.

The U.S. government dismisses the importance of Medvedev’s visit on Wednesday to meet Venezuelan President Hugo Chavez and the deployment of several Russian warships for joint military exercises with Venezuelan forces in the Caribbean. It says Russia’s weak navy is no threat and downplays its rivals’ blooming friendship.

But OPEC-member Venezuela is Russia’s first firm ally in the Americas since the Cold War and Moscow sees ties to Chavez as a way to answer U.S. influence close to its borders in the Caucasus.

Russia’s aim to grow its Latin American presence may be hurt by falling oil prices and Barack Obama’s U.S. election win, which could help the United States regain influence lost in the region during the unpopular presidency of George W. Bush.

Still, Chavez has made a career of opposing the U.S. "empire" and he welcomes a heavyweight partner like Russia as an alternative to ties with his main oil client Washington.

More…

Jim Sinclair’s Commentary

It is out of control.

Events Turning Violent In Iceland
by Eric deCarbonnel
Saturday, November 22, 2008

The Guardian reports that Icelanders demand PM resignation, clash with police:

Icelanders demand PM resignation, clash with police
Reuters, Saturday November 22 2008

REYKJAVIK, Nov 22 (Reuters) – Thousands of Icelanders demonstrated in Reykjavik on Saturday demanding the resignation of Prime Minister Geir Haarde and Central Bank Governor David Oddsson for failing to stop a financial meltdown in the country.

It was the latest in a series of protests in the capital since the financial meltdown that crippled the island’s economy.

Hordur Torfason, a well-known troubadour in Iceland and the main organiser of the protests, said the protests would continue until the government stepped down.

"They don’t have our trust and they are no longer legitimate," Torfason said as the crowds gathered in the drizzle before the Althing, the Icelandic parliament.

A separate group of 200-300 people gathered in front of the city’s main police station demanding the release of a young protester being held there, Icelandic media reported.

Police in riot gear used pepper spray to drive back an attempt to free the protester during which several windows at the police station were shattered. The protester was later released after a fine he had been sentenced to pay was paid.

More…

Posted at 8:38 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

First Iceland, then Ukraine, Romania, Lithuania and now Ireland! The UK, France and Italy are not far behind!

Best,
Ciga Big Tatanka

Bailout for Bank of Ireland
Aine Coffey
November 23, 2008

THE Irish government has agreed to take part in a €3 billion (£2 billion) bailout of Bank of Ireland that will be led by private equity. The deal would be the first state aid for an Irish bank.

This week a number of private-equity groups will make proposals to BoI. A condition of the government cash injection will be that new investors are locked in for a set time to ensure they don’t try to sell quickly and make a big profit.

Names already linked with a potential investment include Cardinal Asset Management, an Irish investment firm, Sandler O’Neill, Texas Pacific Group and JC Flowers.

Ireland was one of the first countries to respond to the credit crisis with a guarantee for bank liabilities worth some €440 billion, but until now it has not bailed out or nationalised any banks, and they have not raised equity themselves.

More…

 

Jim,

Gold has held up remarkably well despite the fear and pessimism. Humans tend to fear that which they don’t understand. The enemy of fear is knowledge. If the dollar is indeed headed to 0.52, the USDX to gold ratio has a technical target of at least 0.015. This suggests a gold price north of $1650. Something you have suggested as a possibility more than once.

The public really has no idea.

Regards,
Eric

Posted at 10:40 PM (CST) by & filed under General Editorial.

My Dear Extended Family,

Things are now "Out of Control."

This international financial crisis is now out of control as the world asks if the USA has two presidents, one president or no president at all.

It would appear that Paulson is in financial control with Bernanke as his second.

I warned you by personal email long before the statement was proven totally correct that “This is it.” That was followed by “This is it, and it is now.” Many people laughed it off.

This is it, and it is now.
Now it is out of control.
Now we enter the Collapse of Confidence period.
Then we begin the Weimar Experience.

It has all hit the fan, and still the absolute majority have no clue. The OTC derivative dealers broke the system into millions of pieces of glass. This broken glass cannot be put back together.

It is heart rending to see a picture of GM autoworkers holding a prayer meeting for their retirement funds. The retirement money was never funded. It is a lost hope. This is another responsibility the government has undertaken that is going to go wild.

Those of you still in freeze frame are headed for lines around your bank. Your bank will likely be acquired by another bank that also is in deep trouble.

The US dollar, like a leaderless company, will lose its respect and therefore value.

In order of importance the following MUST be done unless you want to be one of the suffering masses that will be all too visible this winter:

1. You must have your assets held anywhere they are in true custodial-ship accounts. That type of account at a bank or broker states clearly that the assets held there are not on the balance sheet of the host financial entity. Those assets are clearly segregated in your name. This must be reviewed by counsel to be sure you have what you think you have. Don’t cheap out. All you have is depending on the validity of true custodial-ship accounts.

You cannot know all the banks are broke, however I feel ALL banks are broke because finance is an intertwined system that if visible would look like a spider’s web. Problems on the top will materialize all along the web. Therefore the singular most important step you must take is the establishment of a true custodial-ship account.

Do not assume you have this type of account unless a competent attorney reviews the account papers.

2. I am extremely concerned about those of you who persist in holding certificates for gold rather than holding the actual metal either delivered to you or held for you in a true custodial-ship type account. The scams out there in gold are plentiful. The only way to avoid these scams absolutely is to have your gold in your own possession.

Every other means of holding gold is steps away from perfection. Some will be ok, but many will not.

3. Why would anyone fail to either take paper certificates or order their financial agent to make direct registration book entry at the transfer agent? In most cases you only have until year-end to accomplish this strategy.

4. Withdraw from ETFs.

5. If you carelessly keep large assets with your broker you are as mad as a hatter. The FDIC DOES NOT have the money to guarantee all they are undertaking. Withdraw excess money constantly from any net broker. If you are so stubborn that you think you can trade to insure yourself when your funds are not making money while still getting your money that counts you are nuts. Admit to yourself you are nothing more than a gambling addict in a downward spiral.

6. Leave no gold or coins with any coin dealer.

7. If you can withdraw from your corporate retirement plan do it.

8. Withdraw from credit unions.

9. Withdraw from all money market instruments.

10. This is it.

11. It is now.

12. It is out of control NOW.

The next two months are going to be shocking, but nothing compared to what you will have to experience in 2009.

Respectfully yours,
Jim

Posted at 8:25 PM (CST) by & filed under In The News.

Dear Friends,

What makes you feel that internet brokers are immune to failure?

Battered E*Trade banking on government funds
Fri Nov 21, 2008 5:15pm EST
By Jonathan Spicer

NEW YORK (Reuters) – The troubles at E*Trade Financial Corp (ETFC.O) have worsened and now hinge on whether it can secure U.S. government funds that would bring some relief to its book of bad mortgage loans.

Shares of the discount brokerage tumbled below $1 to its lowest price ever this week, indicating that investors think chances are slim it will secure the $800 million it applied for under the Troubled Asset Relief Program (TARP) rescue program.

Competitors, including Charles Schwab Corp (SCHW.O) and TD Ameritrade Holding Corp (AMTD.O), have said they are loath to bid for the smaller and now very cheap company, but have made no secret they covet E*Trade’s brokerage business, which has kept it afloat despite the drag of its mortgage business.

Roger Freeman, a Barclays Capital analyst attending a business update hosted by Schwab this week, said E*Trade’s existence "depends on whether it gets the TARP."

E*Trade’s survival probably hinges more on whether its customers continue to drive growth, according to analysts. But after a string of quarterly losses, the TARP funding is vital for the near term. But there are serious doubts the company will qualify alongside larger banks whose collapse could further shake a weakened U.S. economy.

More…

Jim Sinclair’s Commentary

This is a sad, but not that far from the truth if you simply put in some famous names for the financial pirates.

There is no better equation for a global Weimar

* SOMALI PIRATES APPLY TO BECOME BANK, AIM TO ACCESS TARP.
* PAULSON: TARP PIRATE EQUITY IS AN ‘INVESTMENT’ – WILL PAY OFF
* KASHKARI SAYS ‘SOMALI PIRATES ARE ‘FUNDAMENTALLY SOUND’ ‘
* MOODYS UPGRADES SOMALI PIRATES TO AAA
* SOMALI PIRATES IN DISCUSSION TO ACQUIRE CITIBANK
* FED OFFICIALS: AGGRESSIVE EASING WOULD CUT SOMALI PIRATE RISK
* FED AGREED NOV 2 TO TAKE ‘WHATEVER STEPS’ NEEDED FOR SOMALI PIRATES.

Jim Sinclair’s Commentary

The following is yesterday’s three bank failures. How is the FDIC going to guarantee GE debt instruments?

From: http://www.fdic.gov/bank/individual/failed/banklist.html
PFF Bank and Trust, Pomona, CA
Downey Savings and Loan, Newport Beach, CA
The Community Bank, Loganville, GA

FDIC Seizes Three Banks, Expanding Loan-Relief Effort
By Binyamin Appelbaum
Saturday, November 22, 2008; D01

Federal regulators seized three banks last night, including Downey Savings and Loan Association, a large California mortgage lender, expanding what is by far the most expensive crop of bank failures in modern American history and indicating that the pace of failures is increasing.

The Federal Deposit Insurance Corp., which took control of the banks, said holders of about $1.9 billion in Downey mortgage loans who have fallen behind on their payments would now be eligible for reduced monthly payments to help them avoid foreclosure. The unprecedented move in connection with a bank failure expands the agency’s controversial loan-modification program, which is opposed by other parts of the Bush administration.

Downey, with $12.8 billion in assets, is the third-largest bank to fail this year, after Washington Mutual and IndyMac Bancorp. All three institutions were large mortgage lenders focused on the California market and regulated by the Office of Thrift Supervision.

The failure was not a surprise. The company said in a securities filing last week that it expected to be seized by regulators, a highly unusual confession that underscored its desperate straits. Downey was a leading originator of alternative loans called option adjustable-rate mortgages, which work like credit cards, allowing borrowers to pay less than the full amount due each month. As with credit cards, many people borrowed more than they could afford, and default rates on the loans have soared.

Another bank seized last night, PFF Bank and Trust, is also a California thrift, with $3.7 billion in assets. Its bad loans were made mostly to residential developers.

More…

Posted at 9:47 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

This week’s Commitment of Traders (COT) report gives us the details of the ongoing liquidation occurring at the Comex which has seen open interest drop to a meager 289,700 contracts as of the end of the reporting period from a peak that once reached 593,953 back at the beginning of this year in January. A washout of that magnitude is simply enormous. You would have to go back to June 2006 to see open interest in the gold at these levels.

One way I prefer to look at this is to say that more than 50% of the players who moved towards gold over the last 2 ½ years are gone from the market. What makes this even more interesting however is in June 2006, front month Comex gold was trading close to $585. This past Tuesday, with the open interest at the same level as that last week of June 2006, front month gold was trading at $730, a full $145 higher. Clearly, the rate of short covering that has occurred during this liquidation cycle was at a much higher rate than the rate at which these same shorts were put on. In other words, the shorts were more eager to get out than the longs were which is really saying something when we consider just how much hedge fund deleveraging and index fund redemption related selling has been occurring. When you have reports of unprecedented demand for gold bullion, shortages in the spot market, mints closing down sales, etc., as a short in the paper market, you simply no longer have any ammunition with which to bolster your side of the argument. You realize that you are flirting with the devil since the only thing you have going for you is long liquidation and that in and of itself cannot last indefinitely as even a paper market must eventually align itself with the real fundamental world. That alone is sufficient reason to take your profits quickly and do not tempt your luck. Greed that results in overstaying your welcome in a winning trade has done in many a trader and cut short their career. We saw today what happens to shorts who overstay their welcome in a market in which the fundamentals are pitted solidly against their positions.

Back to the details of the COT report for gold – The fund net long position actually registered a very small increase this week but this is not because of new buying on the part of the trading funds but rather due to a very large amount of short covering on the part of those funds who had decided to attack gold from the short side. They covered 6158 shorts against the liquidation of 5288 longs by their counterparts.

The commercials are more interesting – the bullion banks (the commercial shorts) did very little short covering this week compared to what they have previously been doing. They have been covering more than 10,000 shorts each week for some time now – this week they covered a piddly 801.

Clearly if you want to know who was doing the price capping at the $750 level last Friday, this Monday and this Tuesday- look no further than this group! Unfortunately for them, today they got buried as the buying from panicked short side specs along with new buying overwhelmed their line in the sand at that level. I expected them to try to make a stand at the $770-$780 level but the market ripped through that level without even missing a beat and ran all the way to $800 before the bullion banks could regain their footing.

What is important to note now is that gold has tripped several technical indicators into a “buy” mode and has also taken out several very important technical resistance levels. Things of such nature generally bring in technical based buying and with open interest so low and so many players having pulled out to sit on the sidelines, there is the potential for quite a bit of buying to come into the Comex should these folks decide to play that game again. I am most anxious to see the open interest numbers from today’s session that we will get Monday morning to see what might have transpired today. I do hope that we have seen an end to the drop off in open interest in gold as it is simply not possible to sustain any rallies for long without more new buying coming into the market. Maybe, just maybe, we have reached that point where the dreadful liquidation is over.

In the meantime, do not let down your guard or grow complacent because of a one day victory over the shorts. If you want to see a lot more of this, then continue to acquire the gold from the Comex warehouses by standing for delivery and taking it out of the warehouse. Nothing will unnerve the shorts more quickly and do more to undercut their confidence than to strip them of the metal and force them to come up with more of it to make good on deliveries. “Stand and Deliver or Go Home” should be the rallying cry of the longs to the shorts.

Technically front month Comex gold is now above the 10, 20 and 40 day moving averages. It closed right on the 50 day moving average. Both the 10 day and the 20 day have now turned upwards which will catch the attention of the trading funds. Next week will be both interesting and crucial especially since it is a holiday shortened trading week here in the US and that can bring added volatility as players move to the sidelines for a long vacation. We are also approaching that time of the year in which many traders simply close down their books and take off until the beginning of the New Year. That too brings a drop off in liquidity so there is potential for even more wild swings as we move into December, as if things were not already enough to give one a good case of vertigo.

 

Click here for today’s Commitment Of Traders charts with commentary from Trader Dan Norcini