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LAWRIE WILLIAMS: Silver and gold capped ahead of the weekend but both now soaring.

Could this be the gold and silver price suppressors last stand?  Defensive activity in the futures markets on Friday managed to keep the gold price from closing above the key $1,850 level despite trading above this for much of the day.  Silver was also sold down to a fraction below $27 by the market close, but even so the Gold:Silver ratio (GSR) managed to come back below 70 for the first time for nearly three years.  This morning it moved down below the mid-60s.  One does therefore get the impression that the two most-traded precious metals could be breaking out from their recent trading ranges.  The big question would thus seem to be will this be allowed to continue and, if so, how far can they be expected to rise and whether any such increase can be sustained?

We speculated on Friday that the recent equities markets activity seemingly targeting short sellers by the new breed of stay-at-home investors might be transferable to the precious metals markets where there are massive short positions in gold, and particularly in silver.  (See:  Could Social Media Drive Silver to New Heights à la GameStop).  The particular vulnerability of the silver short position holders (mainly traders) was highlighted in a recent article by Ted Butler and it would appear that some of this anti-short holders market activity in silver had already started on trading sites like robinhood.com before trades in SLV and other silver counters were halted for technical reasons on Friday.  There had been speculation, since denied, that the trading halts were in response to pressure from the traditional investment sector but this may not actually have been the case, although it will undoubtedly have come as temporary relief for some of the most vulnerable.  Even so SLV generated some huge inflows on Friday in any case amounting to the equivalent of over 30 million silver ounces.

There is a theory that any suppression of the silver price on the futures markets is supported by an almost infinite cash mountain.  This might be the case if most of the big shorts were held by banks. But it seems to be traders who are most at risk given the big banks seem to have liquidated most big short positions they may have held.  Indeed according to Jeff Christian of the CPM Group, the banks make most of their money in the silver market from small percentage charges on trades and a higher silver price actually may generate more profits for them.  Any short holdings they may, or may not, have are generally hedge bets against physical silver inventories they may hold.

Given the prevalence of conspiracy theories on the internet there had also been some unsubstantiated reports that instruction to suppress the silver stock trades on sites like robinhood.com had come from the Biden White House itself.  If this was the case it will cast doubt on the likely role of the Administration and on the integrity of the site too.  We are inclined to doubt this suggestion, but given so many of these conspiracy theories seem to be believed nowadays, an initial backlash could adversely impact the site and the White House too.

There is also the suggestion that Wall Street is ‘running scared’ of this new breed of investor and is already moving to slap them down.  Such moves to seemingly protect the short sellers from potential financial ruin are not being taken without opposition from the general public and indeed right across the political divide.  It takes a lot to find a degree of agreement from such staunch political opponents as Ted Cruz on the right and Alexandra Ocasio Cortez on the far left!  If it is indeed shown that the Biden Administration has been complicit in moves to protect the financial ‘fat cats’ that could rapidly undo any favourable political capital earned in the first few days of the new Presidency.

We do thus suspect that a degree of self-preservation involving a reduction in the strictures which appear as if they might have been imposed on investing in some stocks will be forthcoming from both the Biden Administration and from the internet-based free or low cost brokerages.  This may  have temporarily re-opened the floodgates with silver the major beneficiary, but gold should benefit too.  Any fallout could well see gold north of $1,900 again this week, and silver perhaps hit close to $30 which would cause the GSR to fall back to the low 60s.  All this is supposition that remains to be confirmed or denied, but in the current post-Trump political climate any such rumour is certain to gain a following.

Bloomberg Intelligence suggests, in any case, that silver appears to be entering a nascent bull market.  It seems to be consolidating gains below good resistance at around $30 an ounce following an initial spurt which carried it to about 70% above its 60-month moving average. Bloomberg goes on to put forward the premise that he swift reversal last year from an 11-year low to a 7 year high could well suggest higher prices ahead, regardless of any impact of the targeting of the short sellers by the new stay-at-home armchair investors egged on by social media like Reddit.

Bloomberg comments also that bull markets are inclined to get overextended and this silver one may be just beginning. The market has turned upward following an extended period of subdued prices and may just need some back-and-fill before resuming the rally.  We think, though, that there is a strong chance of the next phase of the bull market already under way, having been triggered by what appears to be new interest in silver investment stimulated like GameStop in the equities markets by social media getting behind it.  Look out for the initial $30 target for silver noted above – and if this happens it could well drag gold up too by another $50 or perhaps considerably more in short shrift.

01 Feb 2021 | Categories: Gold, Silver

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