Silver Headfake Report: 22 June, 2014

Monetary Metals's picture

by Keith Weiner


Something extraordinary occurred this week. On Wednesday, the Fed made a routine announcement. That day, the price of silver was rising, but not out of the normal. Fireworks began on Thursday, and in 6 hours, the price of silver skyrocketed by 5%.

We have never before changed the headline or format of the Supply and Demand Report. However, it is warranted under the present circumstances.

The Fed’s announcement was mundane. It will continue tapering its bond purchases, from $45B monthly to $35B. It will continue its low interest rate policy. It cut its growth forecast. This was all expected except, arguably, the cut in the forecast.

Some pinned this move on the unwinding of the Chinese commodity finance scheme. That unwind will involve selling metal and buying futures. The impact of this is a rising basis, but probably not a rising price.

Many said that that the Fed was to blame (or credit). One commentator even said that gold had now become an inflation hedge. Apparently it wasn’t last week, but now it is. We respectfully suggest that he step back and take a deep breath.

Looking at a price chart, the action is pretty obvious. This candlestick chart is not the standard chart format we normally use in this Report.

            Silver Chart
Silver Chart 

The blue line shows support around $19, going back 7 months. In the last few days of May, the silver price broke below that line. But by June 10, the price broke out through the line sharply. The breakdown at the end of May was a false breakdown.

Thursday’s price move also drove above the 100-day and 200-day moving averages (not shown). In March, silver had dropped below both averages, which have been falling for a long time.

There are other ways of analyzing the silver price chart, though that is not our focus here. No matter how you look at the price chart, the sharp spike in the silver price appears very bullish.

We therefore want to look at another chart, showing the silver basis and cobasis. Think of them as measures of abundance and scarcity, respectively.

We’re going to skip the gold graph this week. Silver did what gold did, and more.

           The Silver Basis and Cobasis and Price
The Silver Basis and Cobasis and Price

Normally in the Report, we include a long period of time (e.g. October 2013 through June 2014, or 8+ months). This week, we zoom in to see detail. The graph begins on May 27, which is when the silver price broke down below $19. We can see a decrease in abundance (blue line) and an increase in scarcity (red line) through June 4.

Then the price begins to rise, and with it abundance. Scarcity drops. The basis and cobasis made large moves. For clarity, the zero line has been drawn in heavy black and the region above is shaded light blue.

From its low, the basis rises from -0.24% to +0.35%. The basis is the carry you can earn in silver. To carry is to buy the metal and sell a futures contract. The annualized profit on a trade with less than 3 months to maturity is 35 now basis points. That’s a lot. The 3-Month Treasury bill, for comparison, earns 2 basis points.

So what is this telling us?

Silver futures were heavily bought. While there are other buyers of futures (e.g. electronics manufacturers who plan for their needs in advance), such a sharp change is generally driven by speculators.

Why do speculators buy silver futures? They anticipate a rise in the price, from which they hope to profit. They can drive the price up with their buying, as we see yet again this week, but they don’t tend to sustain big price moves. When we say they anticipate, we really mean front-run. They are expecting, rightly or wrongly, that real physical demand is coming. They want to buy ahead of it, and sell into it.

This week, their expectations of hoarders changed significantly. Speculators now believe demand from hoarders will rise.

Hoarders are, in many ways, the opposite of speculators. They do not use leverage. They do not buy with the intention of selling soon. They are not necessarily thinking of profits when they buy. They are thinking about preserving wealth, perhaps for the next generation. They take metal out of the market for the long term.

It is the hoarders that speculators are trying to front-run.

Clearly, speculators this week expect a growing demand to hoard. That’s probably what that analyst meant when he said that gold became an inflation hedge this week.

The speculators may even turn out to be right. It is possible that real demand for physical metal, which does not exist in the market today, will begin ramping in the coming week. Perhaps this time the speculators know something that the hoarders don’t yet know. There is a first time for everything, and this could be the first time that speculators jumped the gun on a Fed announcement and beat the hoarders to buy at the last of the lower prices.

We wouldn’t bet on it.

And that’s the whole point, isn’t it? The silver longs are indeed betting on it. When they use 4:1 (or greater) leverage to buy a silver future at $20.86, they are hoping to be able to sell it soon at $21.86, $31.86, or $186.

I had a brief twitter exchange with someone this week. He said that the basis is not a good indicator of timing. He added that the there was a collapse of the cobasis in January followed by a long rally.

He is correct that the basis does not give timing. It is entirely possible that the silver price chart now looks so tempting, that more traders will pile in to the metal this week. However, he is not quite correct about the “long” rally. It lasted for about two weeks, and took the price from $19.15 to $21.89. By the end of March, half the gain had been given back, and by the end of April all of the gain was gone.

Let us all recall for a moment the long rally from August 2010, to April 2011. The silver price rose from $18 to $49. That was a long rally, in terms of time, over 8 months. More importantly, it was a long rally in terms of price action: 172%. In that long rally, by the way, we observed backwardation in contracts dated out to 2015. That simply is not the case today.

Here is a graph showing the basis graph from January and February of this year, overlaid with price.

           The Silver Price and Cobasis Jan-Apr
The Silver Price and Cobasis Jan-Apr

This shows the basis for the July contract, which is around half a year from expiration in this time period. Being farther from expiry, it doesn’t yet undergo the higher volatility of the March and May contracts that we showed in the Reports of that time period. Being farther from maturity, it is not directly comparable. An apples-to-apples comparison shows that the drop is much bigger this month than it was in January.

There is a negative feedback in a rising price with rising basis. Silver is a monetary metal. This means that it’s unlike other commodities in that it is accumulated without any particular limit. The ratio of stocks to flows (i.e. inventories divided by annual mine production) is measured in decades for silver. For normal commodities, the ratio of stocks to flows is a few months—a fraction of one year’s production.

This means, among other things, that the supply of silver to the market need not come from the mines. All existing stocks of silver are potential supply, under the right conditions, and at the right price.

A rising basis combined with a rising price means that demand for futures is exceeding demand for metal. With rising prices, the demand for metal drops while the supply rises. Unlike in other commodities, existing inventories add to supplies.

With a high basis, the marginal demand for metal is to go into the warehouse, to go into carry trades. When the basis is rising, then warehousing is rising as well.

The problem is that, eventually, what goes into carry positions must eventually come out. The warehouse, formerly the marginal demand for metal, becomes the marginal supply. Down comes the price, perhaps more quickly than it went up.

There is one final thing worth looking at. Commodities went up at the same time as silver. Here is a picture of the prices of silver, lumber, and cattle.

           The Price of Silver, Lumber, and Live Cattle
The Price of Silver, Lumber, and Live Cattle

Lumber and especially live cattle are not for hoarding. They are for consumption, and of course for speculating (everything is for speculating in the regime of zero interest). We would not expect hoarding demand for silver to coincide so neatly with rising real demand for wood and meat. But on the other hand, speculative demand for silver can perfectly coincide with speculative demand for wood, meat, and all sorts of other things. Why shouldn’t traders bet on a rising silver price and a rising beef price?

Whatever it may mean, that traders bought these three things at the same time, we doubt it is that demand for hoarding silver is on the rise. While it may be different this time, the most likely outcome is that silver speculators will drown in a deluge of metal coming to market.

This is a good opportunity to reiterate our long-standing advice. Never naked-short a monetary metal.


© 2014 Monetary Metals

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AlgoCZ's picture


Here is how daily market operations of the FED affect prices of assets:

SnatchnGrab's picture

Another currency people might want to look at is .22LR. 

El Hosel's picture

Wake me up when silver is up 5% at $52.50...  Silver at $20, spy at 1900 = same smell. Wake up and smell the corruption.

Moar Price Discovery would be nice.

assistedliving's picture

yeah but i can wipe my ass w/ paper

mjcOH1's picture

And think of the BTU value.

msmith9962's picture

Anything wrong with buying a handful of 1/16 AGQ $115 calls?  Seems like some cheap insurance.

F em all but 6's picture

All irrelevent in the long term. USD will go to zero. Its the flight to saftey that will benefit those that stack and wait. A wheel barrel full of dollars for an ounce of silver will pay off a lot of dollar denomonated debt. Hell on earth is on its way. Hedge accordingly

Conax's picture

"It is possible that real demand for physical metal, which does not exist in the market today, will begin ramping in the coming week."

The Chinese and Indians would beg to differ.

Here in the US, maples and eagles are flying off the shelves, coin demand certainly does exist at these prices.  I think anything as beaten down and oversold as silver can make big moves without warning that are perfectly natural.  If the price moves above 30, there will be a lot of phyzz come available, since many people will dump because of the last two years of suppression.

joego1's picture

Buy the hall of mirrors.

Winston of Oceania's picture

Well you simply can't shoot werewolves with either gold or fiat so we have that going for us...

vmromk's picture

Listen to the moronic author at your peril.

He is an outright idiot.

Fuh Querada's picture

the same can be said of most of the garbage appearing in the ZH header section. Exceptions like WB7 and testosterone & very few others prove the rule. Only redeeming feature are the comments.

JerseyJoe's picture

I have looked at this company for a while now ala ZH.   What you have to realize, is this company makes it's money selling tech advice on a manipulated market.   They (and others) refuse to believe/acknowledge that these markets are manipulated so they are basing their market calls on pure BS.  They are being played!!!   But their foolishness helps the PM longs because it is analysis like this that drives the hedgies deeper into a short position that is going to explode in their faces.

In contrast check this out:

This is far more realistic on what is really happening and Macguire is not alone.   We have an epic short squeeze building within the hedgies.   AND Hedgies have no phyzzz to cover - THEY HAVE TO BUY PHYZZZ COVER!!!   This will blow up to the upside.  And this company will be out of business.  Or screaming buy buy buy.  

Good luck with that!   

Fuh Querada's picture

Maguire makes the important point that the charts are painted at will by the bullion banks. Still apparently not widely realized.

CultiVader's picture

I listened to the Macguire interview and it made a lot of sense with the historical commercial short postions in place. Good call JJ. Will wait a month or so to buy more Ag after the spike and correction.

JerseyJoe's picture

Yeah - more sense than trying to tease predictions out of trend data the bankster manipulate 24/7 to achieve the Pavlovian response they looking for out of the "tech mavins" as Macguire explains.  

I still find it funny that virtually every tech "guru" claims the markets aren't manipulated because it would expose how worthless their reports are.  And this guy is one of them. 

Quinvarius's picture

I was going to lay into him.  But your post pretty much summed it up.

bombdog's picture

What was the gist of the article? Short covering? Is he bullish or what? Silver goes up as an inflation hedge. As for "hoarding" since when was that a driver of prices on the crimex? The price goes up when the banksters are ready. Looks like they are ready.

Watson's picture

Why is this guy bothering about a price movement around USD 20-50, when back in 2011 silver was over USD 40-00?

And then did an absolutely classical double-top and has been losing air ever since...


SilverIsKing's picture

The absolute classical double-top garnered scores from the judges as follows:  10  10  10

Huge degree of difficulty and it stuck the landing like a pro.

That said, you clearly don't own any.  Good luck to you.

realWhiteNight123129's picture

THe article is quite good except on the speculators driving the price of cattle and lumber alone. Speculators can indeed drive the price of the basis, but with a tight stock to use ratio and perishable and high cost of carry of cattle, the spot price of Cattle reflects much more real-time supply and demand. Given that the soft commodities are perishable, cornering is much tougher to accomplish.

Thomas Tooke explains the reason while all commodities have a tendency to go up during wars. 1. Fiscal situation and more printing excepted for war expenditure when Napoleon escaped from Elba. 2. Supply and logistics issue created by conflicts. 3. Outright shortage for key commodities. During the 1797-1821 British suspension of convertibility (a bit similar to our regime since 1971), when Napoleon escaped from Elba, Gold and commodities started to shoot up. 

Today it would be oil. in the 1960s, it was cotton which went to the moon.  So nothing surprising in the co-movements of commodities if one knows history.

Bro of the Sorrowful Figure's picture

a famous goldbug once said in response to a question about what he thought of silver: silver is like gold, but with a super powered jet pack. loved that. been stacking even more ever since.

fonzannoon's picture

" While it may be different this time, the most likely outcome is that silver speculators will drown in a deluge of metal coming to market."

I will never understand silver. There is either a massive abundance of it, or none at all. 

Downtoolong's picture

I think the reason silver went up is that my 300 share short position of SLV put options struck at $19 expired on Friday, and some HFT algo went berserk trying to trade its way out of a losing position.

Hey, it’s just as likely as any other explanation.

AdvancingTime's picture

After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader you are wrong. An unholy alliance of the Federal Reserve, the government, and the too big to fail has left the rest of us in a precarious position.

For the big boys, its insider information and computer trading, this includes computing patterns that exploit where stops are placed, this improves their ability to wash the weak out of their positions. The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. More on this subject in the article below.


USisCorrupt's picture

I did not realize that charts even matter anymore.


EVERYTHING is rigged and until it is not why bother analyzing it. I just use my common sense and buy what I think has VALUE and it surely is not green paper and electronic digits.

NOTfromSanFrancisco's picture



Charts matter after everything is said and done... Anymore, rarely beforehand...

DeadFred's picture

Everything is rigged and that is why charts matter. They don't rig the markets by constantly buying and selling huge positions, they do it by manipulating the market at the critical points on the charts. The machines and others watch the charts and act on what the charts say, not somebodies evaluation of fundementals. Speculators jumped on silver because there was a false breakdown (a bullish signal) and it went ballistic when it broke through a multiyear down trend line. Look at a multiyear silver chart with the price capped by a straight line down from the highs and supported by the $18 bottom. That triangle had nowhere left and silver HAD to breakout in one direction or another. It went up and the speculators jumped on the chance that this is the big move that many expect. I do, and the charts say this may be it. Time will tell but the risk is low because the $18 support is strong. Below that is $16 and $14.

lunaticfringe's picture

Excellent. I use the very same logic. Years ago, I became a complete gaper while watching cnbc broadcasters yak ad infinitum about the "recovery" and the manipulated numbers spewed forth by the BLS each month.

Who the fuck cares about any of those opinions when in fact they are all based on the same garbage in-garbage out numbers since 2008? They have spun the same lies so many times that they now believe their own bullshit. I suppose the oligarchy has a show that must go on. 

El Oregonian's picture

Yes, all his "Blah-blah-blah" is just noise. Just keep on stack'in. If it drops in price just consider it 'on-sale' and add more... You'll be nicely rewarded for your efforts.

SuperRay's picture

Paper = bullshit. End of story

Pinto Currency's picture


The LBMA is trading more than 1 billion oz. of silver per day.

This is paper trading not trading of silver. and therefore basis/cobasis on the LBMA and Comex only have marginal meaning as they are based on fictitious trading.

The Shanghai Gold Exchange silver price premium is > 5% over London and this is a market where you have to deposit a bar to sell a contract.  A real market.

There is a disconnect between the London paper silver price and the Shanghai physical silver price.

Shuttering the Daily Silver Fix in London after 117 years is not signalling that everything is great with the paper silver markets.