There’s a thing about records. They continue until, they don’t. A string of record weather continues until it changes. Similarly, markets can be continually propelled until they aren’t. Such is the case with the current silver market. Speculators in the silver futures market have set net long and total position records in each of the last three weeks. This has led to a significantly overbought market that is due for a correction. Once a catalyst is provided, whether it be an FOMC announcement or some other data point, the speculative washout should be substantial.
We’ve discussed the first quarter commodity rally in detail over the last two weeks. Our general opinion has been that these rallies are temporary as commodity producers use this opportunity to hedge forward production at decent prices for the first time in over a year. This week, we’ll discuss the metal markets – gold, silver, platinum and copper. We’ll detail how we used the Commitment of Traders report to pinpoint the market’s bias as well as how to factor external shocks into the current picture. Finally, we’ll provide some support levels as we look to take profits on the current decline.
We’ve discussed at length over the last two weeks that commercial producers in most of the commodity markets have come out in force to unload their future production on the first quarter commodity rally. Fore example, we’ve noted that gold producers haven’t been this bearish since 2013 and that the crude oil glut would take more than a year to work through. See, “Gold, Oil, Grains – Was that It?” for the background we discussed last week. Last night’s tragedy in Brussels has added a bit of a boost to the precious metals as expected. If this boost is insufficient to force short covering or, attract new buyers, it’s over until prices decline.
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.
We began this week by revisiting the sugar futures market. We started talking about it a couple of weeks ago for Equities.com in, “Time to Sweeten on Sugar.” We updated this outlook Monday for TraderPlanet.com. This trade finally triggered on Thursday and currently sits above the $.1310 level that we believe will induce some speculative short covering. See, “Sugar Prices on the 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.
This has been a tremendously active week with big volatility and important market turns. We have to begin with last week’s gold platinum spread. We outlined the case in our Gold, Silver, Platinum and Copper Outlook. This week, April platinum traded down to nearly a $50 per ounce discount to April gold. Currently, this spread has rebounded to approximately a $5 discount. That’s as much as $4,500 profit depending on the entry point.