Silver Plunges On China Slowdown Concerns, Dollar Short Covering

Tyler Durden's picture

In early trading, silver is down nearly 20% from Friday highs, and just under 15% from its Friday closing fixing, hitting just over $42 in a slide of $6 commencing just after 18:25 pm. The reason for the collapse is not immediately clear, although concerns of a Chinese slowdown and overtightening are rumored to have been among the culrpits. The circumstantial evidence is in the OZ pairs, with the AUDUSD which has long been a high beta proxy for China plunging in early trading as well. Oddly enough, gold has been spared most of the carnage in silver, and was down about 1% in early trading. Overall, this appears to be nothing more than a short covering episode in the USd provoked by nothing factual. We will keep an ear open for any incremental data to determine if there is any actual reason for the plunge, such as for example that the BOJ has suddenly decided not to pick up the baton in trillions of monetizations over the next few months, instead of just another bout of technical selling.

Silver:

And China-Dollar:

 

Here is Goldman providing some more color on the Chinese slowdown

April PMI readings suggest weaker growth...

Although the official NBS/CFLP and HSBC/Markit PMIs are supposed to be seasonally adjusted already, they both showed seasonality in their historical April readings (the seasonality in the HSBC/Markit PMI is a lot less consistent and significant than the official one). Considering the seasonal bias, the lower reading in the official PMI and unchanged reading in the HSBC/Markit PMI suggest manufacturing activity growth weakened in April.

...and lower upstream inflationary pressures

The latest reading of the Input Price sub-index (note this is a reference index which does not enter the calculation of the headline PMI), which is highly correlated with the sequential reading of PPI inflation (see Exhibit 4), suggests the latter is likely to show further moderation in April as well. At the same time, with the softening of food (especially vegetable) prices, we are likely to see a meaningfully lower CPI inflation reading as well, perhaps to around 5.0% yoy, down from 5.4% yoy in March.

We believe the underling growth momentum indeed has been trending down despite some data issues...

There have been some controversies regarding the relative reliability of the PMIs versus official “hard” data such as industrial production (IP) as a gauge of manufacturing activities. In March, the PMIs apparently were not strong considering seasonality (headline official PMI went up but much less than the rise in March data historically), but hard data almost across the board showed stronger growth than in January-February. We believe the difference might be the result of unstable seasonal factors in the PMIs and other data complications such as the Lunar New Year effects which often distorts monthly data within the first quarter of the year and changes to statistical standards in terms of official IP/fixed asset investment data (see China: March PMIs suggest activity growth continued to moderate, Asia Economics Data Flash, April 1, 2011 for further details) . Besides, the equal weighting methodology of the PMIs meant when small enterprises move differently from large companies, the PMIs would tend to reflect their changes more than hard data such as IP. Having said that, we believe the trend of the two PMI series is generally reliable and they have both been on a downward trend since reaching a peak in 4Q2010 and there is no clear sign of an imminent change to that trend yet. Within 1Q2011, growth in March probably had a rebound but it appears to be a temporary one.

...driven by continued policy tightening and increasingly prevalent power shortages and possibly a slowdown in exports growth

Our channel checks with commercial banks suggest their lending activities have been under continued pressure from regulators in April. At the same time, there have been increasing anecdotal information on the rise in the actual lending rate (commercial banks are free to charge interest rates above the official benchmark lending rate without a ceiling) as a result of the various quantitative controls. Apart from these conventional monetary tightening tools, the government also seems to be broadening the width of tightening by imposing additional administrative controls on investments in aluminum smelting and production in energy-intensive sectors as a result of the increasingly prevalent power shortage in the country which tends to slow domestic demand growth. Besides, the Export Order sub-index of the PMI has been falling rather quickly since the start of the year which deserves a high level of attention though so far it is somewhat at odds with other information such as our Global Leading Indicator which has been a reasonably good leading indicator of exports growth and it has not shown any meaningful softening.

There are no signs of an over-tightening as yet

Despite the softening of the PMIs, they both stayed clear of the 50% threshold and there has been no dramatic fall in other major economic indicators either. While the 50% threshold may mean something different in China than in many other countries as China’s trend level of PMIs appears to be higher, a slightly below trend level growth is what we would regard as appropriate given there is still a clear need for the Chinese economy to lower its level of inflation.

We expect this policy stance to be kept largely unchanged in 2Q2011 compared with 1Q2011 and the downward trend in activity growth and underlying inflation is likely to continue

We believe given the level of CPI and PPI inflation is still above the government’s comfort zone and activity growth appears to be holding up at a healthy level (yoy activity growth may actually rise further because of a low base in 2Q2010), the growth-inflation combination will mean policy makers are likely to continue to keep the policy stance comparable to 1Q2011 (not March, as the policy stance in January-February was much tighter than it was in March). More meaningful changes to the policy stance will likely come in 2H2011 as yoy CPI inflation is likely to start trending down as a result of a change in base and the expected sequential slowdown.

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Sokhmate's picture

I for one, am happy with this silver plunge.

It means that I will be able to, how you say, dip the buying fuck or some such

knukles's picture

Yes as Russia we saying goes.

Lucius_Junius_Brutus's picture

Can anybody explain to me in plain english what the f**k just happened? I thought the precious metal market was driven up by inflationnary pressure? What could/have produced such a drop?

Lucius_Junius_Brutus's picture

So you're saying this is a return to the status quo ante? No more silver apreciation? How come? There isn't enough silver to go around, why would the price drop?

flaxpin's picture

Trader games.  Don't trade it, buy some ozs.

JLee2027's picture

Did a new silver mine with 1 trillion ounces just appear? Did the Bernank find a way to turn paper into Silver?

Fuck no. 100000% manipulation. Buy physical from APEX while you can at these prices. 

Lucius_Junius_Brutus's picture

As a matter of fact I can see the chairman trying out alchemy, after all, even without a funny hat he is still the only man I know who can make gold price shoot through the roof with sheer words. Harry potter can suck up his magic wand.

KinorSensase's picture

don't get shook...ain't no such things as half-way crooks

 

http://www.youtube.com/watch?v=aO0wYzFiaYY

qussl3's picture

Silver and Gold unfortunately are still priced in the paper markets, where shenanigans are commonplace.

Try finding any dealer willing to sell you at spot today.

Speculate in paper, save in physical.

Lucius_Junius_Brutus's picture

So you're saying that the drop is a move by big players to buy the dip? Am I getting that right? How can you enginere such a thing? (clueless frenchman trying to get it, sorry).

qussl3's picture

Cant make a judgment about anyone wanting to buy a dip.

This monster move comes on the heels of a massive margin hike from MF global after markets closed on friday, I wouldnt in the least bit be surprised if ALOT of levered longs got taken out today.

Furthermore this week is one where a number of asian markets will be closed as well as the LBMA on monday if i recall, thin markets on the back of huge margin hikes equal a perfect opportunity for paper games.

As others have noted, unless there is corroborating news out of the EU about massive restructuring or a Chinese faceplant, BTFD.

But as you have witnessed, keep leverage in check, silver is a tiny market which is begining to attract HUGE interest, it will be volatile.

This may just be a portent of things to come both on the up and downside.

 

 

Gunther's picture

 

Lucius,

to bring the market down a big player sells paper-silver up to the point where there a no more buyers. Then the price drops a lot to a level where some big buying is.

During a thinly traded market this does not take too much money.

Everybody trading on margin gets a margin call and has to sell (or put more money in the account.)

If the plot works out, the seller can buy back the paper-silver at a lower price then he sold and pocket a profit.

To call the bluff of the paper seller someone else could buy real silver bullion at spot and take delivery.

Those games are nothing new in the silver market; if anything is remarkable the that that the games did not happen for a while.

To read about the action at the Paper-Silver-Market Harvey Organ gives a daily overview on his blog.

http://harveyorgan.blogspot.com/

I hope that explains what is going on.

Keri at Bankster Report's picture

Also, Lucius, silver isn't for the light-hearted, unless you're the light-hearted who doesn't look everyday at spot prices.  Don't try to time this market.  If you dig silver for the long-term, then an 8% dip is a chance to get 8% more silver.  As far as dumping orders to try to "engineer" a lower price at which to buy the orders back: it works with naked moves better than actual moves, but either way it really only works if you're buying it back at a level lower than where you got it in the first place.  If you bought silver at $41 and tried this stunt, resulting in a drop to $42, then you are SOL.  This is not the kind of thing someone/inc who got it under $42 would be profitable executing, which limits the culprits (if that is indeed what happen, which I don't think it is) to traders who bought last week.  I think it is unlikely, personally.  I like the forex cover idea much better.

Keri at Bankster Report's picture

unintended "503 unavailable" related double post

nmewn's picture

The drop is valued in fiat...they took a paper fiat market from a 32.65 ratio up to a 35.35 as I type...they are desperate for physical silver in the paper market.

If you have someone, as I do, who has agreed to, as he said..."not nick you both ways" and trade straight up, holding physical of either is not a problem...its correcting faster in fiat than I can type this out to you at any rate...LOL.

Take physical delivery and sleep well.

Regards.

mrcybermac's picture

Seems like it's probably related to a(nother!) pending CME margin hike. (article on CNBC.com?).  Everytime there is a margin hike it flushes out some of the speculators who have no intention of taking delivery.  I saw someone comment that by the time silver is 75$ margin may have been hiked all the way to 100% making it a cash only market... interesting idea.  Whatever is happening, it's not a change in the fundamentals.

scatterbrains's picture

If I'm a large dealer in physical silver and the paper criminals decide to play games and push the paper price down 20% I'd just shut the sell window down for a bit, especialy if I know how hard it is to stay stocked.  I'm hoping that silver breaks free of it's paper chains  at some point because of these antics.

Rome is burining's picture

A fat finger is way more rational than a bubble at this time.  The drop was the result of a concerted efforts of gubberments trying to once again suppress the prices.  Hold on - physical can't be papered over for any extended period of time.

SME MOFO's picture

its been a wierd morning, i was trying to figure out what you were saying and then i realized i read undergarments where you said gubberments

Al Gorerhythm's picture

I don't get this . thing as a reply. Can someone please expand?

Quinvarius's picture

Obviously someone had some silver to sell and didn't want a profit on it.  That is how the paper silver market works.

razorthin's picture

Time to make a shitload on some AGQ put writing

DaddyO's picture

 

Friday would have been the day to do that don't you think.

DaddyO

razorthin's picture

Selling puts, not buying.  Should be some nice premiums in the morning.

topcallingtroll's picture

Exactly, but be careful.

I am tempted to lay in a put spread at some point.

Saucy-Jack's picture

Smackdown bitchez.....

cxl9's picture

No problem. When is Bernanke's next speech?

 

penisouraus erecti's picture

haha - you wish. for those of us buying since the $12-$13 levels it's not too upsetting. Good thing there's not much manipulation in this market though.

let-them-eat-cake's picture

Fundamentals: Try taking a wee peek at them.

akak's picture

Johnny come lately silver bugs being pounded hard tonite.  Told you all this was coming and you all chose to junk.

 

Die silver bug, die!

ThunderDumbass, repeat after me:


.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... only $5 to dig from the ground ....

.... must .....eat ..... silver ..... owners' ..... brains .......

 

MGA_1's picture

Same same market that almost pushed silver to $50 last sunday is now down $5 in a heartbeat?  Hmmm... looks like a fat finger found the access market.

razorthin's picture

They call these gifts.  Equity investors should be so lucky.

Shock and Aweful's picture

I know what I will be buying tomorrow morning....if this holds out that is.

Bicycle Repairman's picture

Somebody made a mistake that they'll regret tomorrow.  BTFD, if you can find any.

jerry_theking_lawler's picture

que the trolls.....they seem to always be lurking, ready to pounce at any moment...if trolls can pounce....

Korrath's picture

I'm cannon-balling back into this pool tomorrow morning.  A gift re-entry point like this should not be wasted.

SME MOFO's picture

I dont care who you are, its always hard to man up and buy into a kick in the balls like that.  MF global is fucked beyond repair all trading screens blank. 

lynnybee's picture

yea, well, i'm an old woman & i'll be at the coin guy's door when he opens tomorrow !!   thank god, i've been praying for a smashdown .    & if it's lower on Tuesday I'll be back there buying a few more silver eagle bulloin rounds ........... i learned a whole lot on this ZEROHEDGE website !

SME MOFO's picture

you seem like a nice lady.  I'm trying to buy a new car with a one lot in 10 minutes.

SilverBaron's picture

You might not get that chance, it's already coming back up.

topcallingtroll's picture

A coin dealer wont mark down his product unless this is sustained.

Golddealer.com or CNI is your best bet because they run a hedge book and try to stay exposed just to the spread.

Bastiat's picture

They can't stop the squeeze coming from the physical side but they can make sure very few will get to ride the physical market's coattails, levered through futures contracts.  Anybody with a stop, got hit on that one.  And they'll keep raising margins.   But I don't think they will shake much physiical loose.

JLee2027's picture

If the large buyers were watching silver from the sidelines, you can bet tomorrow a lot of them will be jumping in the pool. Bubble my ass.

max2205's picture

This is going to get uglier real fast

Moe Howard's picture

BTFD!!!!!!!!!!!!!!!!!!!!!!!!