Silver (And Gold) Are Breaking Out Again

Tyler Durden's picture

Despite the utter deluge of "this won't last" explanations of why yesterday's surge in gold and silver is transitory (and nothing to worry about), the sell-side is staring agog this morning as the precious metals markets are breaking out to new cycle highs. While the CCFD unwinds appear the clearest driver, Yellen's aggressive inflationist bias, and unintended consequence of increasing supply destruction (as prices were manipulated below production costs) appear to be trumping any short-covering, opex-related reasons for the push higher.

PMs are breaking out again...

 

Much to the chagrin of the analysts:

NY Trader (via Bloomberg) - Gold Spikes on ‘Massive’ Hedge Fund Short Covering in NY

Spot gold touched $1,322.12, strongest since April 15, partly on buying led by leveraged accounts that included hedge funds, according to an FX trader based in North America.

Gold Spike Yday May Be Related to Quadruple Witching: BMO

Yday’s 3.3% spike in NY gold futures to $1,314/oz “may simply be a function of closing out or rolling over large futures and options positions” that are part of today’s so-called quadruple witching, when four futures, options contracts expire, writes BMO technical analyst Russ Visch in note.

 

He notes last “dramatic spike” in gold in March was during that month’s quadruple witching, after which gold retreated from nearly $1,400 to $1,240/oz

 

Says long-term downtrend in gold is “probably not” over

 

Watching for 200-DMA to turn higher, which wold increase the chances that a bottom is in.

SMRA - Be Skeptical Of This Gold Rally

Make no mistake; the latest data from the CFTC regarding Commitments of Traders reveals nothing to suggest that there was a cathartic level (i.e., a contrarian extreme) of disdain toward gold at the late May/early June lows. For this reason, we think the gold market lacks the psychological foundation for the recent rally to be the start of a major turnaround. Instead, as the chart below shows, gold is rallying as part of a predetermined pattern (triangle), with the primary source of inspiration for the late May/early June reversal being the yellow metal's extreme undervaluation vs. equity prices.

But it appears other factors are at play.

As CCFDs unwind..

Here's how that might work:

In the gold markets, the paper or synthetic 'demand/supply' dominates pricing as opposed to the non-precious metals which have at least a grain of fundamental sense to them still

 

Throughout 2012/2013 - as the gold CFDs were booming, Chinese demand for physical gold was soaring as the price plunged (due to the forward hedging required in the CFD transactions which pressured gold swaps/futures lower and thus dominated pricing)

 

As CFD unwinds hit en masse, these flows must unwind (cover hedges and ensure the underlying physical is there... and if not buy it)

 

This will pressure gold futures prices higher and because unlike in non-precious commodities where spot markets wag the tail of the futures markets - spot gold will likely be dragged higher also (as we know the demand for the physical has been high).

So unlike in the industrial commodities - where the CCFD unwind drives prices down as the image above shows, thanks to synthetic manipulation and domination of the paper gold (and silver) market, the opposite occurs in PMs.

... and perhaps most importantly, supply destruction is starting to bite:

Mining Company Is Canada’s Second Chapter 15 of 2014

 

Mining company Veris Gold, which listed debt of as much as $500 million, is the seco d Canadian business to file a Chapter 15 petition so far this year. Veris sought court protection in Nevada and Fox Rothschild is debtor counsel. While Canada was the biggest source of Chapter 15s in 2013, Brazilian companies are the biggest source of these cases this year.

Meaning less and less gold is produced as there is virtually no margin at current prices, which means supply will soon tumble or force more consolidation. The end result, far less supply even as demand from China, be it for funding deals or otherwise, continues to rise.