letter jun 22 silverThe blue line in the silver chart below 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.
No matter how you look at the price chart, the sharp spike in the silver price appears very bullish.
This is a good opportunity to reiterate our long-standing advice.   Never naked-short a monetary metal.


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Submitted by Keith Weiner, Monetary-Metals

Something extraordinary occurred last 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
letter jun 22 silver

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
letter jun 22 silver bases




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
letter jun 22 silver 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
letter june 22 silv lumb cattl

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.


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  1. Silver Head Fake?
    This is true when looked at in a Spiritual light, given silver symbolizes the feminine {deception} view of self, which is the revealing of our nakedness, being it a  mind of duality or a false perception of self.

    • You have no clue lol go on and sell into this rally cause gold is obviously so overpriced, even though it has been in a bear market for the last 2 years and stocks are at all time highs ! Oh and don’t forget goldman, socgen and the rest of the boys are calling for 1000 gold or less so it’s a slam-dunk sell right lol There is no point even trying to convince anybody on this site to sell their stack devil man, cause we are in this for the duration… when gold hits new highs I want you to personally come here and tell everybody how sorry you are

    • @Aurum
      “… when gold hits new highs I want you to personally come here and tell everybody how sorry you are”
      Too late.  We already know.  😉

  2. This guy is unwittingly aiding and abetting the banksters in this short squeeze.  Listen to Macguire’s interview on KWN, he explains how the banksters are complete reaming the hedgies by painting the tech triggers.  This joker sells his services to the hedgies.
    Think about it.  What good is tech analysis when the prices are manipulated 24/7.   Not a single one of these tech “gurus” would ever admit the market is manipulated because it would make their reports utterly worthless.  
    Macguire provides far more insight and understanding than this joker.  

  3. I actually agree here. If I’m wrong hang me!!! But I think there is a flush out due before we kick much higher. How low I don’t know, we could see an $18 handle maybe $17, but we are due an Options Expiry hit this week and I think this was a headfake. But I am convinced we will have a rapid rise afterwards from month end to year end. 
    So I see this as a defining buying op. But so what if I’m wrong. I stack.
    Good piece @Devilsmetal

  4. I suppose if the Chinese wanted to crash the dollar and simultaneously boost PMs by draining the last few real tonnes of metal from the western vaults, they could trade out of a trillion or so of T-Bonds and have the ‘liquidity’ to face down both the bullion bankers and Treasury’s ESF, toe-to-toe at this point. With the ‘Fed’ and its sycophantic front operations (Brussels), eating themselves sick, fighting pitched battles on two ‘fronts’ could just be a sufficiently overwhelming.

  5. Good Point Pat Fields.
     If China has its own ESF, a good possibility given that they’veheld the shadow banking enterprises together thus far while being  forced to paper over the collateral problems at the Chinese port of Quingdao (that is yet spreading), they will soon be able to counter the body blows of the Fed ESF, if they haven’t done so already.  We may have seen some of that foot work with the PBOC taking JPM down a notch or two during the sequester.  Some even say the US Government went bankrupt at that time and the Chinese are now our masters (a slight chance but I doubt it)
    The Fed is leveraged 80 to 1 and more likely is technically bankrupt   The Chinese have the  FIAT left hook and the real money right cross. Both can give a knockout blow if delivered with sufficient stealth and strength.  The Chinese have many allies in their corner.  To continue with the boxing analogy, it’s the 7th round and the champ is tiring fast.  He’s back on his right foot and China is pressing the advantage.  
    But, the smart money has its capital on a different sort of ending.  They have bets on every round and all possibly combinations.  Money is bet on both opponents just in case; a hedging of the bets so to speak.
    This will go the distance because the champ won’t go down willingly.  There’s way to much money to be made on each round and each blow.  
    Ali had his Thrilla in Manila.  The banksters are less poetic and more ruthless. In times of currency wars the banksters always win. In times of hot wars the banksters make twice as much.
    The house always wins

    • AGXIIK … “Some even say the US Government went bankrupt … and the Chinese are now our masters”
      Reminds me of that old Lone Ranger joke … ‘who’s this ‘we’ Kimosabe?’

      If the Chinese ‘own’ anything or anyone, it’s the District of Columbia city-state and its ‘Government of the District of Columbia’ formed in 1871.

    • We hear a lot that the banks always win, that they can never lose. We also hear that they are all “zombie” banks and are insolvent with immense ratios between their assets and their derivatives exposure. Presumably what you mean is that the government or Fed, B of E etc or which ever entity is really running the show won’t allow them to fail and will just give them free money. Many many banks have gone out of business over the years because unless it is supported by the system banking is an inherently very unstable and risky business. It couldn’t be the sort of business it is now without the near monopoly on currency issuance, the legality of fractional reserve banking, and government patronage. If it had to rely on just the currency of depositors and lending that currency out they can only ever be operating on a knife edge that is totally dependant on trusting and cooperative customers. Basically banking is not what most would consider a viable business without it being given massive priviliges and the nod and the wink to engage in corrupt practices.

    • UKTramp … “banking is not what most would consider a viable business without it being given massive priviliges”
      The genuine function of banking is as a custodial and accounting services operation, which can remain perfectly honorable and last through centuries without an iota of crooked activity. When a correct view of banking is understood, it becomes clear (to me at least) that the corruptive influence is more likely initiated by governments seeking to borrow more than their tax revenues can justify. That calls for placement of Bonds at par which, under normal scrutiny, would only be taken at steep discounts.

      Since governments all see themselves as grandiose and historically significant, their officers tend to dream up huge ‘timeless’ projects that can only be accomplished by stealing the Labor of their constituencies. Thus, we have worthless Plantation Scrip distributed by government-commandeered agent banks used to give pretense of ‘payment’ to billions of slaves.

      This is certainly not to say that the bankers are blameless and industrialists with the same ‘dreams of glory’, who glom onto the scam of ‘hidden bondage’ and monopolization of their business segments, aren’t active conspirators in the scheme. Fishes rot head first. Just sayin’.

      Money Is Weighed, Fictions Are Counted.

    • @AGXIIK
      “The house always wins”
      Yep… until it is torched with the mofo banksters locked inside.  THAT and only that will end this reign of terror.

    • @PatFields
      Dear Pat. Thank you for replying to what I wrote. I entirely agree that confined to it’s socially useful function of being a custodial and accounting service then banking could be an honourable industry. The trouble is that such a function could not possibly generate the profits required to build opulent offices, provide the infrastructure and banking paraphanalia that people expect, employ staff and pay fat salaries and so called bonuses to a proportion of that staff. At an interest rate of 5% to 15% on any money raised only from depositors it wouldn’t work, at least few seem able to operate such a model now and survive independently. Banking produces no real worth and is a purely parasitic enterprise engaged in the transference of wealth. Organisations that only engage in lending charge far higher rates of interest than that, even into the thousands of percent here in the UK for loans to the financially gullible. It only becomes viable once the small amount of depositors currency can be multiplied many times over and by having the privilege of being allowed to create money from nothing. If I could use my computer  to generate a loan account to a new mortgagee where non existed before and then have them pay me back the principle plus any interest where neither of these sums existed before and in the event of their default then become the owner of the property they sought to buy then I don’t think it would be too hard to become immensely wealthy and / or a huge property owner. This is the same as converting the privilige of creating / printing currency into the ability to magic up or print houses, cars, businesses and anything else they can secure a debt on. The real mystery is how banks ever go bust with a milch cow like this and when allowed to operate in this way. Unsecured debt usually attracts far higher interest rates for obvious reasons. That we all work, hopefully doing things of value, in exchange for bits of paper or electrons in a computer that have been generated for no effort whatsoever is the biggest confidence trick ever perpetrated.  As we all know, this system which is tried repeatedly only ends one way, but whilst it is in operation feeds like a blood sucking leech on the slave population pushing asset values up where it suits the lenders. That house price rises aren’t seen as currency debasement by the mass of people shows how good the deception is. We are now at the limit of the stretched rubber band in that regard in the UK because a generation cannot now afford to put a roof over their heads either by buying or by renting without public assistance.
      Currency for nothing is what makes banking viable now hence QE. Similarly the other markets they have been allowed to infiltrate operate such ridiculous concepts as being able to sell what you do not own and buy things you never take delivery of. This results in a never ending expanding fake market and economy the result of which tends to suppress the market prices for the real assets being traded to the immense detriment of the slave producers. It is another way of dividing and separating the producers of worth from the value of their work and transferring it to the financial wizards. Being able to trade goods when you do not own them or only have to put up a small proportion of their worth is a part of what corrupts the precious metals markets too and what may allow them to continue playing non physical market financial games with a physical asset that exists in quantities of a fraction of the amounts that are implied to exist by the magnitude of the parasitic paper trading.
      This entire system is morally and functionally corrupt to the very core and I don’t see how any mere reform will ever create anything more coherant or just because there are too many of the powerful with their noses in the trough. That leaves only a sudden and severe restructuring / reformulating of the system and such events only really occur after a massive collapse of the current system or all out revolution…….and even then getting anything better is down in the lower percents of liklihood. I dream of an honest political leader one day organising an unscripted, unscheduled national broadcast where he or she stands up and says it like it really is to an incredulous population, in full, no holds barred, without any regard for pissing off those that were their backers up to that point. What a day that would be. Blackboard and chalk in hand they would explain and confirm to the slaves how they have been enslaved and to whom and how their currency is created. Perhaps they would even get to the end of the broadcast without the plug being pulled. Perhaps they would reveal so much that bumping them off after would serve no purpose since the secrets were out.
      I always read what you write Pat because you obviously know far more than I do and I am struggling to learn what I can but the closer I look the stinkier it seems to get. I could very well not understand enough how this system really works but I promise you I am trying to because how it continues frankly amazes me. It all seems to depend on a credulous and compliant populace who are provided with just enough to see revolting against the system as not worth it and who never stop to think about what their so called “money” really is. Hence the debt slavery continues.
      And I do count my real wealth / assets in ounces / grams because not only can paper rot it can mysteriously evaporate.

  6. Perhaps an odd question, but could anyone answer me what the availability relationship is between silver and silicon.
    And if sillicon could replace silver as a conductor when prices rise ? Are they brothers in metal or are they competitive in nature? It’s perhaps off-topic but for those with knowledge please share

  7. Wow.
    Thanks for publishing the historical silver fraud chart.
    As it no longer represents trading reality ( supply/demand ) we can all but ignore it, unless anybody here can forward it on to……oh never mind.
    When one years mine supply ( paper contracts ) can be used ( in one trade ) to take the price up or down at will, it means these TA boys need to get another job.
    Hard to go forward when looking behind you.

  8. Everyone keeps talking about one final washout until that happens then they call for another. There’s always “one more” on the horizon isn’t there? The fact of the matter is that nobody knows where the price is headed. None of the gurus know but they have to keep pretending that they do in order to sell more newsletters. You can make a chart paint whatever picture best suits your thesis so I ignore charts for the most part. Just keep stackin’ on the dips until you reach your target allocation. It’s really as simple as that. 

    • “Just keep stackin’ on the dips until you reach your target allocation. It’s really as simple as that.”
      Well, it’s ALMOST as simple as that.  The problem is, acquiring this shiny stuff is damned addictive.  It’s a bit like a kid running downhill, faster and faster, until he simply can’t control his descent and cartwheels into an ungainly pile.  I’m still running as of now but how much faster I can go is unknown.  😉

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