In interesting take on Silver, ...
Will Silver Do a Headfake?
Keith Weiner
06/24/2014
Something extraordinary occurred last week. On Wednesday, the Fed made a routine announcement. That day, the price of silver was rising, but not out of the normal. Fireworks began on Thursday, and in 6 hours, the price of silver skyrocketed by 5%.
We have never before changed the headline or format of the Supply and Demand Report. However, it is warranted under the present circumstances.
The Fed’s announcement was mundane. It will continue tapering its bond purchases, from $45B monthly to $35B. It will continue its low interest rate policy. It cut its growth forecast. This was all expected except, arguably, the cut in the forecast.
Some pinned this move on the unwinding of the Chinese commodity finance scheme. That unwind will involve selling metal and buying futures. The impact of this is a rising basis, but probably not a rising price.
Many said that that the Fed was to blame (or credit). One commentator even said that gold had now become an inflation hedge. Apparently it wasn’t two weeks ago, but now it is. We respectfully suggest that he step back and take a deep breath.
Looking at a price chart, the action is pretty obvious. This candlestick chart is not the standard chart format we normally use in this Report.
Silver Chart
The blue line shows support around $19, going back 7 months. In the last few days of May, the silver price broke below that line. But by June 10, the price broke out through the line sharply. The breakdown at the end of May was a false breakdown.
Last Thursday’s price move also drove above the 100-day and 200-day moving averages (not shown). In March, silver had dropped below both averages, which have been falling for a long time.
There are other ways of analyzing the silver price chart, though that is not our focus here. No matter how you look at the price chart, the sharp spike in the silver price appears very bullish.
We therefore want to look at another chart, showing the silver basis and cobasis. Think of them as measures of abundance and scarcity, respectively.
We’re going to skip the gold graph this week. Silver did what gold did, and more.
The Silver Basis and Cobasis and Price
Normally in the Report, we include a long period of time (e.g. October 2013 through June 2014, or 8+ months). This week, we zoom in to see detail. The graph begins on May 27, which is when the silver price broke down below $19. We can see a decrease in abundance (blue line) and an increase in scarcity (red line) through June 4.
Then the price begins to rise, and with it abundance. Scarcity drops. The basis and cobasis made large moves. For clarity, the zero line has been drawn in heavy black and the region above is shaded light blue.
From its low, the basis rises from -0.24% to +0.35%. The basis is the carry you can earn in silver. To carry is to buy the metal and sell a futures contract. The annualized profit on a trade with less than 3 months to maturity is 35 now basis points. That’s a lot. The 3-Month Treasury bill, for comparison, earns 2 basis points.
So what is this telling us?
Silver futures were heavily bought. While there are other buyers of futures (e.g. electronics manufacturers who plan for their needs in advance), such a sharp change is generally driven by speculators.
Why do speculators buy silver futures? They anticipate a rise in the price, from which they hope to profit. They can drive the price up with their buying, as we saw last week, but they don’t tend to sustain big price moves. When we say they anticipate, we really mean front-run. They are expecting, rightly or wrongly, that real physical demand is coming. They want to buy ahead of it, and sell into it.
Two weeks ago, their expectations of hoarders changed significantly. Speculators now believe demand from hoarders will rise.
Hoarders are, in many ways, the opposite of speculators. They do not use leverage. They do not buy with the intention of selling soon. They are not necessarily thinking of profits when they buy. They are thinking about preserving wealth, perhaps for the next generation. They take metal out of the market for the long term. |
