Danger To The Commodity Markets

Just a week ago gold and silver were well placed to begin a new uptrend and while they are still are, we have over the past week witnessed severe testing of - and erosion of - support at a critical level that is leading to rapidly increasing downside risk.

What could have caused this deterioration in the technical picture? In addition to the obvious (and related) reason of dollar strength, the specter of major government intervention to cool commodity markets is raising its ugly head. Faced with mass uprisings around the world by exasperated citizens whose anger about rising energy and food prices is boiling over, governments are under extreme pressure to take action to alleviate the situation. For those in power political survival and the maintenance of privelege are absolute top priority, and nothing spurs politicians to action like rioting hordes threatening to storm government ministries and palaces and drag them out into the street. So, short of mowing down the masses with machine guns, a tactic which quite often backfires (no pun intended), they have to take some concrete measures to accede to their demands.

Given the above we can readily understand why governments and politicians are now actively looking around at ways to cool the commodity boom that involve the minimum cost and inconvenience to themselves. Never mind that the boom is driven by real shortages, short-term expediency and survival are the name of the game. Thus it is that they are looking around for convenient fall guys and scapegoats and as a result commodity speculators are starting to find themselves in the crosshairs. Big speculators are buying thousands of futures contracts in commodities, sometimes extending years ahead, and stashing them away, and are therefore obvious targets. The CFTC (Commodity Futures Trading Commission) recently fired a warning shot across the bows of commodity speculators by proclaiming that commodity markets are not geared to have large funds hoarding thousands of contracts in grains and other essentials. This is really serious stuff because the CFTC has teeth and can step in and slash the contract size per account dramatically, which would really pull the plug on the commodities boom, at least temporarily. Once commodities plunge as a result, governments can then turn around to their populations and say - “Look, we fixed it - aren’t we great?!” The fact that this amounts to a kind of Stalinist intervention and price control won’t bother them any, even though the end result of their actions will probably be rationing of various commodities and lines at gas stations - for the commodity boom has been and is being driven by real shortages, that are best corrected by the price mechanism.

As speculators ourselves it is vitally important that we take this scenario on board, for if they go ahead and do this - and it is now a fast growing probability - or even if they simply jawbone about doing it, which they have already started to do - we could see a devastating meltdown across the commodities spectrum. So, how do we deal with it? - by appropriate speculating of course. We are not in the business of “freezing in the headlights” and allowing ourselves to be squashed flat. In the light of this scenario and the increasing downside risk we will now examine the gold chart.

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Clive Maund, Diploma Technical Analysis
[email protected]
www.clivemaund.com

Copiapo, Chile, 13 June 2008