by Bill Downey     Price Analysis of Gold and Silver
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Technical Analysis Trading Gold, Trading Silver/ analysis By Bill Downey providing key turning points & charts for investors and speculators in Precious Metals Trading, and Precious Metals Markets

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Gold getting ready for a good sized move

20 Apr 2015 2:30 PM | Bill Downey (Administrator)

Charts and analysis follows the article.

Is The Global Financial System On The Brink Of Collapse?
By Dave Kransler

April 17, 2015

A reverse repurchase agreement, also called a “reverse repo” or “RRP,” is an open market operation in which the Desk sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.  

Last week’s article headline: IMF tells regulators to brace for global ‘liquidity shock’ 

The financial news spin-doctors are attributing Friday’s abrupt sell-off to a report of a Bloomberg terminal outage and to a report that China has expanded its list of stocks available for shorting.   This explanation for the plunge in stocks globally is so absurd it almost leaves me speechless.

I have been postulating since mid-December that the strange volatility we've been experiencing in the markets – combined with the most intensive effort I've ever seen by the Plunge Protection Team (the Fed + the Treasury’s Working Group on Financial Markets) to prop up the stock market and keep a manipulative cap on gold – is occurring because there’s is a massive derivatives melt-down going on behind the scenes.  The volatility reflects the turmoil and the market intervention in stocks and precious metals reflects the effort to keep the problem covered up.

But a good friend and colleague showed me graph this morning that shows my thinking about a derivatives collapse may be correct.  (GoldTrends has put the gold price in the graph).
 
Gold Vs Reserves

That graph shows the Fed’s Reverse Repurchase Agreement operations with foreign Central Banks and big foreign banks.   A reverse repo is an operation which generally is thought of as being used as a tool to remove short term liquidity from the banking system.  However, as you can see from the timing of the first massive spike up, which occurred in early September 2008, it is an absurd notion to think the Fed would have removed liquidity from the system. (Note:  the second spike up in 2011 coincided with the Fed’s “Operation Twist” which was essentially a huge QE extension disguised with a “twist” – but nonetheless was done to keep the system from collapsing).

No, instead the massive operation was conducted to INJECT Treasury collateral into the global banking system.  Treasuries are used as collateral against derivatives positions.  It’s in a sense margin collateral for the big boys.   When an entity (typically a bank or hedge fund) takes on a derivatives bet, it needs to post collateral to protect the counterparty from a decline in the value of the bet.  Treasuries are the de rigeur collateral, although the ECB now allows everything for collateral except loans to lemonade stands.

When the value of the derivatives bet declines because the value of the underlying asset declines (think:  Greek debt, oil debt), more collateral has to posted.  Eventually, the market runs out of collateral and there’s a collateral short squeeze.  The use of hypothecation exacerbates the situation by several multiples.  Please note that Zero-hedge intermittently reports big spikes up in Treasury settlement fails.  This reflects the extreme shortage of collateral.  When collateral has been posted but not hypothecated, it can be called and used for settlement.  When that Treasury has been hypothecated by the custodian of the collateral, it becomes harder to call, especially when it’s been hypothecated several times.  Big spikes up in settlement fails occur.

Circling back to my postulation that a massive, ongoing derivatives melt-down has started, as the derivatives lose value, more Treasury collateral has to be posted.  When the situation becomes extreme, collateral isn't posted and counter parties begin to fail, especially if the counterparty can’t come up with the cash needed to remedy a derivatives bet gone bad.   My bet is that the Greece situation ignited the problem and the collapse in the price of oil threw millions of gallons of napalm on the situation.

The reason I believe this explanation is correct, is from the graph above.   We know that in 2008 we were told that a big derivatives accident started in Europe and spread to the U.S.  Lehman filed for Chap 11 on Sept 11, 2008.    We also know that AIG and Goldman experienced a massive counter party default collapse in September 2008 that was remedied thanks to rather explicit lies circulated by Ben Bernanke and Henry Paulson about systemic collapse if TARP wasn’t approved.

A reverse repo can be looked at as tool to remove liquidity from the system OR as a tool to inject Treasury collateral into the system.  We know the Fed has been “testing” a new Reverse Repo system since mid-2013 that take Treasuries from its “SOMA” holdings (SOMA = the Treasuries the Fed purchased with QE) and use them for reverse repos, including reverse repos with MONEY MARKET FUNDS and foreign central banks/ Too Big To Fail banks.  Nothing happens by accident and that spike above shows us why the Fed was “testing” a new reverse repo system.

The only reason the Fed would need to inject massive amounts of Treasuries into the global banking system is because there’s an extreme shortage.  A massive derivatives accident requiring massive amounts of collateral to be posted has developed.  If Treasuries are not available to post as collateral, while at the same time a massive amount of hypothecated (Treasuries out on loan, several times over) collateral fails are occurring, it will cause the banking system to seize up.  The giant spike up shown in the graph above is occurring because the Fed is engaging in an enormous reverse repo operation in order to prevent the global financial system from collapsing.

Remember I suggested some time ago that the elitists like give us a warning before something bad is about to happen.   As my colleague John Titus states:  “the true elite aristocracy are polite criminals – they consider it gauche to flush the toilet while we’re in the shower without giving us a heads up.”

This is why the IMF issued this warning Thursday for the financial media to publish:

The so-called ‘flash crash’ on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as “a powerful amplifier of financial stability risks.”    

This was the article headline last week ---- IMF tells regulators to brace for global ‘liquidity shock’.

I guarantee that the reason for this is unequivocally NOT because the Chinese Government is letting the public short a few more stock issues OR because Bloomberg experienced a widespread terminal outage.  

(end of article...& thanks to Dave Kransler)

Gold Technicals

Gold Chart

Gold is on the verge of making a decisive move as it has meandered at this long term trend line for 5 months near 1200.  A weekly close below 1158-1163 would favor new lows and a move below the trend line.   On the upside, we need a close above 1225 (resistance) then 1234 (200 day moving average) and then a monthly close above 1255-1272 to neutralize the downtrend.   The bottom line is a good sized move is highly favored to transpire soon.  The direction has not yet been decided.   The numbers above are the guide.  

Gold long term trend line from 2005 price chart

Gold Short term

Resistance is the 1212-1222 area and 1234-1244.  Support is the 1182-1192 area and 1166-1172.  The trading range of 1175-1225 should be coming to an end soon.  We need a close above 1225 to favor higher prices.  Resistance would then become 1234 (200 day average), and 1239-1244 (Fibonacci retracements).  The perfect scenario would be for one more drop to the lower dual support channel line and then a reaction higher towards 1240.  The lower line test would be best as an intraday test affair with gold holding the 1172-1182 buy the closing price of the day.  We have noted for a good three weeks now that 1225 on the upside and 1172 on the downside were the levels that had to be taken out to confirm a move.   As you can see, we are still in that holding pattern.  Once decided, a good move is due to develop.   A close below 1188 today would favor lower prices on Tuesday.  It takes a close above 1212 to begin to favor the bulls.
 
Gold price chart since 2014 low

Gold Cycles
The next cycle turn is due April 18th (plus or minus 72 hours).  That means that tomorrow (Tuesday) is the last day the cycle window is open.  Thus the next two week trend is about to get going.  If the rotation label is correct then gold should be making a cycle low and higher prices will be favored into the first week of May.  A close below 1158-1163 (below the lower channel line will suggest a cycle inversion is taking place and will favor a drop instead of a rally to May.  Odds are about 75% that we’ll make a low and move up.   Remember, odds are not absolutes, and although most of the cycles work, some do not.  Thus any probe to 1172-1182 that holds and closes back above 1192 should begin to favor we've made a low.

 Gold Cycles

Silver

Silvers new weekly low seems to suggest that prices may want to be making a low for April and a re-flex rally back to the first week of May could be in the cards.  A close below 1520 would allow for further drops.  With the global situation becoming unraveled we need to be very careful.  If we reach the lower channel line and reverse back up to close above 1609 in the next day or so, it would be the first clue that a two week bounce could ensue.

ANY BANK CONTAGION or GREEK PANIC news and the potential for silver to buckle must be respected.  The trend remains down but with the cycle turn due here, it warrants watching for a turn.  
 
Silver price chart



Technical Analysis :: Gold & Silver

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