In my opinion, the big gold and silver price drops in late June, July 3rd, and July 7th all revolve around a concerted and coordinated effort to reduce legacy short positions in the gold and silver market. Something big is about to happen. The take-down style we’ve seen in the last two weeks tends to be followed by delivery of large quantities of physical gold and silver to the banks in the subsequent delivery month. I expect some major fireworks pretty soon.
Zerohedge – Precious metals fans have had to content with a triple whammy this year: not only is the dollar weaker, not only have cryptocurrencies – seen by some as a natural alternative to safe PMs, especially among the younger generation – soared since the start of the year, blowing out all other asset classes including precious metals, but gold and silver have largely gone nowhere despite a year of political volatility and central bank confusion.
There is a ray of hope however: according to Bloomberg’s macro commentator Marc Cudmore, silver’s “justified” plunge – as the gold and silver price has a strong correlation with real rates – is finally nearing completion, as “we are approaching the point where both higher yields and lower yields have the potential to boost the asset class.”
The technicals are also turning: “In euro terms, the silver price is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now.” Finally, “Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest.”
Finally, while there are “clear dangers involved when trying to catch a falling silver knife” Cudmore notes that “a risk-reward analysis makes an attempt appealing.”
His full Macro View take below:
“Silver’s Justified Plunge Is Nearing Completion”, by Mark Cudmore, a former FX trader who writes for Bloomberg
Silver price is plunging and it’s even worse than it first appears when you consider that the dollar is having a bad year. In euro terms, the silver price is down 24% from its April peak. Still, there are reasons to argue that the shift lower is mostly complete.
Gold and silver price has a particularly strong correlation with real rates since the metals provide no yield, and hence demand is inversely related to the opportunity cost of speculation.
An environment in which global bond yields are rising in the absence of significant inflationary pressures is about as bad as it gets for speculative precious metals, so the move makes sense.
However, if the rise in global yields persists, then severe spillover effects in other asset markets could prompt a bid for precious metal havens again. So we are approaching the point where both higher yields and lower yields have the potential to boost the asset class.
Technicals also look potentially buoyant. In euro terms, silver is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now.
Another thing — Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest.
There are clear dangers involved when trying to catch a falling silver knife, but a risk-reward analysis makes an attempt appealing
BullionStar, Ronan Manly – Silver futures prices on the COMEX futures trading platform briefly plummeted at approximately 7:06am Singapore time yesterday, with the price for the front month (most active) September silver contract falling from a US$16.06 quote down to a low of US$14.34 all within a 1 minute interval. The futures price then recovered nearly all of its losses in the subsequent 2-3 minute period. High to low, this COMEX silver futures contract saw its price fall by just over 10.7%, before rebounding nearly 11%.
During this time when the COMEX silver price crashed, there was nothing fundamentally happening in the wider financial markets, or indeed in the physical silver market, to justify these price gyrations in COMEX silver futures prices. Which all goes to show that the COMEX ‘paper’ futures silver prices is completely detached from the physical silver market, and that COMEX silver futures prices have no anchoring in the real silver market.
This price movement in the September 2017 silver futures contract (contract code SIU7 aka SIU17) can be seen in the below 1-minute tick candlestick chart from CME. Times in the chart are New York Time (NYT), which is 12 hours behind Singapore.
During this one minute period between 19:06 NYT and 19:07 NYT, the SIU7 contract saw trading volume of 4954 contracts (the 4.954K in the chart below), with the silver price falling from a high of 16.065 to a low of 14.34, before ending that minute period at US$ 14.68.
The COMEX SI silver futures contract, which is a deliverable contract but which in practice is rarely delivered; is a futures contract for 5000 troy ounces of silver. The 4954 contracts traded during the 1 minute period in theory represent 24.77 million ounces (770 tonnes) of silver and would be valued at $397.8 million at the opening price of US$ 16.06 at 19:06 NYT.
Overall within these 4 minutes, more than 8,300 September silver contracts were traded.
Following this 1 minute flash crash, in the subsequent minute between 19:07 NYT and 19:08 NYT, the SIU7 contract silver price rebounded sharply, rising from US$ 14.67 to US$ 15.62 on a trading volume of 1495 contracts. This rebound reflected in the below chart which also shows the opening and closing prices of each minute period. The price continue to rebound between 19:08 and 19:09 on volume of 936 contracts to close the minute at US$ 15.07, and then between 19:09 and 19:10, the silver price again closed higher at US$ 15.90 on volume of 932 contracts.
Overall, from the low quote of US$ 14.34, the silver price had rebound within the next 3 minutes to US$ 15.90, a rebound of 10.95%, and just 1% lower than the price had been (US$ 16.06) 4 minutes earlier.
Note that the same price flash crash also affected the next most actively traded COMEX silver contract for December 2017 (code SIZ7). See COMEX silver futures summary table below, and notice the lows for the September 2017 and December 2017 contracts at US$ 14.34 and US$ 14.44, respectively.
What caused this momentary price plummet in the COMEX silver futures is not clear. This is because the CME Group, operator of the COMEX futures platform, has provided no explanation for these price gyrations. Possible causes could include market illiquidity, deliberate manipulation, a trading error or errors, or algorithmic trading programs triggering stop losses or inducing abnormal trading patterns.
Until the CME Group releases a statement on this (which it probably won’t), the exact cause of this futures price flash crash remains unclear. What the CME did do yesterday however was as follows:
At 19:06:38, the CME systems implemented a 10 second halt in the COMEX silver futures contracts. Within 20 minutes, CME made an announcement in a messaging broadcast that it was reviewing all SIU7 (September futures) trades that had taken place under US$ 15.84 and all SIZ7 (December futures) trades that had taken place under US$ 15.94. After another 20 minutes, CME announced in a messaging broadcast that for SIU7, any trades executed below US$ 15.54 would be adjusted up to US$ 15.54, while for SIZ7, all trades executed below 15.64 would be adjusted up to US$ 15.64.
These speedily introduced price adjustments would appear to suggest that the CME Group quickly determined that whatever caused the sharp price falls in the COMEX silver futures prices was not part of normal COMEX futures market trading, and that the CME made the call to back out and cancel at least some of the effects of this abnormal market trading. This would also seem to suggest the CME found evidence of something untoward, either silver price manipulation, or unfair algorithmic trading, or unjustified stop-loss triggering etc.
While these ‘paper’ trading markets in the form of the OTC London silver market and the COMEX futures market unfortunately do have a real impact on the international silver price that is inherited by these physical markets, this latest pricing fiasco on the COMEX again demonstrates that COMEX trading of precious metals futures and London trading of fractionally-backed unallocated precious metals spot and forwards contracts are becoming more and more detached from the underlying reality of the physical gold and silver markets.
This also has an adverse effect on investor sentiment in these paper markets and could in time be a trigger for shifting gold price discovery from paper to physical.
Secular Investor: Whilst a lot of precious metals investors are solely focusing on gold, we would almost forget about silver, also called ‘the poor man’s gold’ although things are changing fast on this market as well.
2016 was the first year in more than a decade wherein the primary silver production (coming from mines either as a main product or a by-product credit) decreased. After seeing a total silver production of approximately 668 million ounces in 2007 increasing to 891 million ounces in 2015, we saw a (first) decrease to 886 million ounces in 2016.
Source: The Silver Institute
As you can see on the previous image, the total recovery from scrap and the inflow from hedges decreased as well, causing the total silver supply to decrease by approximately 3% to 1.007 billion ounces, the lowest level since 2013.
Whilst the total demand for silver also decreased to 1.028 billion ounces, 2016 was the fourth consecutive year with a supply deficit. Sure, the deficit was just 21 million ounces, but that’s entirely due to the lower demand for jewelry and investment purposes. As you can clearly see in the same table, the demand from those two end-uses was 519 million ounces in 2015, but fell to just 414 million ounces in 2016, a decrease of 105 million ounces.
One of the arguments of bears is the decreasing use of the precious metal in the photographic sector. It’s absolutely impossible to deny that, but it’s also already clearly visible in the trend since 2007. In 2007 the silver demand for the photographic sector was 117 million ounces 12.32% of the total world demand, but last year, the sector needed just 45 million ounces of silver, which is now just over 4% of the total world demand.
This means that even if the demand for photographic uses would drop to zero (which isn’t impossible, although the sector demand has remained relatively stable since 2013), this would most definitely NOT cause a shift of the demand curve. One main contributor to the steady demand would be the increased use of the photovoltaic sector, where the silver demand reached its highest point éver.
So the supply side of silver isn’t really slowing down (yes, the total demand was lower due to lower demand for investment uses), but the silver demand from industrial sectors is still at an elevated level.
This also means the supply side will have to (try to) keep up with the demand. According to the Silver Institute, only 30% of the mine supply is coming from mines which have the commodity as a primary product. 12% comes from primary gold mines, whilst an additional 23% is mined as part of primary copper deposit. With the current low gold and copper price, not a lot of new mines will be developed which will put pressure on the supply side of the equation.
Fortunately 35% of the mine supply came from lead-zinc mines, and as these two commodities are performing well, it’s not unlikely more lead and zinc mines will be brought into production, boosting the silver output in the process. That being said, several larger zinc mines have been shut down and are still shutting down, and it looks like the average grade of the precious metal as a by-product in the ‘advanced stage’ zinc mines is dropping, perhaps even to a level where smelters don’t deem the silver to be payable due to low recovery rates in the process.
Long story short: the demand for silver is there ‘to stay’, but will the supply side be able to keep up with the demand? Scrap supply seems to have peaked, whilst it won’t be easy to increase the mine supply.
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