Are We Nearing The Breakpoint In The Silver Market?

The silver market is finally showing some signs of life...

by Chris Marcus via Arcadia Economics

After getting a thorough simulation of what it feels like to watch paint dry over the past eight years, the silver market is finally showing some signs of life.

After rising almost $2.50 from the May 20 $14.41 lows (coincidentally also the same time the banks finished buying back their short position - as can be seen by the red line in the middle section of the chart below), silver recently even crossed above the $17 mark.

(courtesy of barchart.com)

Of course many are now wondering if we're about to see the price smashed again, or if we're finally at the beginning of a bigger rally.

Fortunately, there are signs that something has changed in the recent trading pattern. Perhaps most significant is that the banks have been short both gold and silver, and we've seen the price run in their face. Which really has not happened much, if at all, in recent years.

Normally we would have already seen a large spike down by this point in the cycle. Yet instead, it has often seemed as if the banks have hammered the bid, but the effects just seemed less forceful than in the past.

Certainly we saw that play out Tuesday morning. Where after silver rallied above $17.40, there was yet again a large spike down. This time of almost 80 cents.

(chart courtesy of Kitco)

The price recovered somewhat, before trading incredibly flat right underneath the $17 mark for the rest of the afternoon. Which strikes me as somewhat odd given the volatility that had taken place earlier throughout the morning.

Certainly it will be interesting to see how the price reacts in the coming days. Although it's interesting to think about how rather than seeing the price drop further like we have so often in recent years, there seems to be more resistance to the large offers that knock out the bids.

Perhaps the first thing that comes to mind is that the silver ETF's report having added over 100 million ounces of silver in the past 3 months!

There's also been speculation about a big buyer in the market, and whether that's accurate, and whether that's China or someone else, in either case, unless the ETF's are flat-out lying, someone has been buying a lot of silver. And it seems that after years of watching unlimited paper offers overwhelm the bids, lately it seems as if the bid is overwhelming the offer.

Of course we are talking about an already tight market, where supply is expected to go down this year. Primarily because for much of the year, the cost of silver has been trading below the average cost of production for most of the silver miners. And according to the Silver Institute's numbers, the market already ran a 29 million ounce deficit last year.

So the presence of a large buyer in an already tight market could be presenting a problem to the shorts. Because keep in mind, if you are shorting an asset, especially if you know that it's price is already artificially low (I have quite a time some days guessing whether the bankers that short silver or are aware of this or not), if you're unable to drive the price lower and buy it back cheaper, there's essentially no longer any reason to keep shorting.

In fact, if you're short, and you know that the price isn't going lower, you have every incentive to buy back what you can before one of your competitors does. Which makes it especially interesting that in last Friday's COT report, the commercial bank short position was reduced on higher prices. Which could be an indication that something like that may be beginning to take place.

Perhaps it's still just too early to tell. And because I understand and appreciate how sensitive topics like these are in the silver community, to be clear, I'm not able to say at this point that a short squeeze has begun. Although for what it's worth, I wouldn't sell the put at zero either. Because while there is still not enough evidence to know yet for sure, if such a thing were taking place, these are a lot of the signs that we would expect to see.

Yet what has me leaning towards thinking that things could get out of control, is that you have all of these factors going on, while central banks around the globe are cranking up the printing presses again.

The Federal Reserve just cut interest rates at its last meeting. And only a few days after, the trade war was ratcheted up again, and then the Yuan was devalued. On Monday of this week, the Argentine peso collapsed again, and the financial stress is being felt around the globe. At this point, I'm guessing we see quantitative easing before the end of the year. Likely in many sections of the world.

So I wonder, should that all occur, it seems like it would be an awfully tricky juggling act to keep the prices of gold and silver down while this is all going on. Obviously after living through the last eight years in the silver market, I've learned to be prepared for anything. Although I have recently increased the aggressiveness of my silver option positions, and this is the highest my radar has been on alert in several years.

Of course, if you are just holding physical silver, then there's not really all that much to do except sit back and relax. I'm also expecting the mining stocks to do extremely well over the next three to six months. And as is often the case, that will likely be dependent upon the underlying moves in the silver price.

As always, if you have any questions about this article, you're welcome to email me here. Otherwise, buckle up for what's shaping up to be a rather wild ride.

Chris Marcus