Having performed indifferently since the price fell in late January, the silver price suddenly broke out of its torpor with a 45-cent rise on Wednesday and peaked intraday yesterday at $17.36. Gold is still confined within its established trading range and is yet to break out.
Since last Friday, gold is down $5 at $1340.7 by early European trade this morning (Friday) and silver is up 40 cents at $17.08 over the same time scale.
As noted in previous market reports, silver had become heavily oversold, with speculators taking record short positions. Drilling down into the Commitment of Traders report for 10 April, we see that the number of hedge funds reporting short positions fell, while the total short position increased, telling us that the average short position was 1,818 contracts, only exceeded once, on 7 July 2015 at 1,834 contracts. Therefore, there are some unusually large short positions in this bear squeeze.
Furthermore, the silver May contract on Comex is running off the board, when both longs and shorts have a three-way choice. They can close their positions and live to fight another day. They can roll their positions forward into the next active contract, which is July. And lastly, the option few consider is they can stand for delivery if they are long.
And here we come across an intriguing mystery. On Wednesday, the May contract saw an increase in open interest of 3,465 contracts, representing 17,325,000 ounces, while open interest in the July contract also increased 3,177 contracts. It is almost certain much of the July increase included roll-overs from May, in which case the new purchases of the May contract were substantially more that 3,465 contracts.
Add to this the fact that a bear squeeze normally reduces open interest, and we can see that the net May contract purchases really were significantly higher than indicated. Why would anyone purchase a futures contract with only days to run? It can only be with the intention to take delivery of the physical. Note also, that open interest for May stood last night at 95,287 contracts, an exceptionally high level for silver this close to expiry, and we can see the stage is set for fun and games next week.
How it pans out, only time will tell. But given that it is hedge funds who are short, with exceptionally large positions, and that they do not possess the physical to deliver, it will be, shall we say, interesting.
Obviously, when a market becomes so wildly oversold, it is set up for disruption. The trigger was other events, such as the rocketing of the aluminium price (following US tariffs aimed at China and sanctions against Rusal), and an 11% increase in crude oil prices between 6 April and last Wednesday.
I have mentioned before that China was soft-pedalling on commodity purchases to inflict losses on front-running speculators and bring shadow banking under control. This has been misinterpreted as recessionary by market participants unaware of the background to these developments. It is likely the reason behind the excessive short positions that built up in base metals, and in late-March, oil as well. China signalled on Tuesday that that time is over, having eased monetary conditions by reducing the required reserve ratio for banks, and the bear squeeze promptly started.
It would not be surprising if China has quietly cleaned out the market at the lower levels. Could it be agents acting on behalf of China that are standing for delivery on Comex’s May contract?
Watch this space.
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