Despite the large commercial short positions, is silver about to shock the world by becoming the best performing asset of 2016?
James Turk: “The shorts dodged two bullets last week, Eric. The first bullet was the silver price…
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James Turk continues: “The shorts managed to force it below $15 by the end of the week, so any call options expiring that day ended out of the money. All the money the shorts received from the premiums when writing those call options went into their pockets. The second bullet was more subtle – and more important.
Silver Shorts Dodging Bullets
Some over-the-counter options can settle with cash or metal at the choice of the option holder. So the other bullet the shorts dodged was the need to deliver physical metal on those over-the-counter options expiring in the money.
It was this imbalance between available silver for delivery and the options outstanding that made me wonder whether we would see a short squeeze as the options moved toward expiry. It was a squeeze that would be driven by the need to find physical silver for delivery, and those are the strongest squeezes of all.
They also end up with the most profound consequences. They present situations that put the shorts in a no win position. The consequence is that they often result in the shorts declaring force majeure, which of course would be a clear admission that they did not have the physical metal required to meet their delivery obligation.
Gold Still Outperforming Silver
There was a pre-expiry bounce in silver before it got hit at the end of the week, but we now have the gold/silver ratio back above 80, signaling that gold is still outperforming silver. We were seeing that outperformance again throughout much of today. Though the price of both gold and silver were higher, in percentage terms the price of gold was rising for most of the day at a higher rate than silver.
There is an old adage that when the weakest component of a sector finally starts moving higher, it is a clear bullish signal. For this reason we need to focus on silver because it has been weaker than gold. Specifically, we need to see the gold/silver ratio starting in order to fall to confirm the bullish action in gold that has driven the gold price higher since its December 2015 low. That’s not happening yet as we can see on the following 41-year gold/silver ratio chart.
41-Year Gold/Silver Ratio Chart
There is something else which is important that we can see on this chart, Eric. The gold/silver ratio has risen back to long-term overhead resistance. The area around 80 has kept a lid on the gold/silver ratio for twenty years, and the probabilities are that resistance around this area will continue to keep the ratio from heading higher.
Turk Believes Silver Will Shine In 2016
So from this perspective, silver is probably about as cheap as it will get when viewed in terms of gold. Also, given the limited availability of physical silver at current prices, it is reasonable to conclude that the gold/silver ratio will fall from present levels, just like it did every other time when reaching the 80 area.
So as bullish as I am on gold, Eric, the high level reached at present by the gold/silver ratio is one of the reasons that I am even more bullish on silver.“
Also of importance…
This was Jason Goepfert’s note on silver from last Friday:
“The Commitments of Traders report showed another week of selling in the precious metals among “smart money” hedgers. Their bets against silver moved to the largest since 2008. In gold, they are short more than 150,000 contracts and over the past there years, such a large short position has coincided with a peak in the gold rallies every time. As always, we’ll be looking to see if it’s different this time, suggesting a new bull market for precious metals.“
King World News note: It will be interesting to see how the gold and silver markets hold up in the face of the heavy commercial short selling. As Goepfert noted, a strong performance could suggest a new bull market is now emerging.
Will Silver Shock The World In 2016?
And if James Turk is correct that silver will begin to outperform gold, this could very well make silver the best performing asset of 2016, and that would definitely be a shock to a world betting aggressively on paper markets.
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