Gold and Silver Speculation

Monetary Metals's picture

by Keith Weiner


There is a stark difference between the states of the markets for the monetary metals. The number of open futures contracts in gold is low, while in silver it’s high. First, let’s look at the data and then we’ll discuss what it means.

Here is the graph showing the open interest.

Gold and Silver Open Interest

The picture is clear enough. Since the beginning of fall, the number of gold contracts has blipped up and down and now there are somewhat fewer (-3.7%). Meanwhile, the number of silver contracts has gone up substantially (+39%).

Now let’s look at the ratio of gold contracts to silver contracts, going back to 2010.

Open Interest Ratio

There is an unmistakable downward trend since the middle of 2010, almost 4 years ago. Then, there were about five gold contracts for every silver contract. Today, the ratio is down to two.

OK, but what does this mean?

Open interest is a proxy for speculative interest. This is not simply because contracts are created by buying, and destroyed by selling. You can’t assume that contracts are created and destroyed as the price moves. To see why it doesn’t work that way, look at the stock market. The price of a stock can move all over the place, but there need not be any change to the number of shares outstanding.

In the futures market (unlike in the stock market), the number of contracts changes continually. Contracts are added or removed by the computer software that operates the market. When you buy or sell, an existing contract may be transferred from one party to another, or a new one may be created.

It’s complex, but in essence if you want to buy a contract just when else wants to sell, the contract will change hands. It works similarly if you want to sell short, right when someone who is already short wants to buy.

By contrast, if there is no current owner of a contract to sell it to you, when you want to buy, then a new contract must be created. Who sells, who takes the short side of this contract? It can certainly be someone else wants to speculate on a falling price. There are always (well, usually) traders who go short silver. However, I don’t think that this is the full explanation of the data shown in these two graphs.

I favor a theory of arbitrage. If it’s profitable to buy metal in the spot market and sell a future against it, then someone will take this trade. This short seller is a source of unlimited contract creation, if it’s profitable.

It’s called carrying the metal. If you carry, then you make a small spread—without price risk. This spread is called the basis—the price of the future minus the price of spot metal. Or, more precisely, basis = Future(bid) – Spot(ask), because you must pay the ask when you buy the metal, and accept the bid when you sell the future.

Let’s take a look at the gold basis and silver basis for the Dec 2014 contract, from early fall through today.

Gold and Silver Bases

The profit to carry gold has been steadily falling. It began at 0.35% (annualized), when the duration was 15 months. It was hardly the stuff of legends—or getting rich quick—even last October. That meager margin has been steadily eroding, and is now 0.1% for 8 months. Suffice to say that gold carry has offered little or no opportunity to make money. Therefore the gold carry trade has not been a big source of contract creation.

The profit to carry silver, by contrast, has not much changed. It’s still around 0.5% (annualized) or more. This is far more attractive than gold, and probably more attractive than other opportunities in our zero-interest world. Therefore, the silver carry trade has created many silver contracts.

What drives the basis spread? Speculators, when they buy a future, drive up its price just a little bit. This is the inducement to the arbitrager to buy a bar of metal and sell the future to the speculator. The arbitrager carries metal, to provide a service to the speculator. He is the one who “converts” (I use this term carefully, in the full context defined here) metal to paper, a bar to a contract. He’s ready, willing, and able to deliver that bar should the speculator have the cash to demand delivery.

The long and short of it (to make a tired cliché into a dreadful pun) is that in gold, there just is not much speculation, and therefore no profit to be made carrying the metal, and therefore when a buyer occasionally comes to the market his demand can be satisfied by a previous buyer who is selling a contract.

However, in silver buyers are running at a much more torrid pace. They’re too numerous to be satisfied by the occasional seller. They bid up the price of the futures, which makes it attractive for arbitragers to carry silver and sell them the contracts they desire.

Incredible as it may seem, at the low price of $20, speculation in silver is rampant. Market participants are trying to front-run a big price move. Due to rumors or gut feel or for whatever reason, they are expecting not only that silver will outperform gold, but that the silver price will rocket to a much higher price. Their frenetic buying of futures has pulled a lot of silver into carry trades.

Maybe hoarders will all of a sudden increase their appetite for silver metal that they will take off the market and bury. If so, the silver futures speculators will be proven right, and they will make a lot of dollars (money is a different story entirely).

I would not recommend that anyone bet his hard-earned money on a maybe. The data—both open interest and basis—show that the buying in the silver market is primarily speculators. They cannot sustain a higher price forever. They are merely trying to front run a higher price driven by hoarders. If hoarders don’t come in, the speculators will be forced to capitulate. When that happens, watch out below.

The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.


© 2014 Monetary Metals.

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Kina's picture

the paper produced price of metals bears little relationship to demand and supply.


We have seen susstained massive demand for gold in Asia for the past few years...and in that time gold has fallen...we saw Silver trashed a few years back.... with humongous selling in a few minutes in the off market...designed to crash it as hard as possible.


Likewise we had 400 odd tons of paper gold dumped on the market in a few hours...which only the fed or bullion bank could do....for obvious purpose of smashing the price of gold down. ... but resulted in increased Asian demand and physical possession of gold.


To make predictions based on chart analysis is beyond crazy when it is PATENTLY OBVIOUS that the price of silver and gold has been for a long time heavily manipulated and supressed by great powers.... and even with this great smashing down of the metals there is enough demand there to keep it popping up. Ex the almost daily smashing down of the metals their current price would be very much hight.. Most certainly silver would be over $50 and gold over $2000


FFS the cost to mine and refine silver and gold puts it above where it is now.



Saqishah's picture

This is a good acknowledgment for me! I am in surprise to see it. Actually I am in favor of which impresses me a lot. Silver and Gold effects me and my Vogue fashion.

Hapa's picture


I alone am preventing that which is not happening anyway.

The wheels on the bus are going to fall off's picture

Its important as a PM investor like myself to see posts like this, because it allows you to make an informed decision on future investments (the balance of probabilities)

i call bull shit on this post, i am still waiting for the $1000 per ounce for gold that Morgan Stanley forecasted for this year..../sarc

Whether it is 20, 23, 25 30 an ounce, the people who believe that the monetary policies are flawed and the fiscal policies are unsustainable are in this for the long term. Imagine even if 10% of the stock market investors move their money into commodities, it would drive the prices crazy, but this is what is likely to happen when we start seeing the policies fail (which they will)

Do not let these posts show your weak hands, this is a long game, that is getting shorter each day. 

Tall Tom's picture

I remember $3-$4 Silver. I bought all the Sterling Silver Jewelry and Scrap that I could at $0.05 to $0.07 per gram. Of course when I sold it as Jewelry for a hefty premium I would take that Cash and convert it to .999 Rounds. (I liked the late 1990s and early 2000s.)


The same can be done today. You can gain.


So Ag can crash to $12? Am I concerned? No. I will buy more.


But Copper is taking a tumble, Copper Mines will cease operations as a result, and since Silver is a byproduct of that mining process then Silver inventories will also diminish.


Furthermore the Gold/Silver Ratio was not even considered in this article.


I think that Silver has found its relative bottom in the $18.50 area. No real concerns.


But it can happen. Yes $12 Silver can happen. It is just not likely to happen.

manofthenorth's picture

This article has more holes in it than my screen door. The CBs are driving, they can set the price in FIAT at whatever they want because they can create all they want. That does not mean that miners can afford to produce at that price or that anyone will sell at that price so it will self correct at some point as well. But riddle me this ZHers. When GS ratio in FIAT is 66 to 1 and it comes out of the Earth at 9 to 1, is $20 Silver supposed to be $144 or is $1300 Gold supposed to be $177. As a Gold PRODUCER I can tell you that when I pay $250 for every barrel of diesel there will be NO production at my mine at $177 Gold.

So when I consider that Silver is probably at least 2 to 5 more rare above ground I do not need "a hunch or gut feeling " to SEE that Silver has A LOT more upside potential.

ALL this article speaks to is the casino games that most here KNOW are jury rigged bullshit. IT HAS NOTHING to do with the value of the Metal or the cost and ability to produce it.

I tell my mining buddies that Silver will be worth more than Gold SOME day. I may not live to see it but it WILL happen.

KEEP STACKING and the casino will have to close , that is what I KNOW.


zeroheckler's picture

"When GS ratio in FIAT is 66 to 1 and it comes out of the Earth at 9 to 1, is $20 Silver supposed to be $144 or is $1300 Gold supposed to be $177."

I hope that I'm wrong, but since silver is irreversibly being consumed at a much higher rates than gold, wouldn't this point to a lower gold price?

logicalman's picture

In the long run, which is likely to hold its value beat?

Metal or paper?

Simple really.

Only an 'expert' would write a long article to say that. (I'm not suggesting this is what the article says, by the way)

'Experts' in many areas need complication to justify their title.


And pretty coloured charts.

manofthenorth's picture

I can make it easier.




Nolo contendere. Like a MMA match between Godzilla and Bambi.

honestann's picture

$16 silver?

$13 silver?

Can this guy spell "back up the truck"?

Carl LaFong's picture

A clear buy signal from Weiner...or is it "Whiner?" 

phantom blot's picture

neutral price ? WTF - bullshit term - and I aint a bull on silver in the short / mediun term

AE911Truth's picture

Could this help explain the difference in open interest between Silver and Gold?


Random_Robert's picture

So let me get this straight....

First Wiener says that directional trends in open interest have no bearing on price movements in the metals,

but then the last point he makes is that if Silver open interest falls, price will fall....? 


Latitude25's picture

Western Central Banks  and bullion banks are in a trap set by the Asians.

johnnyblade's picture

Who has the cheapest prices on silver.  I've never bought a physical ounce in my life and was thinking about buying a little.  Thanks

RevRex's picture

Merit has the cheapest prices I have found, but they have a $1500 minimum order.


I like the Sunshine Rounds or ten ounce bars with the security feature,

giggler321's picture

F*** it, time to sell the monster box then?

RevRex's picture

$12 Silver?





And I suppose Gas will go back to 79 cents a gallon too!

quasimodo's picture

I still remember when it was 88 cents/gal. 

Life sure seemed a helluva lot simpler back then.

Conax's picture

"The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle."

Here's my analysis.

Kiss my ass.  Nobody should sell a single gram at these idiotic prices.

Silver hit $21 back in 2008.  The banks noticed trouble was afoot and put a stop to it.  Sentiment damaged, they got away with it.

It bounced along the river bottom until late in 2010, and hit the afterburners again.  At this point, the paper trade volumes went absolutely ballistic, the paper kracken was unleashed and is still puking up cash-settled contracts to this day. 

Let them drag it down, they will run out of metal, and we win. 

ebworthen's picture

The "neutral" price of Silver is $100/troy ounce without speculation based on paper.

But, we currently live in a paper world wearing newspaper hats and eating paper mache.

Those of us who wear real hats and eat real food will have to wait for the rain.

logicalman's picture

Just had awesome home made (by my son) smoked pork and habanero sausages for dinner.

I'm not a huge fan of rain, but I'm prepared for it.

As for the hat thing, I only wear them when absolutely neccessary - cycling in -40º requires REAL hats.


strannick's picture

+ a quardrillion drops of rain

Latitude25's picture

In the past ZH had good articles on gold and silver.  These days not so much.  What's up with that?

Lord Koos's picture

Bear market... not so exciting anymore.

Latitude25's picture

lol Yeah its's a bear market.  Tell that to 4 billion Asians.

strannick's picture

The problem is that for some inexplicable reason, ZH keeps publishing these Wiener articles. LIke his namesake, his articles are comically shaped, but poor for your digestion.

Hes a cross between an obfuscating academic bumbler, and a markets-are-rational idiotic apologist. Im sure he was an avid reader and admirer of John Nadler

KingdomKum's picture

we few,  we happy few,  we band of silver holders  .  .  .

bluskyes's picture you see my friends, it is foolish to be holding silver here. But since you are my friends, and I am a generous man. I will buy your silver for only $0.25 under spot. It is a generous offer, so sell now, before the price drops further.

Colonel Klink's picture

Another PM hit piece by a club member.

robertsgt40's picture

Right Col.  At $12 silver the vaults would be emty by sundown.  This goose fails to mention what happens when equities/dollar tanks.  Where will folks park their money?

Colonel Klink's picture

Vaults are nearly empty now.  What happens if a large paper holder wants delivery, oh yeah that's right, they can't.

The wheels on the bus are going to fall off's picture

Arent the large paper holders the main banks in America? they will never ask for phyzz, they are in it to manipulate it

Colonel Klink's picture

Yep, unless it's someone like Warren Buffet who has a large physical position and get's blackmailed to give it up in order to avoid prosecution.

Hubbs's picture

Gold is @ 1300 an oz, silver at 20 or a ratio of 65/1 vs the traditional 16-17 to 1 based on historical availability  (I make the assumption that when you dig for gold, you also get silver, and that refining costs are the same). The fact that silver has new industrial uses that have emerged over the last several decades naturally would scew this number from its historical baseline.

So are there are any computations which take into acount the consumption of silver to recalculate the  availability of silver left over to act as money? This new ratio might give some insight as to whether in RELATIVE terms, gold is overpriced or silver underpriced.

Ban KKiller's picture

Up arrow for red chile...

Silver beaches!

raeb's picture

The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.



The neutral price?  How do you arrive at that?  In the end, true supply and demand will rule.  Remember, the cure for low prices is low prices.

Colonel Klink's picture

That's paper silver, that's as good as Silver.  This one is for 275,000 ounces, you may want to hold onto that one!

-Lloyd Weiner

strannick's picture

In Wieners dimwit world, Comex is a rational market, well regulated, where market participants fairly trade and speculate. I would sooner believe in unicorns flying orphans to Santa's workshop, or that Jeffrey Christian is a decent fellow, or that Bart Chilton is an honest regulator. When criminality and manipulation are your starting points, the silver market starts to make a lot more sense. 

Quinvarius's picture

Every time you post and tell everyone to sell, the prices go up.  Literally.  Every time.  You try to justify your price chasing with market dynamics that no one in the market uses.  No trader trades based on carry anymore than they buy and sell Treasuries for the yield.  If they did trade off of carry, gold would not be stuck in backwardation, and gofo would not be going negative all the time.  You are trying to paper trade momentum...period.  You are the next Gartman.  You have no experience.

If you want to know what is really happening, stop trying to out think the issue and listen to Schiff.  There is no new dynamic required to understand gold demand.

GS-DickinDaMuppets's picture

The equation is very simple: (MOST) buyers of PHYSICAL Gold and Silver are placing a bet AGAINST the dollar (FRN).  They are betting the current perceived  purchasing power of the dollar will go DOWN in the future (INFLATION).  It is that simple - nothing more or less.

The exception to the above are, of coarse, the speculators (Gamblers) and the manufacturers that make products using silver.

SilverIsMoney's picture

The OI in silver is people shorting... Were either setting up for a massive short squeeze or price slaughter. It has nothing to do with people prefering silver and everything to do with it being an easy short because its an open secret JPM manipulates the crap out of it and price has obviously been capped at 20.20.

SilverIsMoney's picture

Btw... Dont believe me? Then why does silver OI collapse when it goes up? Golds then goes up because people start going long as the silver shorts exit. You even look at the chart? This inverse game has nothing to do with actual interest.

Random_Robert's picture

Umm not sure you understand how the metals futures market operates.

Open interest can only be increased by the intention to buy.  

Short sellers (naked or otherwise) can not move open interest one way or the other- all they can do is stop existing contracts, or stop new issuance.

- every contract has to have a buyer in order to increment OI higher...

Agstacker's picture

The more fiat FRN's I convert to silver the happier I get :)

MeMongo's picture

My Grandfather was caretaker of a very large farm in Missouri that belonged to a billionaire banker, that's when a billion was alot, but this banker advised my Grandfather to buy silver all throughout the late 70's, and he did! The little tidbit he forgot to mention was when to sell. My dear Grandfather sat on that pile of 10 ounce bars that I was so fond of as a kid for roughly 25 years until he was forced to live at $10 an ounce. A couple years later we all know where silver went...hint near $50 . The last advice my Grandfather gave me was this " be careful of that silver boy, at times it can be very volatile". Most specifically I remember him always saying " if you don't hold it you don't own it" If any of you bitchez had a Grandfather that taught you to hunt like mine, than you're more than aware how salient those words of advice can be.

J S Bach's picture

Just remember the historic ratio of silver to gold... 15 to 1.  This alone would drive any mindful "speculator" into the universe's most conductive and lustrous metal.

TheHound73's picture

Aye, I've been looking at the Gold/Silver ratio since 1560.  Seems like in modern times anything below 30-to-1 is sweet time to convert Silver to Gold. At 66-to-1 silver just looks oversold.