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Make It Stop!

05 February 2021

Last week Wall Street hedge funds were screaming "Make it Stop !!"  over firm killing short positions some had in GameStop ($GME), a US video game chain store, and AMC Entertainment ($AMC), a US movie theatre company, the crowd may have already moved on. The price of GameStop and AMC were driven up by a perfect storm of highly leveraged short positions, by large players vs. thousands of small investors buying the stock, urged on by a social media frenzy, particularly on Reddit.

But then Reddit users moved on to a new target, Silver!

GameStop Share Price

MarketWatch reported on Silver rallying to the highest market close in 3 weeks Thursday last week, this was against a weaker gold price. The talk was that the silver price was being driven up in part by the same sub-Reddit forum, WallStreetBets, that drove the GME and AMC share prices. This was a confirmed by intense buying demand over the weekend, with bullion dealers worldwide being inundated with orders. Resulting on most US dealers selling all their silver inventory and going into backorder.

Marketwatch Silver Price

As a result, the silver price spiked by as much as 21% in AUD terms from $7 per oz from late last week to Tuesday this week. Although since Tuesday the silver price has declined, as the initial mania has abated, currently trading back in the $34 range (AUD Spot Price). Which is still 7% higher before the Redditors massed. It is expected we will see more silver price volatility in the coming weeks as the silver story continues to ripple through mainstream media.

Silver Spot Price

With elevated silver prices it might be worth re-visiting the Gold to Silver Ratio. Currently the ratio is 68, this means the gold price is trading at 68 times the silver price, which is at a 5-year low. As a result, we have seen many clients locking in their recent profits in silver by selling silver for gold.

ABC Bullion has also seen a spike in silver bullion orders since Monday morning; being committed to our clients, ABC Bullion enables our clients to get the competitive advantage of dealing directly with a manufacturer – at every step along the value chain, from wholesale precious metal refining to retail bullion sale. This allows us to maintain robust stock levels of ABC silver products all manufactured from our sister company ABC Refinery. From mine to market, your partner in precious metals.
 

Precious Metals Commentary

Gold started the week capped at technical resistance around US$1865 and has then traded defensively ever since as bond yield rose steadily before peaking after the passage of the Biden Administrations stimulus package in the lower house, sending 10 year yields to a weekly high of 1.16 %.

In essence, gold decline is a reflection of risk-off behaviour with investors looking at the recovery in equities and energy and taking an optimistic view of the post-vaccination world.

As a consequence of evolving expectations, the US bond yield curve has steepened to the highest level since 2015, with bond markets sending a strong positive signal about US economic expectations. Furthermore, gold is facing a headwind from the recovery in the DXY, which we have been talking about for a few weeks now. The Dollar Index rallied up to 91.58 overnight. The positive vote for the Dollar reflects the positive spread US bond yields have over other major nations, nearby long term supports last visited in February 2018. It also reflects a substantial net short position in Non-commercial futures position (see graph) which has often presaged a longer-term recovery in the USD.

The key news event today is the publication of Non-Farm Payrolls today. Expectations are for 77,000 jobs. A higher number should be negative for gold.

Support-wise, gold broke down into the Weekly Cloud from above, and this level is normally supportive. Now that the price is at current levels, there may be more short-term volatility, with the next major support at US$1763 from the low in November 2020 and the 50 % retracement back of the move back from the March 2020 low to the August 2020 high. See the chart of the Weekly Chart below.

At current levels we expect gold can rebound to US$1816-1824 however for now the momentum is with bonds and equity flows.

Gold Spot Price

CME Non-Commercia Positioning

Silver

Silver was the centre of attention even beyond the world of precious this week, as the Redditor / Gamestock story spilled over into Precious Metals. The price went up, and then down, dropping 15 % from the Monday highs at one point. There is a massive difference between a small-ish equity and the billion-ounce gorilla that is silver, and of course the key difference is the relative lack of short positioning, apart from the producer hedge community, who do have reasonable shorts. Their ‘visible’ shorts amount to 3-4 months of production currently.

The higher price earlier in the week prompted a substantial chunk of physical selling from mainland China, which caused silver forwards to tighten slightly as stocks were financed on their journey out of the country.

Technically, silver found support on the drop at the Weekly Standard line. The medium-term trend remains bullish. A positive technical interpretation would be to say that the ‘potential’ breakout from the evolving pennant pattern is being retested. If the price is supported and emerges again from the pennant then look for silver to extend higher, perhaps to complete the entire pattern around US$40-42?

Silver Ichimoku Chart