Market Report: Silver catches virus

Mar 20, 2020·Alasdair Macleod
XAU 70

As the metal with the strongest antibiotic qualities it is ironic that the coronavirus pandemic has affected the silver price so harshly. As our headline chart shows, the silver price has collapsed by fully one third this year.

Prices are rallying in early European trade this morning, with silver up 6.3% from last night’s close and gold up 2.4%. From last Friday’s close, silver is down a net $1.90 at $12.83, and gold is down a net $25 at $1505. The gold/silver ratio rose to a record 126 on Wednesday but has since backed off to 117.

On Comex, open interest in both metals has fallen sharply with prices. The next two charts illustrate this for gold and silver respectively.

Screen Shot 2020 03 20 at 11.34.07 AM

The collapse in open interest reveals the purpose behind recent sharp falls, which is simply for the bullion banks to balance their books. Since mid-January, gold’s open interest has fallen 245,860 contracts, the equivalent of 764.7 tonnes, which means short positions worth $39bn have been eliminated, mostly from bullion banks’ books. In the illiquid silver contract the figures are respectively 84,400 contracts, 13,126 tonnes and $6bn. Clearly, if gold and silver dollar prices had continued to rise one or more bullion banks might have folded, leading to a major crisis at the heart of the monetary system.

While paper markets have been sorting themselves out, physical deliveries have seized with outrageous premiums quoted and delayed delivery dates for retail buyers. The physical market is swirling with rumours that Swiss refiners in Ticino (abutting the Italian border) have closed or can’t ship product, and the long-awaited decoupling of prices is taking place.

This last point is based on hope rather than reality. Normality will return, which is what the shake-out is all about. Once the bullion banks have squared their books, they will let the paper price run, because they are likely to recognise the game is up and they have no alternative.

Market prospects are fundamentally different. While equities have collapsed at the fastest pace since 1929 on the realisation that production of goods and services is plummeting, central banks, led by the Fed, are flooding the world with fiat currency. From a bullion bank’s point of view, it is a fundamental change in the relationship between precious metals and dollars, and an and to the business of periodically fleecing bullish speculators. Either bullion banks get out of the game, closing down liabilities as soon as possible, or they go on the long tack and enjoy the ride.

This being the case, many bullion banks are likely to withdraw from the market if they possibly can and liquidity in paper markets will suffer, which means that events are likely to have a disproportion effect on precious metal prices in the coming months.

Our last chart takes stock of gold’s bull market in the major currencies since the bottom at $1050 in December 2015.

XAU 75

After recent falls, in yen gold has risen 24.6%, in dollars 40%, in euros 41% and in sterling 82%.

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