Ole Hansen, head of commodity strategy for Saxo Bank says Chinese day traders are what’s behind the limit move up on silver, yesterday.
Please consider Chinese Day traders Love Silver — As Long it Behaves.
Synopsis
- Silver surged to a two-year high Monday before the rally hit a wall above $21/oz
- Precious metal was up nearly 50% year-to-date at its intraday peak
- Surge occurred in Asian session as commodity trading venues in China proliferate
- Silver’s rise mirrors a similar surge in steel rebar and iron ore futures in April
- Silver unlikely to repeat the extent of the April correction for steel and iron futures
The biggest two-day surge in silver since 2011 has raised a few questions about the sustainability of the current rally and what is driving it.
Speculative positions held by hedge funds in both gold and silver have reached record levels while demand for exchange-traded products especially those in gold have continued to rise on an almost daily basis.
The 13% bottom-to-top rally from Friday to Monday in silver could represent a short-term top in the market, not least considering the 44% year-to-date rally seen already. During the rally in Asia Monday, several major stop levels got hit on Comex silver which could indicate that many short positions have now been flushed out.
It was not a coincidence that the Monday surge occured during Asian trading hours. When it comes to commodity trading, the Asian session was often in the past a period of tranquility with limited market action.
During the past week, volumes have spiked to levels last seen during the April frenzy. What happened Monday was that silver fairly quickly went limit up at the 6% daily cap in response to the strong COMEX close on Friday. This helped trigger a spill over surge on Comex silver which went through several major stop levels before retracing after hitting a two-year high above $21.
The fact that the traded volume goes up while the open interest goes down is a clear indication that day traders have taken over for now. As long this continues, we are likely to see bigger daily price swings with the Asian session seeing most of this.
Do these observations lead to a warning that silver could be in for a collapse similar to that in iron ore and steel rebar? No is probably the shortest answer. Silver is a much more globally traded commodity than some of the other futures currently available for trading in China.
The latest surge has triggered a great deal of attention and with both XAGUSD and XAUXAG reaching and temporarily breaching their technical extension levels, further upside now hinges on the support from a continued rally in gold.
The XAUXAG ratio completed the extension of the March to April move yesterday when the ratio temporarily hit a low around 64.2. With the ten-year average at 60, silver is no longer as cheap as it was back in March when it hit 84.
On that basis, continued demand for precious metals should see silver continue to outperform but at a much slower pace with the relative value increasingly coming back into line with longer-term averages.
Silver Weekly Chart
Mike “Mish” Shedlock
Gold/Silver ratio above 75:1 clearly was unprecedented and unsustainable.
Chinese day traders may or may not have had anything to do with the rally.
Mish – when do you see the PM markets getting frothy?
I hope the Chinese specs decimate the paper shorts.
“Precious metal was up nearly 50% year-to-date at its intraday peak”
That’s quite a manipulation of price. Oh, that’s right, it is not supposed to be manipulation unless the price is going down.
If you pay $18 for something that is worth (maybe) $15 (average over last few years?) … you stand to lose about $3.
If you pay $100 for a Treasury note that is worth $20, your losses are going to be much much worse. The shrills in academia will forecast (worthless) that the Fed’s track record will be better in the future than it was the first 100 years — or worse, they will lie and claim that treasuries are “risk free” (because they don’t have a model to measure risk, not because there isn’t any).
But unlike the shrills in academia, most people do not have tenure or a priority claim against a tax exempt endowment fund.
For the common person, a “small” potential loss in silver is better than a very large and probable loss in Treasuries.
Often, academics are too buried in their models to see things that are obvious to the less educated
Silver is still the most undervalued asset on the planet.
Just maybe the Chinnes can Put it to the Cartel Banks.
So let’s see who has the Bigger Balls.
Silver and gold probably will continue to rally as long as global bond yields are declining. A trough in bond yields means short term tops in gold and silver. Day traders not the main cause of silver surge.
Wall Street loves “Secret Chinese Day Trader.” This sounds like a textbook Goldman Saxon contrary call…where you’re the dope who sells the silver “because of secret Chinese Day Trader” and then Pawn Shop Louie becomes a millionaire.
When does the Government Guy get paid again? Only when the Law looks the other way you say?
Well…no wonder the stock market is rallying.
Start buying Textron!
So it sounds like the authors are asking for the government to raise the “limits to play”, to reduce the number of bidders, and force the price back down.
On an unrelated note, I might ask who was selling heavily on the COMEX just after the end of the NYC fireworks display? It wasn’t just silver…. it was gold, silver, platinum AND palladium.