While the jury is still out on whether David Rosenberg went bullish on equities just as the market topped out (Rosenberg certainly denies it), it is without doubt that in his note today to premium subscribers, in addition to some traditionally cautious and correct observations on the economy, the former Merrill strategist has "just said no" to silver. It remains to be seen if there will be another clarification note following this one should silver (and/or gold) resume the gradual roll higher (especially since with just 90 contracts traded on the HKMerx, the brand spanking new contract may need to lower margins to attract participation). Quote Rosie: "for now I think it is time to step back and adopt a more defensive and cautious posture towards the group...I would not recommend being aggressive in the commodity space until many of the clouds that have recently surfaced begin to part."
Of all the commodities, the chart of silver going into this current corrective phase looked the most asymptotic. As is the case in the markets, the harder they climb the harder they fall. But inevitably, support is found, and generally at the 200- day moving average, which in this case is $29 an ounce.
We went into this with pro-risk trades being fuelled by QE2, sky-high margin for equities, a general view that inflation was the correct trade and a sustained decline in the U.S. dollar. The net speculative long positions in the futures and options market for most commodities, including silver, did suggest that a squeeze on these longs could generate some outsized price action and it must be remembered that the market for silver is far smaller than it is for gold.
Plus, a lot of the risk-on trades were predicated on a sustained weak U.S. view, and while the greenback is in a secular bear market, it had moved into a huge oversold position technically and the net speculative short position had surged to a sufficiently high level that like silver, any shift here could trigger an outsized move and it has. Once the speculative shorts in the dollar and longs in several of the areas within the commodity space are squeezed out and the spot prices are realigned with the broad trend lines, it will be safer, in my view to accumulate. But in the interim, and knowing how commodity markets can behave for a period of months or quarters (2008-09 should not be forgotten), given their inherent volatility, we should probably expect to see a downswing sustained for the next several months. Beyond the technicals and the positioning, we also have to see how successful the Asian central banks are, especially in China and India, at curbing their heightened inflation pressures without upsetting their economic apple carts.
I am still a long-term commodity bull, and I think there will be a massive buying opportunity for those who are patient and have a view beyond 2011; however, for now I think it is time to step back and adopt a more defensive and cautious posture towards the group. On a positive note, the dislocations in the market have created interesting opportunities for alternative resource strategies, which focus more on relative value mispricing rather than outright direction. Moreover, if the six months after QE1 ended last year is any indication, we should be expecting to see a firm USD and some softness in the CRB index through the second half of the year. Being nimble will be crucial, as always, but I would not recommend being aggressive in the commodity space until many of the clouds that have recently surfaced begin to part.