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January 12, 2011

I think Gold, Silver and several other commodities will take at least 30%-40% hits between now and fall of this year.

This would translate into $400-$500 an ounce in Gold, or $40,000-$50,000 on the 100 ounce contract and $13,200-$16,500 on the 33 ounce contract.

On the way down, I think we will see at least one $100 down day and at least one $200 down week.

This would translate into $10-$12 an ounce in Silver, or $50,000-$60,000 on the 5000 ounce contract and  $10,000-$12,000 on the 1000 once contract.

Yes, these are big numbers but I haven’t just thrown them out there at random. Futures do routinely make 30%-40% contractions, and I assure you, in spite of all the hype and “logic” of precious metals climbing steadily ever higher, Gold is not some “super-commodity” that is immune to the normal tendencies of the markets.

With this newsletter, what I try to do is show you what goes into forming my opinions, and one major factor in my perspective has always been a review of what markets have done in the past…All the markets go up AND down, and while there are definite variations as to how that happens, whether you are talking Silver or Soybeans, the same moves (in size, velocity and timeframe) can be found over and over and over again. With this in mind, I just completed a study of significant downside reversals from new or recent highs in the hard commodity markets (no currencies, bonds, stock indices) during the last decade or so. What follows are some examples of what I observed…And I know this is overkill (76 charts) but my intention is to emphasize the point that all bull markets DO eventually reverse, and when they do, 20,30 or 40 percent declines within a matter of months are relatively common, or, as I said before, almost routine .WHATEVER the commodity, and HOWEVER “logical” or pervasive the bull market story may be, as I am forever repeating, this is all just a big mob psychology game and bull markets that END are as common as every night turning into day…I’d also add, my experience has absolutely been, the more popular the idea, the bigger and nastier the sell off that INEVITABLY does take place.

Here they are…I’ve set this up so they can be flipped through fairly quickly. And again, for brevity’s sake, these are just the traditional hard commodities, with even a few of those markets left out.

And if you know anything about the markets, you’ll understand that NONE of these reversals were even remotely expected by the trading masses…In every case here, I would offer it is virtually a certainty that the media and analytical community were unanimously looking for higher…and ever higher…prices.

 1-7-11july00corn.png1-7-11sept04corn.png1-7-11dec08corn.png1-7-11sept09corn.png

1-7-11may03wheat.png1-7-11may08wheat.png1-7-11dec08wheat.png1-7-11sept09wheat.png

1-7-11aug04soybeans.png1-7-11nov05soybeans.png1-7-11may08soybeans.png1-7-11nov08soybeans.png

1-7-11mar99soyoil.png1-7-11aug04soyoil.png1-7-11dec08soyoil.png1-7-11may01cotton.png

1-7-11dec03cotton.png1-7-11july04cotton.png1-7-11may08cotton.png1-7-11dec01cattle.png

1-7-11apr02cattle.png1-7-11feb04cattle.png1-7-11apr06cattle.png1-7-11dec08cattle.png

1-7-11jan02feeder.png1-7-11may02feeder.png1-7-11jan04feeder.png1-7-11nov06feeder.png

1-7-11jan08feeder.png1-7-11jan09feeder.png1-7-11june02hogs.png1-7-11dec07hogs.png

1-7-11dec08hogs.png1-7-11aug09hogs.png  1-7-11sep05coffee.png1-7-11may08coffee.png

1-7-11july99sugar.png1-7-11oct06sugar.png1-7-11may10sugar.png1-7-11dec02cocoa.png

1-7-11july03cocoa.png1-7-11dec08cocoa.png1-7-11may04oj.png1-7-11july07oj.png

1-7-11jan09oj.png1-7-11nov01lumber.png1-7-11nov04lumber.png1-7-11july10lumber.png

1-7-11dec01crude.png1-7-11dec06crude.png1-7-11dec08crude.png1-7-11apr03heat.png

1-7-11dec05heat.png1-7-11jan07heat.png1-7-11dec08heat.png1-7-11july01gas.png

1-7-11dec05gas.png1-7-11mar01natgas.png1-7-11apr03natgas.png1-7-11mar06natgas.png

1-7-11dec08natgas.png1-7-11mar07copper.png1-7-11dec07copper.png1-7-11dec08copper.png

1-7-11may04silver.png1-7-11july06silver.png1-7-11dec08silver.png1-7-11mar10silver.png

I took some Gold examples as far back as the last major top in 1980…

1-7-11apr80gold.png1-7-11feb81gold.png1-7-11jun83gold.png1-7-11apr88gold.png

1-7-11aug90gold.png1-7-11dec93gold.png1-7-11june06gold.png1-7-11aug08gold.png

I hope the picture is clear enough…When a futures market quits, it frequently does so in 20,30 or 40 percent chunks inside of 3-4 months (or weeks)…At any rate, that’s the way it always has been…and in this day and age, I don’t think volatility is going to be diminishing…

OK, So here is the present…Decide for yourself whether or not you think any of what follows makes sense…

As a trader, I long ago concluded that when Silver...the so called poor man’s Gold and NOT really that precious a metal…starts leading Gold on the upside (i.e. moving faster and bigger than Gold) it is a sign that the bull market is nearing an end…I therefore find it HIGHLY significant that Gold essentially reached this roughly $1400 peak in mid-October, and has since gone dead sideways, while during the same three months, Silver has erupted for another $6.00 or 25% in value, looking VERY much like the classic, but rarely seen, “blowoff top”. I have witnessed some CRAZY (even for futures) moves in Silver, even when it was trading in the $10.00 range, and I promise you, it could easily be right back where it was just 4 ½ months ago, which is an amazing $12.00 lower ($60,000 per 5000 ounce contract), faster than anyone outside the futures industry would ever think possible.

Here is a better look at what I am talking about…And I’d also reiterate, if silver was at $18.00 just 4 ½ months ago, there is NO reason why it cannot be back there in half as much time…As I keep saying, this is the futures arena, the most leveraged trading on the planet, and astounding (to outsiders) prices changes are as much the norm as the exception…

All I’ve shown you above are options, which I think are a superior vehicle to futures, but if the idea of using futures interests you, here is the approach I would recommend:

GOLD

Sell it now. Risk new highs which are about $45 away.

On the 100 ounce gold contract, with a $6075 margin requirement, and where each $1 move = $100, your risk is then approximately $4500. Every $100 move down will mean +$10,000.

On the 33 ounce Mini-gold contract, with a $2000 margin requirement, and where each $1 move = $33, your risk is then approximately $1485. Every $100 move down will mean +$3300.

SILVER       

Sell it now. Risk new highs which are about $1.60 away.

On the 5000 ounce silver contract, with a $10,463 margin requirement, and where each 1 cent move = $50, your risk is then approximately $8000. Every $1.00 move down will mean +$5000.

On the 1000 ounce mini-silver contract, with a $2093 margin requirement, and where each 1 cent move = $10, your risk is then approximately $1600. Every $1.00 move down will mean +$1000.

 

Importantly, in both markets, IF you are stopped out (meaning the market has made new highs) you should be mechanically (and psychologically) ready to short the market again if it reverses soon thereafter and returns to current levels…and once again place your stop over the highs. The logic here is the market will either make new highs and keep moving higher, or the move into new highs will represent one last false breakout and you HAVE to be ready to resell if necessary…even if you are selling it in the same place after having already lost money.

I have pages of notes I put together while researching these positions but will just keep my comments to a repeat of something I have said several times before: If you think the US and World Economies are going to fall apart, buy $1400 Gold. If you think the world currency system is going to implode, that we’re all going to be using gold and silver to pay for everything, buy $1400 Gold. If you think we’ll see hyperinflation (and let’s get straight about what that means…that maybe you’ll suddenly be paying $25 for a loaf of bread), buy $1400 Gold….And if you don’t think any of those things are going to happen, DO GET SHORT NOW. This IS a game guys…and you KNOW which side Wall Street (remember all those geniuses?) is on…

GLD, the world’s biggest gold ETF, now is the 4th or 5th largest owner of gold in the world, which should be a bearish signal in itself…Let’s be clear. All of the touted reasons for owning gold mean you are supposed to have actual possession of it…NOT a piece of paper, which is ALL you have if you own GLD or any of the myriad other precious metals ETF’s that are nothing more than brokerage industry creations to harvest more investor capital.

I’ve got a ton of other comments but enough said for now on the subject…I think $1400 Gold and $30 Silver are totally stupid prices…I think being short either of both of these metals could turn out to be one of the biggest trades ever. Yes, I’ve been wrong or maybe I’ve just been early…and maybe I’ll continue to be…But I think you get short this market….NOW…and stay short…in an almost no-matter-what sort of fashion…And believe me, I don’t just sit here and make any of these statements loosely…

During my now three decades doing this, I’ve tacked 12 personally developed above-all-else trading reminders on my walls around me. These days, after so many years, it’s rare when I add anything to that list…but this afternoon, in the midst of all this research, another one went up to aid me in my resolve…because this stuff does sometimes take a bit more intestinal fortitude than you were thinking would be necessary, and I Do think this trade has ENORMOUS (let’s say All Star) potential, no matter what, I want to be on it when it happens. My newest reminder (and they are always to the point) is:

WHEN IT PAYS, IT WILL BE BIG

I believe that, body and soul. If you are not on this and wondering where you might make a hit this year, do give it a look, and if it makes sense, do get on it immediately (and the trade that follows)…

And one last area of interest…

There are a number of agricultural markets that are basically in the stratosphere---And even though I spent quite some time short while they traded sideways (almost 2 years), then got long for a decent ride last year, I do again think they now have massive potential on the downside…In a nutshell, I am now going back to the short side of Soybean Oil AND Corn AND Wheat…in kind of a short the Ags portfolio…but I’ll save any discussion for a later newsletter. Here are a few charts in those markets.

That’s it…There are a few other markets in which I see major opportunities as we crank up 2011 but this is definitely enough for now…

Give me a call and let’s put some money to work…I may have my head totally turned the wrong way but I think this year has monster potential in more markets than I have ever seen…I’m ready, putting 2010 behind me, and firmly believe most of these trades are going to start working right out of the gate…

Let’s go guys…

Regards,

William

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