Today the price of gold futures surged to $5,250 as silver futures surged t0 $94, but take a look at this…
February 27 (King World News) – Alasdair Macleod: Gold was steady but silver volatile as Comex March contracts matured. Suspension due to “technical failures” saw high volatility in silver which has since recovered.
At 13.00 Eastern Time yesterday, Comex suspended trading in metals and national gas contracts and options, citing technical issues. The suspension lasted about 40 minutes and all-day orders and GTD orders (good ‘till day) were cancelled. It came at a delicate time for the March silver contract, with the earlier prospect of deliveries demanded exceeding silver registered for delivery. Instead, they appear to have been cashed out.
Was this Comex’s way of defusing a silver crisis? We will probably never know…
In a difficult week for traders due to Comex contract expiries, gold and silver both firmed on balance. In European morning trade, gold was $5170, up $63 from last Friday’s close, and silver at $89.70 was up $4.20 Comex turnover was very subdued in both contracts.
Gold futures expiry, not being an active month caused few difficulties for traders who appear to be generally uninterested in the contract. Open interest is unusually low, which suggests that there is significant room for speculative buying before the contract is deemed overbought. The relationship between price and open interest is shown below:
This is an immensely bullish setup, unusual in character. Hedge funds and trend-chasers could buy up to 200,000 contracts before gold becomes overbought. Under those conditions, buying would not be restricted to Comex. Add in Chinese savers’ demand and we can justify a call for significantly higher gold prices.
Silver is much more interesting. Comex open interest has collapsed which is explained by the short interest side effectively refusing to deal, other than to close existing positions. This is the next chart:
Meanwhile, Shanghai reopened on Tuesday following New Year celebrations and premiums for silver up to 12% over London spot have returned with a vengeance. These persistently high premiums are draining Comex and London’s liquidity.
On Comex, silver registered for delivery has declined to the equivalent of only 17,226 contracts, which explains yesterday’s controversy over Comex suspensions. There are still 6,214 March contracts outstanding this morning, suggesting that the grip around the shorts is still tight.
At least the shorts have succeeded in deterring buyers. The next chart shows that at 12,121 contracts the managed money category comprised mainly of hedge funds had the lowest long exposure for the last 20 years:
This was the position on 17th February, the date of the last Commitment of Traders figures, when open interest was 13,496 more than this morning’s preliminary number. We shall have an update for last Tuesday’s position after markets close tonight.
It is all very curious. Technical analysts are saying the silver price is going far higher, but trend-chasing hedge funds and investment managers are sitting firmly on their hands. It suggests that if silver resumes its march higher, disbelieving investors and speculators will change their minds but find there is no stock available at anything near current prices. And as commented above, gold is in a similar position but with more liquidity, likely to underwrite and possibly turbocharge the silver bull.
There is one important insight to share on silver. Last September, when China announced severe limitations on exports of rare earth metals, she unexpectedly withdrew from supplying silver. It was this which caused the crisis in London a fortnight later on 9th October, when lease rates spiked to 40% in a scramble for physical silver.
The reason China created this crisis is simple. The US had just put silver on its critical minerals list, signalling that the US government was about to buy large quantities for strategic purposes. China wasn’t going to supply silver which would end up in the USG’s stockpile.
It leaves the US with a problem. This week, fringe speculation suggested that President Trump was looking at Mexico’s silver as a solution, and if his form over Greenland was anything to go buy seek to incorporate Mexico into the US. That is unlikely to be a viable short-term fix, and individual supply deals with the mines are more likely, taking up to 200 million ounces of supply off the market. This would worsen the supply deficit for the current year already estimated at 300 million ounces. But it’s difficult to see where else the US can go.
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