Tag Archives: silver market

Silver – Too Cheap to Sell, Too Expensive to Buy

The silver market has been remarkably quiet in the wake of China’s destruction of the gold market. This week, we’ll touch on a couple aspects, specific to silver that show while commercial traders have been buying this decline, it may be prudent to wait a bit longer before stepping in. Normally, I take a bottom up approach to putting these pieces together beginning with macro issues and finishing with trade details. This week, we’ll set the stage and then move from myopically focusing on the current setup before discussing the potential dangers of this viewpoint.

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Silver Still Has Further to Decline

Like many physical commodity markets, silver futures are still on the decline from their 2011 highs near $50 per/oz. This market had begun to find a base through mid 2014 when the Fed’s announcement to end Quantitative Easing sparked several commodity rallies. Clearly, this was premature in the market as silver, along with most of the other markets quickly found that its spark failed to catch and once again resumed its downward trend. The primary characteristic of this downward trend in silver futures has been the commercial traders’ consistent selling on rallies. This has been especially notable as these rallies have neared the downward sloping trend line that has capped them.

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Silver Decline Nearing an End

Our research for TraderPlanet this morning suggests that the decline in silver may be nearing an end which could spring the mother of all short traps. The weekly Commitment of Traders report has shown commercial traders are exceptionally bullish at these prices and the trends on the chart suggest that December silver futures may not reach their downside objective thus forcing many small traders and trend followers to finally exit their short silver positions.

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Gold and Silver Topping Out

The gold and silver markets have been perking up lately which happens to have coincided with the Fed’s talk of removing stimulus from the domestic economy. Logically, talk of higher interest rates has spurred interest in portfolio re-allocation towards gold and silver as investors attempt to get a jump on the beginning of a structural shift towards inflation. The result of this is that gold has rallied about 11.5% year to date and silver is up nearly 20%. Much of this rally has been technical in nature, as the markets have moved beyond some key chart points. Technical levels are always important in short-term trading. However, the fundamentals suggest that this rally may be petering out.

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Measuring the Metal Markets

The recent selloff in the metal markets has broken the sideways trading range they’ve been in for more than a year. We’ll begin by briefly recapping their recent history back to the 2011 high water marks. Copper was the first market to peak. An expanding Chinese economy and a low interest rate environment drove this market.  This led to large end line consumers purchasing forward contracts to meet future demand. Finally, copper peaked at $4.65 per pound in February of 2011. The silver market peaked in April of 2011 at nearly $50 per ounce. This was by far the most speculative of the metals markets and we’ll get into the ramifications of a speculative rally, shortly. Platinum made its high in August of 2011 at $1,918 per ounce. Gold was the slowest to peak finally reaching $1,923 per ounce in September of 2011.

The recent declines have come amid a backdrop of rising interest rates. The language coming from the Federal Reserve Board suggests that they are looking to tighten money supply and withdraw some of the excess cash that has been pumped into the system beginning in September 2001.

The recent lows mark very important Fibonacci points. The Fibonacci sequence originated in 13th century Italy by Leonardo Pisano, nicknamed Fibonacci. The mathematician found the pattern of 0+1 = 1, 1+1 = 2, 2+1 = 3, 5+3 = 8, 8+5 = 13, etc. This pattern is found throughout nature to include flower seeds, shells, pineapple segments, etc. Their adaptation to trading financial markets came through the use of wave analysis and the energy released in the action and reaction of those waves.

The trading adaptation converts the Fibonacci sequence into ratios. The ratios are then used in conjunction with peak and trough analysis to determine not only potential support and resistance levels but also, the energy required to turn the tide and begin a new sequence in the opposite direction. The two primary Fibonacci ratios used in trading are .38 and .62. These are rounded for the sake of simplicity. A trip to the beach will explain their importance in that wave one and wave two typically encroach upon the beach by a third of normal shoreline measurement while the third wave may advance nearly twice as far prior to its retreat.

Putting these ratios to use in the metal markets we can see that gold, platinum and copper have all retreated by approximately 38% from their all time highs made in 2011. Platinum has retreated by a third, copper by 36% and gold by 39%. Silver, as the outlier has retreated by 63%, almost stopping exactly at the .62 ratio. The depth of silver’s decline also helps it hold its crown as the most speculative and volatile of the metals.

The Fibonacci numbers don’t possess enough voodoo to generate trading action on their own. However, when combined with the considerable commercial buying we’ve seen on this decline these retracements must be viewed in the context of a pullback within a longer term upwards trend. Beginning with the recent biggest loser we see that commercial traders have been net buyers in the silver market for 19 of the last 23 weeks, nearly tripling their net long position within that time. Gold, copper and platinum are also getting strong support by the commercial traders on this decline. Their actions tell us two things. First, they don’t expect the end of cheap money to be the end of strength in the metals markets. Secondly, this decline is a buying opportunity.

Specifically, we view platinum as the most attractive buying opportunity. This is based on its industrial use as well as the escalating mining cost of platinum going forward. Currently, platinum is trading below its cost of forward production. The mining cost is about $1,500 per ounce while the futures market is trading around $1,350. Furthermore, platinum is the primary component in catalytic converters of diesel engines. Diesel engines continue to take market share in Europe, India and China. This leads us to believe that in the wake of the metal markets’ declines; platinum is most likely the safest one to buy.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

J.P. Morgan Locking in Silver Losses?

There’s an old investment saying that says, “Never marry a loser.” When the ego gets in the way, the trade becomes more about being right, than about being profitable. When J.P. Morgan used Federally backed funds to acquire Bear Stearns in March of 2008, it seemed like the steal of the century. They bought Bear Stearns at $2 a share and the Federal Reserve guaranteed Bear’s illiquid debt and counter party risk allowing J.P. Morgan to step in and take immediate control of Bear’s trading operations.

 

Apparently, part of Bear Stearn’s proprietary portfolio included a rather large short position in the silver market. J.P. Morgan, rather than liquidate the position at a loss, clean up their new balance sheet and pocket the profits decided they were smart enough to trade their way out of it using the profits accrued from Bear’s acquisition to sustain the ongoing trading losses. Thus, they’ve continued to add on to their short position selling more silver futures to increase their average price the entire way up. It has been reported by the UK’s Guardian that J.P. Morgan may now be short the silver futures market to the tune of 3.3 BILLION ounces. As a comparison, the total outstanding deliverable interest in the silver futures market is 320 million ounces and annual global supply is approximately 900 million ounces.

 

Short positions in the futures market can only be settled in two ways. First, the contracts can be repurchased at the current market price, which in J.P. Morgan’s case would be a losing trade. The second way out is to physically deliver the silver itself. This would make the people who bought the silver from J.P. Morgan, whole.

 

J.P. Morgan has the ability to hire some of the top minds in the trading game and over the last two years, they’ve been working hard to try and trade their way out of this mess. Their primary strategy thus far has been to take advantage of the limited trading in the overnight electronic markets to manipulate the market prices. The basic plan they’ve been following is to place large orders to sell more silver which make the overnight markets appear to have an abundance of sellers. When normal market players come in and need to get their own silver sold, their own human instinct takes over and they make their offer at a lower price than what they’re seeing on their screens. Once J.P. Morgan feels that enough sell orders have piled up under their own bluff of an order, they come in and buy up the lower priced offers and withdraw their large bluff sitting over the market. They have been under investigation by the Commodity Futures Exchange Commission for their manipulation of the silver market for the last year.

 

Clearly, J.P. Morgan has a problem. They owe the market more silver than the world produces and their previous attempt to unwind their position is under investigation. So, what’s the next logical move? They’re currently attempting to corner the copper market from the long side. They are essentially, creating a hedge. The idea is that they’ll make in the copper market what they’re losing in the silver market. Over the last three months as silver as silver has gone from $19 an ounce to more than $30 an ounce, J.P. Morgan has been managed to accumulate between 50 and 80% of the copper traded on the London Metals Exchange.  It’s no coincidence that they also announced their plans to offer an Exchange Traded Fund backed by physical copper. Clearly, they’re hoping to recoup some of their losses through price appreciation in copper while the generating a new revenue stream, as well.

 

Time will tell how this plays out on their balance sheet. History has shown that traders who lock into one idea, like selling the silver market, typically go broke before they are proven correct. J.P. Morgan’s dominant purchases in the copper market reflect their fear of outright loss in the silver market. Considering the notional amount (3.3 billion ounces) they are short relative to the size of the silver futures market and the global supply of physical metal, it will be interesting to see how they manage to divorce the loser they’ve inexorably hitched their wagon to.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.