Is the silver bull back?

Notably in silver, bear squeeze conditions were evident this week. The likelihood of the bull market returning is now strengthened, particularly given gold’s improving prospects.

The classic conditions for a bear squeeze are a combination of bearish trader consensus and an unexpected rise in the price, leading to shorts being squeezed into buying back their positions. That’s a reasonable description of market developments this week. The chart below of silver’s price and open interest on Comex illustrates the basis for these conditions.

Open interest has declined to levels not seen in decades. However loud the noise from the very small and vociferous band of silver bulls, this tells us that speculative interest is as negative as it gets. When that is the case, anyone who is a seller has sold, and the only prospective dealers are buyers. Those buyers are short sellers locking in profits, or when the price starts rising simply because it has stopped falling, they fall victim to margin calls.

In silver’s case, the price rose suddenly and sharply this week taking it from Monday’s low of $72.21 to a high yesterday of $82.12, a rally of 13.7%. Trading volumes picked up, while open interest less so accentuating the squeeze: 

We shall return to silver later. Gold is a far more liquid market, and its price has faced a tussle between portfolio managers eyeing cash for risk protection while central banks, sovereign wealth funds and predominantly Asian wealth seek the protection of gold from a declining dollar. Nevertheless, the tide appears to be turning against fiat cash in favour of gold.

Despite its greater liquidity than silver, the Comex gold contract illustrates similar conditions. Open interest is exceptionally low, with trading bulls having left the arena. But despite the collapse in open interest, the price has held up exceptionally well:

Short-term uncertainty is now entirely due to the fog of war. This morning, there are reports of Iranian attacks on US navy vessels transiting Hormuz. Markets face a weekend of heightened uncertainty and the prospect of an escalation leading to sharply higher oil prices. But the more we look at gold and silver, they resist going materially lower:

This morning, gold was $4720, up $113 from last Friday’s close, and silver at $80.45 is up $5.15 on balance. As noted above, there is a firmer underlying feel to these markets, and they appear ready to resume their intermediate upward trends. 

In the case of gold, it is all about paper currency debasement, confirmed by the strength in other key commodities, notably copper which is hitting all-time highs. This is also true of silver, but there are additional bullish factors in this case to keep in mind.

Non-cyclical industrial demand for silver is still growing strongly, with photovoltaics leading the way followed by electric vehicle and military applications. Indian demand is particularly strong. Additionally, there is pent-up Indian demand because shipments have been stuck at customs for the last six weeks by administrative bottlenecks and lack of clarity over taxes.

Furthermore, China’s net imports of silver have jumped in recent months, putting further strain on global liquidity at a time of persistent global supply deficits. As the second largest global source of mined and processed silver, China appears to have adopted a policy of restricting her exports, becoming a net buyer. And it didn’t help when last year, the US belatedly decided to declare silver a critical mineral, signalling that she would be in the market to accumulate a strategic stockpile. China won’t want to gift silver to the Americans, which is a further reason for her to restrict exports.

The emerging crisis for the dollar’s value, signalled by gold and commodity prices generally will inevitably lead to additional investor demand, particularly from populous Asian nations seeing silver as an affordable alternative to gold. The combination of increasing industrial and rising investor demand points to far higher prices, with silver outperforming gold on the upside.

Today’s uncertainties in the fog of war will seem trivial compared with the consequences of the tectonic forces emerging from the Persian Gulf crisis, driving all price values in the coming months and particularly those for silver.