Silver's Perfect Storm
CDE, BTO
Dear investor, lets be clear and set the stage properly this was a take down in silver, whether or not a coordinated intervention, it was the ‘perfect storm’.
First, we will start with China and the price action over night on Shanghai.
We knew that prices would be lower over night so no surprise. However, the chart shows the gap down with a doji candle stick that means indecision. I guess that should not come as a surprise either as traders did not know what to make of Friday’s action and Sunday evening and early Monday. The other observation is that volume on this April Shanghai contract was lower than normal last night.
Like the ‘perfect storm’, several factors converged at the same time to cause the disaster. In the movie, the ship sank and all were killed but with silver, the ship was only capsized.
First factor was a huge run up in silver prices, a lot of froth and enthusiasm and it was similar with gold. Silver jumped about 58% in January alone. Prices and froth were ripe for a correction. As I have been pointing out, demand was being driven by China and unlike North America it was very high retail frenzy. On that point I want to provide some detail on retail investors.
There are three types of retail investors, high net worth, affluent and mass retail. In North America it has basically been high net worth and affluent retail investors that were buying, probably what fits in as paid subscribers to my newsletter. The mass retail is driven by a social media frenzy and more.
So the high price and retail frenzy was one factor, and the next one involves China too.
On January 30th, China shut down the only China silver fund, the UBS SDIC silvers future fund. It is the only fund in China that invests on Shanghai silver futures. The shut down was not like an hour or so circuit breaker, it was shut down the whole day. This was the 2nd in 8 days, the previous was on January 22. They also shut down four oil funds as well for shorter time periods.
The issue was retail investors were out of control. They bid up prices on the silver fund and the fund could not keep up with buying silver futures so the premium moved up a whopping 36%. These retail investors in their frenzy were paying a silver price that was 36% above market and prices were already high. China just turned off the tap and unlike North America that has several silver funds and ETFs, there was only one in China. Basically retail frenzy, broke the fund so authorities had little choice but an intervention.
The 3rd factor was North American bullion banks were ready to jump in and pound down the paper silver market. This is nothing new and has happened many times in the past. The banksters have been unable to hammer gold or silver down because of strong physical demand in Asia. Once that silver tap in China was turned off, the bullion banks took the opportunity window.
And as usual, they struck after Shanghai markets were closed, but still ripe with anxiety. The CME sharply raised margin requirements just before the crash, a typical move that always happens in interventions. Increasing margin causes investors to sell Comex contracts they can no longer afford or don’t want to put up more margin and most likely, some were sitting with a profit as well. Once some traders start to sell and the price starts to go down, computers selling follows suit and the price goes down more. At that point, the stop-loss algos kick in for more selling.
Another solid clue of a bankster intervention, on Jan 30, J.P. Morgan reportedly called for delivery of 633 contracts (over 3 million ounces) at the exact bottom of the dip ($78.29). Of course the ones that are engineering the take down, will no where the bottom will be. This next chart is Comex silver volume and open interest.
On the chart you can see a huge increase in volume, about double, however open interest did not change much, only down about 8,000 contracts. So they did not rinse out a huge amount of longs, but probably just enough to cause an initial price drop and than with churn, trading back and forth drove prices lower. Some that sold, probably bought back lower the same day.
And finally a fourth factor. The Fed Chair announcement was also thrown into the mix as it caused a sharp reversal higher in the US$. This makes a good cover story to blame the take down on. Of course the higher dollar did put pressure on gold and silver prices as well as other commodities.
I will close with a chart of April Comex gold.
As is typical in a take down, the banksters used the thin trading on Sunday evening and wee hours Monday morning to whack gold down some more to about $4425 and it bounced back up by about 6 AM today. This has mostly likely hammered out a bottom, now we will see how the recovery unfolds.
China’s halt is a signal that demand is high, it won’t disappear but just redirect. But volatility will likely continue. Silver is still over US$100 in China.
The US$ strength will subside as eventually the market will figure out that no matter who is the Fed Chairman, QE will be a reality, inflation will rise and the economy still weaken. The Fed will remain between a rock in a hard place. The US consumer confidence is at 14 year lows and the economy continues to slide.
Most silver stocks just reversed and gave up their January gains, but there are a couple that present a better buying opportunity.
