Is the correction for gold and silver over?

Apr 26, 2024·Alasdair Macleod

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Gold and silver prices steadied this week and appear to have found a base. This morning in European trading, gold was $2347, down $45 since last Friday’s close. Silver was $27.70, down a dollar on the same timescale.

From the spike highs on 12 April, even the bulls thought a correction was due, and opinion appears to be still side-lined. However, there are some indications that prices might have found support. 

Comex Open Interest on the gold contract began increasing on falling prices after Monday’s large markdown. This indicates that there are marginal buyers of gold futures at these levels. More importantly, it tells us that the Swaps (mostly bullion bank traders) are no longer taking out hedge fund stops and closing down their shorts, but are finding themselves increasing their short positions to suppress prices. This is against a background of moderate Open Interest:

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The chart above also shows the remarkable divergence between a rising price and Comex positions. It contrasts with the excessive speculation at the time of the late-2019 repo crisis when the longs got way ahead of the game, only to be shaken out just ahead of the covid crisis in February—March 2020. Clearly, this bullish move is not so much being driven by speculating longs.

Trading volumes are also subdued, as the next screenshot from the Comex website shows:

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This tells us that there is a shortage of liquidity, conditions which lead to volatility. But if the Swaps are trying to reduce their positions, that suggests a vulnerability to a bear squeeze: in other words, prices could rise sharply. The next chart quantifies the pressure on the shorts.

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29 Swaps have short positions, giving an average gross exposure of $2.2bn, some of which are bound to be even larger. Financing these positions is an inefficient use of a bank’s balance sheet under Basel 3 regulations, and bullion bank traders must be coming under pressure from bank treasurers to close these positions down.

Despite the $360 rise since mid-February, the conditions for a massive systemic bear squeeze are still in place.

The story in silver is different. Photo-voltaic demand is off the charts now that India is ramping up production. Deficits in mining supply of 200 million ounces relative to demand are likely to persist in the coming years, according to the Silver Institute. There is an assumption that the accumulation of silver in exchange-registered vaults, amounting to some 15 months of supply will prevent a squeeze developing. But for this to be true suggests that this silver will be released, which is unlikely given future demand, and that gold values will decline releasing speculative positions. But gold looks poised for another bullish run and strategic stocks are likely to be added to. 

Under these circumstances, the effect of what amounts to a systemic squeeze on bullion banks and market makers could have an explosive effect on silver prices.