Open interest in the silver market just collapsed to the lowest level in 15 years!
Alasdair Macleod’s latest audio interview discussing historic collapse in Open Interest in silver and gold has just been released! (Link at bottom of article).
May 1 (King World News) – Alasdair Macleod: With open interest down to multidecade lows, trading in silver is the risk no one is prepared to take. Market-makers make wide prices and speculators are not prepared to play.
Open interest in both gold and silver Comex contracts is extremely low, as we explain in this report. And it should be borne in mind that current levels of open interest represent very oversold markets ripe for a bear squeeze.
Silver paper declines
With its enormous volatility, Comex silver is an excellent counter for a market maker to trade. But they are trying to close it down. The reason is simple. Even with less than 100,000 contracts open interest, the short side is an unacceptable risk. One can understand management oversight in the swaps and bullion banks telling their trading desks to get out of silver because despite the trading opportunities, mark-to-market losses are simply unacceptable.
This has driven open interest to lows not seen for over 15 years. The current decline in open interest started when silver rose above $40 as the chart below shows, confirming that traders were running scared of accommodating long speculators even then. The expiry of the May contract this week has seen open interest plummeting to 95,802 contracts this morning on preliminary estimates as the spreads to roll over into the July contract are deliberately made too costly.
However, within the confines of ultralow open interest there has been reasonable trading volume on Comex:
Gold’s position is similar
Open interest in gold is also at multiyear lows confirming deeply oversold conditions:
But unlike silver, where speculators seem to be dealing more with each other than the swaps, gold’s turnover is abysmal reflecting close to zero interest:
In European trade this morning, gold was $4590, down $120 from last Friday’s close, and silver at $73.45 was down $2.20 on the same timescale. With holidays in European financial markets today and in London on Monday, trading next week is likely to be quiet as well.
In other markets, the WTI oil price rose to $105 from $95 during the week, remaining well below transaction levels in Asia. Clearly, pricing is dominated by US paper markets such as Comex which are divorced from developments in Asia. US supply is freely available, and that’s what paper prices appear to reflect. One is tempted to speculate that the US Government is keen to keep prices and derivatives such as gas (petrol) suppressed ahead of the driving season and with an eye to the mid-terms. But at these price levels US supplies are bound to suffer heavy drawdowns of already depleted strategic reserves.
Why the disinterest in gold
US-centric pricing is also a credible explanation for gold’s performance; the story goes like this.
Other things being equal, higher oil prices mean higher inflation which in turn means higher interest rates. This imposes a cost penalty on being long of gold. Therefore, anticipation of these events makes the dollar attractive relative to gold. We have seen this relationship between oil and gold play out consistently over the Hormuz crisis and is the best explanation of why gold didn’t rise as a safe-haven hedge when political risk increased with the bombing of Iran.
The Asian view is very different. They ignore the interest rate argument adopted by Western paper markets because they see the risk to fiat currencies’ purchasing power. In their view, all paper currencies will be worth less in future and should be sold for real money, starting with the dollar.
In short, paper traders in New York and London are blind to the risk to the value of paper currencies. Their view is the risk is to assets, such as bonds and by extension equities. This is why they sell them for cash in the currencies in which they account.
The difference in approach is why gold and silver migrate from West to East. As oil prices soar, open interest in Comex gold and silver futures declines. And stands-for-delivery continue apace. For investors this can be very frustrating, because even though they may accept the argument that it is currencies in decline rather than gold and silver rising, no one likes to see precious metal prices decline.
Patience is the watchword. Bear in mind that both metals are deeply oversold, setting the stage for a massive bear squeeze which will probably come out of nowhere. To listen to Alasdair Macleod discuss the historic collapse in Open Interest in silver and gold CLICK HERE OR ON THE IMAGE BELOW.
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