Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Silver Short-Squeeze Potential by Adam Hamilton

June 3, 2017

Silver has suffered a lackluster year so far, really lagging gold's upleg. Sentiment is still reeling following silver's crushing selloff from mid-April to mid-May. But that plunge was largely driven by extreme silver-futures selling by speculators, including a blistering spike in short selling. The resulting excessive shorts have left silver with excellent near-term potential for a short squeeze, which would catapult it rapidly higher.

Technically, silver ultimately acts like a leveraged play on gold. The yellow metal has long been silver's dominant primary driver. Investors and speculators alike flock to silver when gold is rallying, forcing this tiny market to surge dramatically. But when gold sentiment is weak due to lackluster price action, silver demand from traders dries up. Thus silver drifts listlessly or grinds lower, compounding bearish psychology.

As of the middle of this week, silver was only up 8.9% year-to-date. That actually bested the beloved S&P 500 broad-market stock index, but it's still considered pretty weak. That's because gold has rallied 10.3% YTD. Silver's gains and losses over any given span often about doublegold's, since the silver market is radically smaller. This is readily apparent in the latest world fundamental data for both metals.

Last month the Silver Institute published its World Silver Survey 2017, the definitive read on global silver supply-and-demand fundamentals in 2016. It reported total physical silver demand last year of 1027.8m ounces. At last year's average silver price of $17.12, that was worth just $17.6b. That's a rounding error in the financial markets, a mega-cap stock like Apple can gain or lose that much market cap in a single day!

Meanwhile according to the latest global gold fundamental data from the World Gold Council, last year's gold demand ran 4315.0 metric tons. At 2016's average gold price of $1250, that was worth $173.4b. So the global silver market is merely 1/10th the size of the world gold market per the newest available data! That makes capital flowing into and out of silver an order of magnitude more potent in moving its price.

Earlier this year when traders were growing excited about gold, silver was normally amplifying its upside. By early March, silver was up 15.6% YTD to gold's 8.6%. But as gold enthusiasm faded in subsequent weeks, silver soon deflated. By mid-April its 16.2% YTD gains were only running 1.36x gold's 11.9%. And that relative outperformance collapsed after silver plunged 12.6% on a mere 5.1% gold pullback into mid-May!

It's very unusual to see silver disconnect so sharply from gold, so traders looked for explanations. One of the main rumors surrounded Asia's largest commodities trader, the Noble Group. Its stock trading on the Singapore Exchange has literally imploded this year, as it faces a huge liquidity crunch from credit-rating agencies downgrading it on default fears. Rumors swirled that NG was a big forced seller of silver.

Many of NG's commodities positions were apparently illiquid, unable to be sold to raise cash without triggering serious losses on those very trades. But silver of course is highly-liquid and readily-marketable worldwide. Over 17 trading days between mid-April and mid-May, silver fell for 16 and the only respite was a trivial 0.1% bounce. That extraordinary span of consistent selling often defying gold was rumored to be NG.

Whether the Noble Group was unloading huge silver positions to raise desperately-needed cash or not, American futures speculators were dumping in concert. Maybe the Noble rumors triggered their serious selling, maybe they would've sold anyway. Either way, silver was blitzed with a withering assault of silver-futures selling. Given silver's tiny market size, this mass exodus of capital quickly brutalized silver prices.

Due to that order-of-magnitude market-size differential, capital flowing into and out of silver commands up to 10x the price impact of the same capital moving in gold! And this is in outright terms, assuming silver is fully-owned with no leverage. But silver-futures speculators wield great leverage, further amplifying the impact of their collective trading on silver's price. So heavy silver-futures selling drives sharp losses.

Every silver-futures contract controls 5000 troy ounces of this white metal. At $17.25 per ounce, that is worth $86,250. But this week, the minimum maintenance margin required to trade each silver-futures contract is only $5000. This means futures speculators can choose to run leverage up to 17.3xon silver futures! That dwarfs the decades-old legal limit in the stock markets of 2x. 17x is extreme and hyper-risky.

So the capital futures speculators bet on silver's near-term price action can have up to 17x the price impact of the same amount of investment in silver owned outright. When this enormous leverage is mixed with a tiny market, the result is naturally incredible volatility. At 17x leverage, speculators can't afford to be wrong for long on silver's price moves. A mere 5.9% adverse move against their bets results in 100% losses!

Every Friday afternoon, the Commodity Futures Trading Commission publishes its famous Commitments of Traders report that details what speculators are collectively doing in silver futures. Their buying and selling as a herd is the overwhelmingly-dominant driver of short-term silver price action. That doesn't negate gold's power over silver, as these silver-futures traders mostly look to gold's fortunes for trading cues.

To continue reading please click link http://www.321gold.com/editorials/hamilton/hamilton060217.html