What’s going on with silver?
If you’ve been bullish silver, you might feel the same angst some investors have felt over the past two months.
But, according to one anonymous analyst from Simple Digressions, it may be time to look at the grey metal again.
“For the last two months the silver market has been sending very mixed signals. Its physical segment is, in my opinion, very strong now but the paper segment is not,” the analyst explained in a Seeking Alpha post Monday.
Laying out the facts
“In my opinion, these facts support a bullish thesis on silver prices. If the opposite thesis (bearish) were at play, the strong hands would not have been adding silver in such an aggressive way (it looks like they are in a hurry),” the author added.
According to his/her research, JPMorgan and SLV (or “strong hands”) have been “hoarding” silver since April 2017. “When nearly everybody was furiously selling silver, JPMorgan, and then SLV, were aggressively adding silver bullion to their vaults.”
But, looking closely at the paper markets, there’s another data point that sticks out to our anonymous analyst.
“According to CFTC, the so-called ‘Spreading figures’ are standing at their highest level since the beginning of the current bull market in precious metals (January 2016),” the post said.
What does this mean?
As so perfectly explained by our anonymous source:
“In other words, if a trader holds a long position in silver futures amounting to 10 contracts and, at the same time, he / she holds a short position in silver futures amounting to 10 contracts, such a position is reported as the spreading of 10 contracts.”
Even if the net effect of holding this ‘spread’ is neutral, the trader could choose different expiration dates – AKA managing risk. And, to our anonymous source, this just means one thing:
“[T]he most important thing is that a high spreading position means that a large group of traders is generally very uncertain about the direction the prices of silver are heading for. Hence, offsetting positions in silver futures. Last week the spreading figure was standing at 9.4%, which was the highest reading since the beginning of 2013.”
What’s more, total open interest in silver futures is close to its record as well. “It means that the silver paper market is overcrowded in the literal sense.”
Soren K. Group's Vince Lanci had this to add:
Silver had taken a brutal beating while Gold held its own relatively speaking. The gold silver ratio bears this out. We had warned that a failure to pierce $18.54 [Edit: HERE] would result in a $2.00 washout. But frankly it happened faster that's we thought.
Silver had outperformed gold until recently. So why the reversal? Lanci again:
I believe it is very simple. Silver's industrial component dragged it down partially unfairly in sympathy with Iron, cooper and other industrial metals. The base metal collapse in recent weeks that took silver with it was the direct result of China's successful maneuvering to remove froth and de-leverage those markets. Their goal was to purge speculation. They succeeded.
He added that this is consistent with past mini-cycles from China. And, consistent with the anonymous source's info we might add. So who are the physical buyers?
China is always waiting at the bottom to buy after orchestrating the selloff. Always. A market gets away from the Chinese government buy levels and they "raise margins", or force deleveraging to get the investor class to sell. And once it gets back to their levels, the government starts accumulating more.
Where are prices headed?
Who knows but even if we’re seeing silver back off from the 3-week high it hit yesterday, the metal continues to be in an uptrend.
But the bottom may be in for a while as long as Iron doesn't get ahead of itself again according to Vince
"This cycle has been going on for 2 years now. China creates the volatility that taxes traders and allows "smart money" to accumulate. Remember, unlike the west, China does not view Gold and Silver as a Giffen Good. They buy value. And they are buying now"
July Comex silver settled the day at $17.139 an ounce, down about 0.3% on the day.
Interactive chart HERE
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