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LAWRIE WILLIAMS: Silver struggles amidst coronavirus market meltdown

Equities markets around the world lost over 10% in value last week over growing concerns that the Ncov-19 coronavirus would adversely affect Q1 2020 GDP figures and perhaps beyond.  One might have expected key safe haven metals like gold and silver to surge as investors switch from risky equities to the safe havens of precious metals.  Initially this did prove to be the case, but gold and silver then also suffered badly – the latter particularly so, with the gold:silver ratio (GSR) rising to an almost unprecedented 95 plus, meaning that it would take over 95 ounces of silver to match one ounce of gold in value.

The media has been full of experts predicting that silver would be the great beneficiary of the runup in gold prices, and in the past this has usually been the case with silver acting like ‘gold on steroids’ as the saying goes.  When the gold price goes up that of silver generally rises at a faster pace and indeed it went up to almost $19 an ounce in the initial precious metals price surge on Monday, but it has come down far more sharply than gold since, ending the week at $16.63 – a massive fall of around 16% on the week, perhaps living up to its other description as the ‘devil’s metal’ due to its tendency to confound the expert opinions.

The silver price in particular seems to have been engineered downwards and probably the gold price too.  Ted Butler who follows the ups and downs in the precious metals markets has the reason behind this being the prospective losses that would be incurred by the big seven gold and silver shorts at the higher price levels being seen at the beginning of the week.  In his article entitled Bear Stearns Déjà vu? He points to the similarities with the Bear Stearns collapse in 2008 leading to JPMorgan taking it over at a knockdown price.  In that case the Bear Stearns short position in the silver market. with the silver price rising, potentially exposed it to enormous paper losses.  The subprime market collapse, which brought down Lehmann Brothers later in the year exacerbating the falls, did not come soon enough to rescue Bear Stearns.

Butler reckons the potential debt exposure for the big 7 shorts in the rising precious metals price scenario was as much as $8billion and the only way this could be mitigated was for gold and silver prices on the futures markets to be brought down very sharply so that some of this exposure could be liquidated at much lower price levels.  As silver is a hugely smaller market this would be much easier to do.  Consequently gold was brought down by only around 6% as against silver’s 16% on the week peak to trough.

Undoubtedly profit taking will have played a part in the falls in both gold and silver, but the 16% silver decline is way above the likely falls due to this aspect of trading, even possibly aggravated by a realisation that industrial demand will almost certainly fall due to the coronavirus.  But again that would be unlikely to generate a fall back of this kind of magnitude.  That leaves market manipulation of some kind as the most likely cause of this huge weekly fall and the Butler explanation fits this theory well.

Gold and silver prices both picked up a little this morning but still remain weak.  Asian equities were up, but European stocks, after opening strongly, pulled back quite sharply and were unchanged to down at the time of writing.  The GSR rose again though to the high 95s which again means that silver is underperforming gold.  Of course it remains to be seen how U.S. markets react once they open.

02 Mar 2020 | Categories: Gold, Silver

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