Silver goes POP!

In an earlier posting I’d said SLV was in a bubble and that it was not safe. While I’d expected it to take a bit longer to go POP!, the raising of margin requirements over the weekend has accelerated that. I had given a “heads up” in an even earlier posting, so I don’t feel too bad about the timing of the last one (Thursday night / Friday morning and without a lot of time to exit before this plunge day), but still, I’d figured it would be another week or so. My Bad.

So where are we know? IMHO, at the top and mid-pop.

Yes, as with all bubbles, it is always possible for The True Believers to overwhelm all reason and drive things up further. But that becomes ever less likely the further you go into the parabolic phase (and we were pretty far into this one…)

At the time that “Failure to advance” happens, the momentum guys leave the trade. Then when “professional shorts” are hitting a top “way hard” and cause a “spike down day” near a peak, you know that big money has moved to the other side.

Today the market opened with major sell orders. Someone was selling big. (IMHO, the folks who bought the protective puts behind their long silver positions which I speculated about in the last posting).

So what does it look like when things are in the middle of a top?

The Action Today

These are charts of SLV vs GLD. They are static captures at the end of the market day today. (Live charts are down below). You will want to click on these to get a clean view of them (as I’ve not taken the time to convert them to a jpg from the gif that Bigcharts hands you…)

1 May 2011 SLV vs GLD 10 day hourly chart

1 May 2011 SLV vs GLD 10 day hourly chart

First off, notice the ‘failure to advance’. Even toward the end of Friday we had the MACD crossover to the downside on a day trader basis. Second, notice how the SMA stack has gone into a ‘tangle’ (that I call a “topping weave”). Now we’ve also got a giant day long plunge on volume and with the price resolving to below the SMA stack. We want to see similar things on the 6 month daily chart in coming days to confirm that the run is over. At this point, it’s a “day trade basis correction” and with the long term trend still setting the rules of trade, but at a top, that reverses, and we ought to see the longer term trend set up confirm this reversal in the next week.

Also notice how the market opened up “Gap Down”. There was ZERO chance for a stop loss order to sell you out at the higher prices of last week. That is part of why I want to be “early out” in volatile markets like metals.

At this point, the “news flow” is informing a lot of folks that they just lost 10% of their “preservation of value” money… as they oh so slowly decide to bail, we could see even more “gap down open” days.

(The “typical pattern” is a “whack day” like this, a day or two pause for more pigeons to buy back in, then the Whale comes back for a round of relentless shorting. At that point it’s way to late to get out near the top. The best you can do is dump what you have as soon as possible even if it is down 15%… Which is why you don’t want to be getting into a bubble trade anywhere near a top.)

So I’d not be surprised to see tomorrow open up a ‘bit’, maybe even close about at the highs of today. But only if we get a “higher high” than prior days is it likely that this was a “one off” and not a “bear raid”.

Oh, and notice that MACD is below zero, mouth down, and red on top. DMI is red on top too. Negative day trade indications.

So from this point on, we’ll be looking at daily price bars on a 6 month chart.

Here are the 6 month daily charts:

1 May 2011 SLV vs GLD 6mo RSI MACD DMI

1 May 2011 SLV vs GLD 6mo RSI MACD DMI

Now we’ve got the “kink” in the black ADX line that I’d said was “missing” in the last posting. That pretty much confirms the trend higher has broken. Similarly the red and blue are setting up for a crossover. We’ve got MACD on this scale headed for a crossover to “red on top”. Not yet confirmed, but it’s a pretty strong setup. Furthermore, RSI has started “steps down” from over 80. It would take one heck of a run up to reverse that. It’s saying “out now”.

Price is not yet back at the SMA stack. In a profound run up, prices can come back to the blue line (24 or 25 day SMA line) and then head up again. This will not be a confirmed drop until prices are under that SMA stack (as in the 10 day chart above, but on this longer time scale).

1 May 2011 SLV vs GLD 6mo VWS

1 May 2011 SLV vs GLD 6mo VWS

On this chart, the lower indicator is the Slow Stochastic. It’s a faster trade indicator. It is clearly “mouth down” saying “trade out” (and for reasons I can’t possibly fathom, it has “blue on top” when saying sell… as that’s the silly color code that Big Charts uses for this indicator).

Williams %R has gone below the midline. That’s also a “sell” indication.

Now look at volume. Spectacular down volume today. Mild down volume on Friday. We are picking up volume to the downside. We now want to see a ‘mild up day’ in the next day or two, but where volume is weak to the upside and prices fail to reprise old glories. That is the signal that it’s all downside for a while (and a nice time to put on short, or to sell out of the long side of positions that were hedged with a protective put or “short ETF” neutralizing position leaving a net short position. At “toppy times” I’ll put on a protective short or put a neutralizing ETF position in place, then just sell out of the “side” that fails to advance in following days.)

OK, now on to some “live charts” so you can watch this unfold on future days.

Some Background Data

JJC   -  Copper
PPLT  -  Platinum
PALL  -  Palladium
GLD   -  Gold
SPY   -  S&P 500
ZSL   -  Silver "Double Short" ETF
SLV   -  Silver ETF
ZSL 2 x Silver Short ETF, 6 month chart with volume

ZSL 2 x Silver Short ETF, 6 month chart with volume

In the last posting I’d said:

Look at that spectacular ramp up in volume. Big money (and savvy money that uses things like “ultra short funds”) is starting to place big bets that silver has reached a peak.

It is even more spectacular today. That leveraged short fund is just smoking.

How about SLV?

SLV Silver ETF 6 month chart with volume

SLV Silver ETF 6 month chart with volume

Same chart as above, but this is a live version so will change over time.

Silver Related Tickers

This chart shows SLV vs PAAS a silver miner vs SLW Silver Wheaton, a silver trader. SLW has about 30% of the silver market (and SLV 45% or so). Notice how SLW is getting hammered too (and PAAS is down as well, so the miners are not immune to a plunge)

SLW Silver Wheaton vs PAAS a sliver miner, SLV Silver, and GLD gold

SLW Silver Wheaton vs PAAS a sliver miner, SLV Silver, and GLD gold

Last Thursday night / Friday morning I’d said:

The canaries are saying to get out of the mine.

IMHO, this is the “last call”. All we don’t know is when the paddy wagon shows up…

Now I’d say that the paddy wagon showed up today… Now comes all the running in circles, screaming and shouting…

This graph shows the various metals and currencies against the dollar. Their gentle rise is reflective of the drop of value of the US dollar. Notice how they are generally moving with about the same slope. (Though some more thinly traded metals, like Palladium, have much more volatility to the price and range more widely).

These graphs let you isolate the “silver bubble” part from the “dollar depreciation” part:

Currencies and Metals

Currencies and Metals

Now compare to silver:

Silver vs a basket of metals and currencies

Silver vs a basket of metals and currencies

The excess rise of silver vs ALL the others is indicative of the present bubble character.

Here you can see that the other metals and currencies are not justification for the silver bubble on a dollar depreciation basis.

OK, this posting is “MID Pop!”. We need prices on a daily tick chart to drop below the SMA stack, return from the bottom to the 50 day line, then drop away to the downside before we can call this a “silver downtrend” and declare the silver run up “over”. Until then, it’s a “correction” in a bull run higher. IMHO, though, this is the top and the “correction” will result in a “failure to advance” in some month or two at the next attempt higher. So if you enter a short here, be ready to leave it at about $40 / ounce. Then at the next time SLV gets to near these prices, prepare for the “last call time to short” on the way to a “rout”.

So for now it’s ‘correction’ trade rules. “hedge positions” and exit any shorts quickly on a 10 day hourly reversal to the upside. Reduce any long sides on a “hedged long” position and raise cash for a naked short later (at that return to the SMA stack from the bottom). For the truly brave, you likely have another shorting opportunity in a day or two. (Though, frankly, with the size of the volume in that double short ETF, I’d not be surprised if our “whale” just keeps hammering prices down…)

In Conclusion

I think it’s pretty clear now why I’m so cautious about metals markets, and especially when they are looking bubbly. When you can “wake up 10% poorer” at the open, you do NOT want to be trying to do a “work out” of that long position this late in the game.

Realize there is nothing to prevent tomorrow from being ANOTHER 10% down at the open.

What I’ve generally seen is a 1 or 2 day pause in these bear raids, they don’t have to keep doing that…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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20 Responses to Silver goes POP!

  1. Luís says:

    Hello Michael,

    Last week I was at the ASPO conference in Brussels. The thematics of minerals and rare earths supplies was boarded by several speakers. 5 years from now RFID tags alone will be using up 80% of the world’s yearly silver supply. Present silver reserves last mere 9 years at present rates of production.

    Anyone thinking silver is in a bubble is either mad or an economist.

    Luís

  2. NZ Willy says:

    Snap crackle *POP*, Chiefio — er, snap — crackle — … Darn, won’t stay popped. See you in the $60s !!

  3. SunSword says:

    Realize these factors however:
    (a) Like gold, silver is viewed as protection against a falling dollar.
    (b) Around much of the rest of the world, silver is still viewed as “money”
    (c) There is a big difference between physical silver (PSLV) and electronic silver (SLV) — you can expect to see distortions between the two going forward

    My assessment — as the dollar continues to depreciate, you will see physical silver continue to rise. Yes, there will be pullbacks, and 20% – 30% adjustments, but overall we are probably looking at $150/oz. physical silver by end of 2012.

  4. E.M.Smith says:

    @SunSword:

    The “falling dollar” only accounts for the portion reflected in the gold and currency baskets. I thought that was rather clear? For that to account for $150 silver, the dollar would need to drop to 1/15 it’s value of 6 months ago. That’s a bit “out of whack” as an explanation. The $40 price would mean silver buys 1/4 of what it did 6 months ago. Clearly not the case.

    THE defining characteristic of bubbles is that price can and does move to insane levels; so using the argument that you expect insane levels of price as a reason for this NOT to be a bubble is just ass backwards.

    @NZ Willey:

    As stated in the posting, it’s not “done rising” until price drops below the SMA Stack and returns to it from below, failing to advance through it.

    I know it’s hard, but please DO try to see these two things as separate items:

    1) My OPINION. When I say “I think” or “I expect” , those are opinions. Everyone is entitled to an opinion.

    2) Chart trend analysis and my “trade rules”. Those are simply non-emotive and non-subjective measures. MACD is either above zero or below… red on top or blue on top.

    So a trend analysis and comparison with the other tickers shows Silver WAY out of whack with everything else ( INCLUDING any dollar depreciation). That defines it as a bubble.

    I look at things like volume and say “In my OPINION” or “It looks to me like” we are in a top of a bubble mid-pop. That’s a synthesis of what I feel and think. It has much higher risk of being wrong as feelings often are.

    Now in this case, the technical analysis says that this IS a bubble. No doubt about it.

    Bubbles can go on “far longer than anyone expects”. That is a historical attribute of bubbles.

    I’ve gone on record as saying that prices could double from here. (They can).

    I’ve also said that in my opinion, they will not.

    AND, most importantly, I’ve emphasized that the RISK and the likely HIGH VOLATILITY are not worth the play.

    Today you saw evidence of exactly why. Opened gap down 10%. Hard loss, no stop loss order can get you out of it. Now you are in the “hoping game”. Hope that it goes back up tomorrow. Hope that it doesn’t drop more.

    That is a very painful game to play.

    I choose not to play it.

    Now for reasons I simply do not understand, making a RISK ASSESMENT that I don’t want to be in that volatile and risky a position and having the OPINION that it is likely sooner rather than later that we take a down tick, somehow that gores folks oxen.

    OK, now take a look at my “choosing an entry” rules (link at the bottom of WSW postings). They help you avoid buying at times like last week, just before a downtick, and they put you IN during a downtick that reverses. IF you choose to play a particular ticker. One of them is the rule stated above. That it isn’t a ‘down trend’ until price punches through the SMA stack and fails to get back above it. Until then the trend is assumed intact and the dowturn is traded as a ‘correction’ only.

    So my trade rules say:

    1) Bull run trend.
    2) Too late to enter now, wait for an “entry call”.
    3) Correction “due” (i.e. that entry is soon).
    4) Until ‘reversal’ conditions met, it’s just a correction.

    HOWEVER

    I’m not willing to play this volatile and risky a ticker. Why? Because the way volume is going it looks like it’s a way over extended bubble. Very likely to go down hard very soon. (i.e. that correction could be 40%).

    At no time does any of that say prices can not go to $60, or $120, or even $400 an ounce.

    It’s a statement about VOLATILITY and LATENESS IN THE TRADE. About it NOT BEING AN ENTRY and about RISK BEING WAY TOO HIGH.

    Now, if instead I’d been all lovey dovey with Silver last Friday, and my Florida Friend bought $10,000. He’d be down $1000 today.

    That’s what’s called “A Really Stupid Trade”.

    In the future, when price drops to the SMA stack, (and it IS a ‘when’, nothing rises forever), there will be a ‘reentry’ call. That is a risky reentry, as price can punch on through to below the SMA stack, so I usually put a ‘buy if touched’ above the price rather than an outright buy order. At that inflection point, we either return to the “established uptrend” or we drop below the SMA stack, return from below, and fail to advance. THAT is the moment when the actual “down trend” starts.

    As already stated.

    Several times.

    To quote from above:

    We need prices on a daily tick chart to drop below the SMA stack, return from the bottom to the 50 day line, then drop away to the downside before we can call this a “silver downtrend” and declare the silver run up “over”. Until then, it’s a “correction” in a bull run higher.

    So please read what I’ve said. I’d really rather not add you to the moderation queue too.

    It is a bubble. But that does not mean it is going to $5 nor does it mean it can not go to $100. It means it will move violently IN BOTH DIRECTIONS and it means that you must be especially careful NOT to enter a trade late in an upleg (and not enter one at all if you can’t stand 10% to 20% moves DOWN in a single day).

    So while I said it is my OPINION that this is the start of a “pop”, I’ve also said that per the indicators, all we can say right now is that it is a violent correction.

  5. P.G. Sharrow says:

    Gold and silver are at least twice the cost of production, Bubble for sure. The third one I have seen in my 64 years.
    Smart people are not pigs. Pigs get butchered. pg

  6. E.M.Smith says:

    Oh, gee, look at that… SLV down 6.2% again today…

  7. gnomish says:

    oh noes- i best get that 6$/oz silver ebayed pronto!

  8. R. de Haan says:

    Lot’s of rumors today about the big trillion + investors
    selling off their Gold and Silver stakes.

    At the same time talks about 4000 US dollar Gold!

    It’s all smoke and mirrors to pull the leg of the small investors.

  9. NZ Willy says:

    Thanks for your concern, Chiefio, and you’re right that the “hoping game” sounds painful, but you see I bought my silver back when it was $12 so I’m not too fussed about what’s happening. Not planning to sell anyway, for me it’s good coin in case our currency tanks. cheers.

  10. E.M.Smith says:

    @NZ Willy:

    I have a small stash of “bug out money” in silver as well. It is in the “never sell” drawer. Bought, IIRC, at about $4.50 / ounce. That is different from trading or investment timing…

    My concern, frankly, was all the folks being suckered into buying new silver at a bit under $50 / ounce. It was being “pushed” just about everywhere. I’d had some folks ask me if they ought to be buying some. (When it is ‘barbershop talk” it’s time to exit…)

    As we’re at $38 today (and down another 6% or so) that’s about a 20% loss in 4 days. (And, I might add, a long ways from that $60 you were expecting…)

    That is exactly the kind of plunge I was warning about.

    On the 6 month daily chart, we’re now at the SMA stack, we’ve got MACD “red on top” and “crossover mouth down”. DMI is “red on top” and ADX has “kinked” into a downward deflection. All as expected.

    At this point we are effectively at that $37 “price target” I’d stated as a likely “end of correction” point. At this point, I’d “go neutral”. The 10 day hourly chart does not yet have a ‘kink’ in the ADX line and is not saying “end the short” just yet, though…

    There is likely to be a bit more “overshoot” to the downside, but heck, no need to be greedy.

    There will also be a tendency for the short trader types to let a rebound happen. (Plucks the goose twice…) Also the chart swing traders will be exiting their shorts at the SMA stack and with a profit (price is touching the 48 period SMA line – most traders use a 50 period, so this signals just a touch early). So downward momentum often “pauses” at the SMA stack for “a while”.

    Not always. Sometimes the Mr. Fat Wallet just shorts things to ruin. It all depends on how ‘thin’ the market and how much they think they can get away with it. Silver being a very thin market, I could see it dropping more at this point. But I’m more interested in ‘bagging the gains’ than ‘being right about the exact moment’…

    So what OUGHT to happen at this point is a small drop below the 50 day SMA line, then a “wobble” back and forth for a couple of days, then a ‘re-short’ attempt to the downside. At that point, two groups will be in battle on the battle ground.

    1) Mr. Fat Wallet Short, trying to double dip the short push.
    2) Technical traders looking to reenter the long side on the “correction”.

    My “trade rules” would have me looking at the chart to pick a winner and trading with their likely direction.

    One that 6 mo daily chart, we’ve got ADX kinked, we’ve got DMI “Red on top”. We’ve got RSI over 80, then dropped. We’ve got Slow Stochastic with it pegged to the bottom (as it’s a strong trend). We’ve got Williams %R crossed over the midline and on the bottom and we’ve got MACD with “mouth down” and “red on top”. All saying “downtrend in force”.

    I would only trade the “long side” of that with a very fast swing trade or day trade. 10 day hourly or 5 day 15 minute tick charts. It’s a “stairsteps down” shape most likely and that means the “up days” are more likely to be “flat days” than an actual up.

    There will now be a LOT of “longs” looking to unload positions on any rebound up. It will be a ‘congested trade’ to try and exit a long position then.

    So what I would do is “wait for a trend resolution” before I’d enter a new trade. The easy short money is done, it will now be a “battle ground top” for a while, then will resolve to a new trend (either up some more, or further down, depending on who wins…)

    My OPINION is that it will resolve to the downside for a month or three, then resume an upward trend once it is back in line with the other metals and currencies. But that’s just an opinion. The charts will inform what the folks tossing money around are actually doing.

    At any rate, I hope this series on Silver has been illuminating on how to use charts to spot bubbles, how to position during a bubble, how to gain (a lot) from the “POP” moment, and now, how to handle the mid-pop money management.

    FWIW, that’s the kind of trade that is most hard to do, and most lucrative when done. Even if you NEVER make that trade, knowing how the OTHERS are doing it will save you from being their goose to pluck…

  11. NZ Willy says:

    All very illuminating, Chiefio, to which I’ll add that CMX increased silver margin requirements 3 times in the past 2 weeks, each one of which resulted in a multi-dollar fall. Now it is suddenly twice as expensive to invest in silver than gold — at the start it was cheaper. I have to wonder if there’s a connection between the big shorts and the decision makers on these margin requirements. Anyway, to my thinking, Siver will reach $100/oz not because it rises to that price, but because the dollar will fall to it. Inflation is now kick-starting, so we’ll see how parabolic *that* becomes. Cheers, NZW.

  12. E.M.Smith says:

    @NZ Willy:

    On a 2 or 3 year time scale, you may well be accurate in that prediction. One must remember to pick their time scale…

    On the 6 month – 1 year time scale, we’ve got a bubble captured mid-pop. Now we are in the “how low how fast?” stage.

    It will be followed, eventually, by a ‘retest’. If that fails, we are in a down trend for months to years. If it passes that test, we’re likely headed to $100 in a year. Until then, to quote one of my favorite folks “We don’t know what we don’t know” ;-)

    I’m quite happy to have helped a person or two avoid a 20%+ kick in the gut, and they can buy back in cheaper if the indicators show a ‘correction over’ circumstance…

    Trading vs “bug out money”…

    OH, and nothing unusual about exchanges playing with margin when they think a market is ‘bubbly’…

    It’s part of the landscape.

    There are laws saying the can’t be connected with the traders, but… lunch talk happens, you know…

  13. NZ Willy says:

    Oy, Chiefio, good call! Silver’s dropped to below $35 now, within a week of you raising the alarm. Not a worry for me, but others are sure jumping around like jackrabbits. The margin increases — 5 of them now — really put the boot in, sort of like changing the rules in the middle of the game, except it’s apparently S.O.P. You win our little debate, but my good coin will stay in my jars and silver will be back. Cheerio, NZW.

  14. E.M.Smith says:

    @N.Z. Willy:

    I don’t see it so much as “winning” as I see it as “learning to read tea leaves”… it’s a dark art to which I’ve tried to bring a bit of organization and analysis. (But it still depends on understanding how the human market manipulators are likely to act next).

    That means things like the “general rule” that it will go to the middle of the SMA stack are just that “general”. If the particular Mr. Fat Wallet who is doing this Bear Raid is particularly mean, or knows they have enough money to do it, they can drive right on through that point and keep on going. Potentially all the way to about $15. Not likely, but possible.

    And yes, margin games are common during “bubbles”. It’s one of the things you must worry about. That the Zebra Shirts will change the rules on you and whistle a penalty box for excessive “enthusiasm” on the boards…

    FWIW, I’m also quite certain silver will be back. It does have a great many special uses and it does have a decaying dollar under it.

    Frankly, one of my greatest frustrations in this series has been trying to get the idea across that it was all about the TIMING and not the STORY. That all the stories are likely to some degree or other valid and will support silver prices in the 5 year time scale, but that on a 6 month time scale they are just stories and nothing more… so the Bear Raid will happen and the bubble will be deflated. Only to form again some time later…

    At any rate, we’re at the lower Bollinger Band and it looks like pretty good support at the $30 point. Then again, we’re taking out 3 months of “spike up” in just a few days, so it may well overshoot to the downside if a lot of folks are just dumping. It will all depend on the panic level.

    So when it stops the drop, I’ll likely buy some then. Why? Well, all those stories still sound good to me! ;-)

  15. KevinM says:

    Chefio wins again.
    (Though that ten year bond 2x short is still dead on the vine).

  16. E.M.Smith says:

    @KevinM:

    I’ve got a tiny “marker position” only on the bond. Just enough to remind me to keep an eye on it. There was a very brief “counter trend trade” that came and went in a couple of days. Other than that, it’s just waiting for the Fed to decide it needs to do something with interest rates OR for the lenders to decide OR for congress to decide OR…

    But yeah, for now it’s “dead money” (so hanging in TIP and WIP has been better).

    I don’t usually post my “blow by blow day by day” trades as that time scale is just too hectic, but like to show how to read the charts so folks can decide for themselves even if I’m not posting what it says to do at the moment.

    @R. de Haan:

    Nice write up of both the old, and present, silver movements.

    Along with some insights into the players behind the scenes…

  17. R. de Haan says:

    @E.M.

    Yes, I had the impression you would like it.

    In the mean time oil has dropped and continues to drop at an incredible speed.

    In fact all commodities are down.

    In Europe they tell the public oil went down because Gadaffi offered to lay down his arms.

    The real argument of course is the state of the economy.

  18. R. de Haan says:

    I know I am a bit off topic here but here is a remarkable development which will have great consequences for the EU maniacs, the Euro and more important the repayment of Greek debt (which simply won’t happen) This is going to hit some banks and some governments really hard.
    http://www.spiegel.de/international/europe/0,1518,761201,00.html

    I however am thrilled.

    Fortress Europe is finally cracking up.

  19. E.M.Smith says:

    @R. de Haan:

    One of the hardest things to get folks to understand is that The Story is always interesting but never the driver.

    Price movements are a ‘discovery’ mechanism. The “Market Maker” wiggles the price back and forth and looks for where there is “volume”. They get a ‘cut of the action’ in either direction, so it is a volume seaking mechanism.

    Oil runs up because more folks are ready to buy on rising prices. Until they are soaked in oil and further rises don’t make more panic buying, but instead cause “demand destruction” as folks stop driving and flying. Then prices are run down to drive speculative long (owners) out of their positions to generate more volume in a ‘sell off’. This continues as long as more price drops cause more sellers to dump. Until the ‘weak hands’ are all empty. At that point further price drops do not make more volume. So prices start back up to try to coax some of those ‘strong hands’ who bought cheap to sell off some at higher prices…

    The result is a ‘wiggle’ back and forth around the ‘clearing price’. For some things, it’s a very tight wiggle. For others, it’s a very broad and unstable wiggle. (Elasticities of demand and supply along with the nature of suppliers and demanders inventory managment and a bunch of other factors drive this… but commodities are far more unstable than most. Thus the plethora of ‘price stabilization boards’ that try to ‘fix it’ …)

    And that, in a nutshell, is why charts work. They help you spot the “too high” run up and the “too low” run down.

    If the S&P 500 will rise, on average, a few percent per year, but has 20% wiggles, you know that the ranges are not stable and “reversion to the mean” must happen. The charts just give you a handle on “how far from median” things have got so you know when the bets are best…

    For oil, the OPEC folks et.al. periodically run the price up ‘way high’ to find out what the market will bear. When ‘demand destruction’ tells them the goal price, they back off and let demand rebuild, then “stabilize” prices at the optimum point for a while. So it runs up to $80, then falls back to $60, and stabilizes at $70 for a couple of years. Time passes… It runs up to $100 this time, drop to $80, then stabilizes at $90 for a couple of years. Time passes… It runs up to $120…

    There is an interaction with economic damage at the demand destruction point, and when in recession demand falls to the lower price point, so there is a bit of an economic cyclicality interaction too. But the basic driver is just cyclical ‘price discovery’…

    So OPEC let the price run up a bit on the Libya et.al. events. Found the point where the ‘recovery’ started dying, and demand destruction was an issue. Now they know America will pay $3.50 to $4 for gasoline. They don’t need to drop it back to $2.50 anymore, and can’t support $5. So we’ll likely end up at about $3.50 as the “new normal”… and be “happy about it”…

    Repeat in a year or three…

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