The Gold Economy

Gold and silver markets have finally reverted to their normal behavior, as the CME Group (CME) has announced that additional margin increases and commercial shorts have increased their buying on the downside. This is good news because the federal government and banks are financing excellent opportunities for investors who are paying attention.

At first glance it seems that the commercial traders are the best on the street, as they have reduced their net short positions to 50,000 contracts in silver — about 25% of their peak short position two months ago. This is indeed impressive. However, a bigger picture view shows that the net commercial short position has fallen to levels seen in late July. During that time, silver has risen from $18 to $25, creating an estimated loss of $1.75 billion for the commercial shorts and an equivalent gain for counterparty long investors. While these traders can be commended for their tactics, their strategy of thrashing has proved to be pointless.

On the other side of the trade, bulls have won on multiple points. The recent correction has unwound sentiment and overbought technical indicators, yet gold and silver remain much higher than they were even two months ago. In addition, those wishing to buy more have been given another chance. It is much easier to accumulate profitable positions during corrections than while chasing prices higher. Silver could easily correct to $22 or even its breakout level of $20 before resuming higher. Gold could correct to $1,320 or its breakout level of $1,260 before resuming higher.

Traders who follow the actions of banks and governments — rather than words and positions — can see pristinely clear opportunities. Over the last two months, the Federal Reserve has begun to monetize treasury debt, and banks have increased their efforts to consistently buy as much gold and silver as they can. Nothing could be more bullish.

Disclosure: Long SLW, PAAS, SSRI.