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Like Dripping Silver Icicles
by Keith Weiner
I don’t typically emphasize price charts in analyzing the market, however something unusual has been happening in the spot (physical) silver market. It did not happen in the silver futures market, nor in the gold market. I have been bearish on silver because of its supply and demand fundamentals, and the price action shown below adds a new dimension.
Let’s take a look at a candlestick chart. Candlestick charts show the open, close, and price range during a particular period. The region between the open and close prices is shaded. Green means that the price rose during the period and red indicates it fell.
In this chart, each candlestick corresponds to one hour. The numbers at the bottom are dates. The chart shows from July 17 to July 25, 2014. As with all charts in this article, times and dates are Arizona USA time (PDT).
Silver Hourly Candlestick Chart
Notice the “icicles” (chartists often call them hammers or hanging men) dripping all over the place? They occur at different times of the day, including normal market hours in New York, Europe, and Asia, and they aren’t mere artifacts of market open or close, or illiquidity. I have not noticed them with such frequency before in silver. What are they?
Each one is a brief but dramatic price drop. If both the drop and the recovery occur within the period of the candle, then the drop will not appear shaded.
If you zoom in to one of them, using one-minute candles, they still look the same.
Silver One-Minute Candlestick Chart
This one had a 1.3% price drop. The biggest this week was over 1.6%.
Let’s zoom in further. In this next chart, each tick mark is a price quote. There can be multiple prices in one second, or several seconds may elapse between.
Silver Price Tick Chart
The whole cascade down occurs from 20:34:09 to 20:34:19, or 10 seconds. Note that there are no quotes after that until 20:34:22, or 3 seconds later, when the price is back to its prior level.
Unfortunately, I don’t have bid and ask data for this period. If you have this data, please email me or contact me with the form on the Monetary Metals site.
It looks like a few orders to sell at the market—i.e. on the bid—punched through the thin bid stack and found what existed below. Air. Sellers stopped entering orders for a while. Finally, the first buyer entered a buy at the market order—i.e. at the ask—and the price jumped back up to its prior level.
Let’s take a brief look at how the bid and ask work. In a live market, there is no such thing as a monolithic price. There are always two prices. If you want to sell now, you get paid the bid price. If you want to buy, you pay the ask price.
The bid price is not exactly synonymous with “buyers”. The typical buyer wants the goods now, and pays the ask price. However, a particular kind of buyer puts in a bid, that is a price to buy, which is below the current ask price. This buyer is equally content getting filled, or going home with his cash instead of the goods.
He is typically an arbitrager. He is profiting from a spread between two prices. He buys in one market and sells in another. In the Monetary Metals Supply and Demand Report, we frequently discuss the warehouseman. The warehouseman buys physical metal and sells a futures contract. He is not speculating on a rising metal price, but earning the spread—called the basis—between spot and futures prices. There are other arbitrages, such as buying in London and selling in Asia.
The key point is that the arbitrager is straddling a small spread. He is sensitive to price. If he can buy for X, then it’s worth his while. But at X+1, it’s no longer profitable (or profitable enough).
We should keep this context in mind as we consider these mini-crashes. It looks like the bid disappeared. It seems premature to generalize, and say that the silver bid is disappearing. But it’s more than can be explained by glitches or coincidences. The question is what has happened to the silver arbitragers?
It could be that their source of funding has dried up. If you can’t borrow money to finance the trade, then you can’t buy silver to store it while you wait to deliver it. This explanation is not so convincing, as I don’t think that credit market is so tight right now.
Perhaps it’s not tight credit in general, but credit is withdrawing from commodity arbitrage trades. This is possible, as there have been several big banks closing their commodity finance operations. Recent uncertainty with the Silver Fix, the withdrawal of Deutsche Bank, and a fresh wave of manipulation lawsuits may all have helped pushed big participants out of the market.
Another possible explanation is that arbitragers are less willing to use credit, or use balance sheet capacity, for silver trades. Silver may simply look less attractive than other opportunities.
One thing is for sure. There is currently an attractive opportunity to carry silver. If you buy silver and sell a December future, you can earn over 0.8% annualized. This is a graph of the December silver basis.
December Silver Basis
Silver is normally a liquid market, but these icicles are showing us a picture of an illiquid market. They are also suggesting that there are no good opportunities for buying silver metal.
That’s what the arbitragers are doing: buying metal to exploit opportunities. If they are not bidding, it may be because they don’t have good opportunities. If so, then all that’s left is speculating on its price.
The bid price of silver for the December silver contract is now about 7 cents above the ask price of spot. Speculators use leverage. That’s the whole point of using futures compared to any other instrument or the metal itself. Leveraged speculators are pushing the price up, and the arbitragers are not able to keep up. The net result is the gap between physical and paper has been widening for a long time—with paper going up relative to physical. This spread hit a multiyear record on July 11.
What happens when faith in the “silver to da moon?” story dies out? Sooner or later, speculators will give up on waiting for $200 or even $50. A few orders to sell at the market could push the bid down to a whole different level. There is one risk factor to precipitate this, lurking right now.
Here is a graph of silver volatility. It has been declining for a long time. A spike in volatility will cause increased margin requirements for speculating on futures, and forced selling as a consequence.
Silver Volatility
In general, volatility is inversely correlated with steady or rising prices. For example, everyone looks at the VIX for the stock market. That chart does not look too dissimilar to this one. It’s something to consider. If silver trades at $20.70 with low volatility, what could happen to the price when volatility quadruples?
Whatever the cause of the silver “icicles”, demand for silver metal is not robust. The icicles look crashy to me.
© 2014 Monetary Metals
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Enough of the naked shorting business. I naked short crude all day long and I dont owe shit. I can sell a 100,000 barrels of the black gold into the market witht the click of a mouse...if the demand is there, it will gobble it up and bid for more. Its that simple. If the mysterious Asian buyers are lurking in the shadows, they would be stepping in and eating up these so called "smash downs". Gold and silver have a major beating headed there way.
you move that much cash and you can't even spell 'their'...?
Poor thing; his candles are dripping. It's too funny, really. The question is is in 2019 will you be glad you put your savings in Silver in 2014? Not what his candles are doing.
Be warned the price of silver could be $100.00 or 1.00 at any time.
As long as the paper market drives the silver price and the bankers and specs. are free to manipulate the paper price.
That's what our regulators are for, RIGHT???
ROFLMAO!
Charts? Oh my lord!
In silver?
The most rigged market on the planet.
Stack away.
I have the paper loses to prove that any other form of holding is a fools game.
Kieth, as you know, silver "lovers" on ZH hate it when you tell them they're going to get bargain basement prices. They value their silver in dollar terms and they want to buy lots and lots and lots of dollars with their silver as soon as possible, apparently.
I view those 'hangmans' like this- The banks dump a pile of shorts to drive the price down, but during the indicated timeframe, be it a minute or whatever, longs came in and bought them up, reversing the drop back upward.
The line hanging down is just a stupid banker's peckertrack.
It is a sign of opposing forces battling it out, minute by minute.
They also go upwards, the longs buy buy buying are stopped short by a big short dumpage, the price moves lower (during that same minute) and now you have long peckertracks sticking up.
The price charts of silver for the last few years suck.
I started legging in, in 2003. $1000 face 90% were selling for $3800.
But we live in the Twilight Zone.
I noticed the hangman's on all the PMs lately.
Didn't know what it means. Still don't.
the big boys naked shorts are biggest in the history of the CrimeX from what Gene is saying.
i know all the fundamedals for it by heart. Since when do fundamendls mater in the Twilight Zone.
Another interpretation about the candle stick pattern is that there is a constant and solid bid in the physical market now (that may or may not be hedged in the paper markets, but less apperently so for whatever reason).
Selling is buying and buying is selling in the new normal.
We've known for a long time the spot, or physical, price is a derivative of the paper price. Not vice versa. If you go to any dealer who sells physical, they will run out of silver before they raise the price above the underlying paper price. It's foolish to think these prices are a result of supply and demand for the physical commodity. This only works when there is an opportunity for price gouging for a consumable commodity like wheat or oil. Drought or unrest in the Middle East cause rapid price increases even if there is no eventual shortage of wheat or oil. And it's all driven by speculators and insiders in the paper markets.
"I have been bearish on silver because of its supply and demand fundamentals"
The guy is a twat. Here's what he's hoping for- "Sooner or later, speculators will give up on waiting for $200 or even $50."
Him and the rest of the Pilgrim society certainly hope they do.
Guess again, dildo. One star article, from the dark side.
Love it. Funny how you never hear: "House insurance is looking to get cheaper before the fire happens." PMs are insurance for financial collapse which could happen tomorrow or 5 years from now. Why does the price matter?
Price matters because the lower the price the more "insurance" you can buy.
'Zactly. I love the manipulation! How else could I buy silver at (or below) the cost of production?
"crashy"?
The only way the physical silver price 'crashes' is if the manipulators want it to!
Sounds as if the article is aiding and abetting.
It is now estimated that 54% of the annual global silver supply is used for industrial purposes. At present most of this silver is lost with very little recovered. Current global silver inventories are at low levels, estimated to be around 600 million ounces. Whereas just 25 years ago, in 1989, the global silver inventory stood at about 2.3 billion ounces. As a comparison of supply versus ever increasing demand, above ground silver bullion in 1950 was over 9 years worth of demand. At present this global silver supply now sits at 10 months of demand.
Remember that silver is rare compared to gold. Even long-time silver investors often overlook this fact. Even though gold is a highly desired item, it is NOT an industrial commodity. Whereas gold is desired, silver is needed. This makes it even more critical to take action quickly.
Consider that the world’s investors get their main clue from price. Because gold has traded at more than 50 times the price of silver, investors assume that gold is more rare than silver. Yet there is 200 times more gold available than silver in dollar value.
Only 35% of silver supply comes from pure silver mines. The rest is the by-product of gold, copper, zinc, and lead mining. In the wake of digital imaging, the recycling of photographic scrap for silver has flattened out. Return of silver jewelry dropped by 20% in 2007, and is expected to remain at similar levels for some time.
Silver deficits now run between 50-100 million ounces per year. The only way to bring the supply and demand for silver into balance is higher prices. This is where the dynamics of the silver market become very exciting for investors.
Think of it—the world has been depleting its silver inventory for more than 60 consecutive years, diminishing the only source of what is available for investment. And only now have we begun to collectively see that silver is a good investment.
Even as premiums rise and available retail supply dwindles, there is still time. Remember, the very best form of silver you can own is physical and in your personal possession
Silver is not an investment. It is a commodity. Bonds(debt) and equities are not investment either. They are finanical assets, i.e. promises of future cash flows. Investment is the act of spending for a new plant, spending on R&D. We have too many financial assets (promises of future cash flows) and not enough investments. A financial assets can be created against consumption debt (subprimes), or auto loans. Financial assets can be also created against investment, like when a IPO is raising money to actual spend on capex and not do share buybacks. Commodities share with good and services, their consumable nature. So Silver is also a present good. The yardstick dollar is backed over abundant credit (claims on future GDP). So when one says there is too much debt to GDP he merely says that there are too many promises of future cash flows in relation to present goods circulated in nominal terms. So the nominal GDP is too low in relation to Debts and Equities (future cash flow promises). Of course if all items of GDP raise in nominal price, the problem is solved (inflating away without real GDP growth). You can resolve the overleverage Cyprus style, i.e. debt is wipe off and currency deposits are wiped-off (but you wheat in the warehouse or Silver in the hand is untouched). Or you can resolve it Fed style, (or Argentina style), which is to inflate teh currency so much so that the nominal GDP booms in nominal terms due to inflation (even if it shrinks in real terms), while the debt stays in nominal temrs. Since the Gov does not want to get kicked like in Cyprus, they will inflate. But eitehr way you will still be better with a warehouse full of cigarettes packs, Silver, booz than with a bank account which has been wiped off, even if the stuff in your warehouse does not go "up" in price, in relative terms you have won enormously. Those are the two ways to get rid of debt.... Of course in a printing wipe off of debt (inflate away), Silver gets remonetized, and reacquires its monetary nature, so you can actually amplify the debasement of the USD and make a gain in real terms. Higher prices of Silver will replenish inventories you are alluding too.
"Higher prices of Silver will replenish inventories". True, but it will need to take MUCH higher prices to get there. When silver is allowed to re-bubble, inventories will be nil for some time, then the physical market breaks the paper scam, re-evaluation of silver, and TADA, you will get more supply again. But that's just my 2 oz. Time will tell.
+1. Only (slight) comment to your (gold) "NOT an industrial commodity" is that about 250-300 metric tonnes of gold ARE being used up for eg. contacts in electronics or coatings of windows. So about 10% of global gold mining supply is taken off the market for good, but the vast majority is not. No wonder they keep silver down (for now)... but watch out when this baby eventually will starts rock(et)ing...
Mr Weiner: You should learn the principles of the Currency, from Thornton and Fullarton and Thomas Tooke.
The demand and Supply of Silver has been broadly in balance obviously since the 1950s, yet the price is much, much higher.
The obvious factor is not the supply demand since the ratio of Silver to many other commodities has been only a function of monetization of silver or not and what goes one with the management of the currency. So checking this ratio you can checked if Silver is monetized (panic about paper currency) or not (rising just as much as the level of general price levels)
1. Argument of supply and demand balance is erroneous. You can check the ratio of Tobacco ex factory price to Silver, it is flat since the 50s (both went up enormously), with big spikes when the confidence is lost in paper. PFCCTOB Index on Bloomberg and XAG Curcny on Bloomberg. So compared to tobacco ex-factory, Silver is not more monetized than the 1950s. It less monetized than in 2011 and hugely less monetized than in the bubble spike of 1980.
2. Bank currency is only as good as the credit backing it. Since the credit contained very litte good credit (Chris Wallen explains the difference vis a vis the 50s), i.e. good bills (short-term, self-liquidating, and in relation to receivables of good services), the bank currency is crap (and in Cyprus as well).
3. In order to avoid massive bank bankruptcies "a la" 1838 wild cat bank episode, the Fed has swapped base money (m0) for the crappy credit in order to avoid a Cyprus moment.
4. The result is that the bank currency is not anymore threathened by default (like Cyprus)
5. However the base money M0 is now issued against absolute crap and totally corrupted.
6. Mr. Weiner looks like an agent of the banking cartel for failing to point that the main reason to buy Silver has nothing to do with supply demand but whether or not the paper currency is managed properly. It is not.
7. If the US does not have inflation, the government sees its debt gettting harder and its nonimal tax revenues sink. Meaning that in irredeemable currency inflation in a myth. I suggest you check the last 300 years of inflation data.
http://commons.wikimedia.org/wiki/File:US_Historical_Inflation_Ancient.svg (no more big green spikes down since 1931)
Since 1931, the Fed has been able to erase all the deflationary spikes. What is hard to control in irredeemable currency is never deflation, it is inflation.
As long as the Fed cheats and condones politicians engaging in war mongering in order to mask another dismal GDP quarter (potentially negative again), the currency will continue to sink. As long as incompetent bankers are bailed-out by defalcation of the savers and middle class, as long as real interest rates are negative and as long as Silver has a reasonable ratio to ex-factory tobacco by historical metric, your arguments will look like "paid for by the banking cartel."
The Silver is not much monetized against other commodies yet the credit backing M0 is absolutely horrendous, and the credit situation is not getting better as explained in the Bank of International Settlements´last report.
Hold your Silver.
Silver is not going to the moon (it never does), the USD is going to the shithole so Silver could get more monetized than it is today while measured with fast shrinking yardstick (USD).
Excellent post. this is exactly the sort of reasoning and research that returns the right answer vis a vis silver. I basically stop reading as soon as anyone mentions supply/demand; or I continue with a smirk to see what the rest of the confusion consists of.It would be very difficult to improve on your post as a a basic primer on Silver and it's function and meaning in todays world. As I reapeat endlessly; if your timeline is five years or more, and you want savings; the you buy Silver. Of course, no one listens.
Mr. Weiner will expereince supply and demand at the worst possible time...
PM's are insurance against fiat collapse, that's all. This time is not different.
Watch the actions only. Words are useless.
China buying gold hand over fist unrelenting for the period of time they did, is a significant action.
Actions, without fail, always indicate future reactions.
I'm going to quibble re: comparing silver with tobacco as any kind of yardstick of demand/supply. Tobacco demand is being reduced by government suppression via taxation as they use it as a cash cow.
If you remained silent no one would know what a trivial mind you have and how you have managed to miss the barn while noticing a corn stalk.
You are correct the demand for tobacco in the US is reduced, however Malhboro cigarettes are smuggled worldwide, it is hard to say if it comes from the US. The point is that the total wordlwide consumption of American flavor cigarettes is rising once you include countries in Africa which 20 years ago copuld not afford Malboro cigarettes. I have also the data on Tobacco leaves themselves. Those prices follow overal the CPI very well over a long period of time (CPI and Tobacco ex factory followed in lockstep CPI until Hedonics came in). Tobacco leaves were used in the US as money for a longer period than the fiat system today back in the XVIIth century in Virginia.
The Reason I used Tobacco Ex-factory price is because it follows very well the CPI index. The other reason I use Tobacco is because its short term demand is extremely stable. The long term demand might be shrinking but prices can adjust to taht.
There is also very little cross-elasticity. Tobacco, unliked other soft commodities ( beef for chicken or pork, or fish, wheat for corn) has no substitute. Demand for nicotine is very stable short term. It clinically is as addictive as Heroin (but has middler short term side effects).
A commodity with a very stable demand supply in teh short term must ahve a very stable "real price", that is a price which does not move in real terms. But if it moves in nominal term, that means the yardstick is the problem. That means measuring things in Cigarette packs ex-factory is more consistent over a long period of time.
Incidentally if you divide the Median income of 400 USD of 1905 by the average price of cigarettes of 7.5 cents, you will realize that the median income today buys about the same amount of cigarettes packs as it did in 1905. Actually the median income today buys you about 20% more cigarettes than it did in 1905, but that is still a far better consistency than USD, which went from 20 USD per ounce to 1,300 USD per ounce.
BEcause Tobacco ex factory "real price" is more stable than anything else, I use it to price things, including Silver. In other words, how many packs of cigarettes do I need to buy Silver in the 1950s, how many now?
Finally cigarettes are used as currency in jails, but was also used as currency during the hyperinflation of Germany of 1947-1948. Germany had two hyperinflation episodes in the XXth century.
It is not suprising to me that when Hugh Hendry was asked if there was only one asset he could buy, what would it be?, he said: Tobacco shares.
Quite impressive posts. Well reasoned. I can't speak for the actual numerical analysis without hard data but I am a fan.
Also, regardless of what financial markets are inclined to report the price of silver to be, I suspect the underlying value of the real asset is going to gradually begin to rise as supply becomes increasingly inelastic. We'll see that soon (next year or so) I am sure.
All that this price suppression and propagated misinformation has done is attempt to transfer monetary metals from jittery sellers into the hands of the sharks. The writing is on the wall though and multiple qualitative and quantitative indicators are flashing in favor of PMs- that is the real (physical) asset, not paper or financial assets.
Thanks BrosephStiglitz... I used to be head of Research in the Hedge Funds industry for a small fund... and I turned "rogue".
I''ll supply some demand if the price drops a couple of bucks again. Of course the LCSs never seem to follow along, for some reason they just increase the spreads when the COMEX price drops under 20.
Maybe toward the end of the week when the July COMEX calendar rolls over. For seem reason the big players in this sector seem to have a real problem rolling their positions with any kind of elegance - seems they leave it to the most junior guys to look after in the middle of the (North American) night, and the result is usually some really clumsy 'all at once' selling. You'd think after all these years they'd be able to provide their trading desks with some kind of 'how to not fuck up the market' tutorial for those guys, but I guess they know what they're doing.
It's the same thing that causes sudden drops in gold. Either someone is trying to drive the price down or someone is the dumbest seller in the world. My bet is on the former.
This is what I saw with the equity markets after the lehman collapse, only in reverse. The dumbest buyer in the world was intentianally trying to drive equity prices up. We now know it was the FED and I suspect the FED is behind the sudden drops in PMs too.
I have no sympathy for those who put their faith in paper. They will get their just reward
Every article this guy writes is filled with troll like stupidity. He even looks like an internet troll. Who the heck takes less than one minute of electronic data, that didn't even stick, and tries to use to justify anything? This guy is what is known as dumb money. It is so dumb it thinks it has a new way of doing things so it is smart. And no, supply and demand fundamentals for silver are not bearish.
I buy it 'cause it's purty....
Shiny, shiny!
I may be wrong, but i dont think the aurhor is too positive on silver.
He also knows nothing about trading, or trading PMs in particular. And that is why he shorted the bottom.
Only two types of people place an order "At The Market", idiots and manipulators. This article shares both those characteristics as well.
Calling NANEX...come in NANEX...over.
Great example of a disinformation commentary that actually proves the price suppression games.
@apberus: +100. If this guy isn't a stooge for the Washington/Wall Street axis I'll shit in my hat.
Liar. Nobody can afford a hat these days.
Then sell it. Get short. Move ahead. Go forward. It's not too late. To whip it, into shape. I'm sure someone will buy it from you lower... or higher.
Shape it up, whip it good, get it straight, just whip it.
I say don't be too hard on the gentleman. Silver could hit new lows before the collapse really cranks up...
;-D
yeah yeah yeah yeah yeah Yeah Yeah Yeah Yeah YEAH YEAH YEAH YEAH!
Morons Analysis me thinks!
Hmmm...so what you're saying is, "buy low, sell high".
V-e-r-y interesting...