spring and summer of 2010, the price of silver was caught in a trading
range of $17.00–19.50. But that all changed at the beginning
of September. From a rally low of $17.50 last summer, the price
has exploded to the $25 dollar area in barely two months. What happened?
From a fundamental
perspective the Perma bulls in silver have forever been describing
the supply situation as one that cannot sustain demand and that
a powerful rally to unprecedented heights would take place. To their
credit and patience, the move may have finally started a few months
Why were some
speculators reluctant to buy before this breakout? Part of the problem
was due to the clamor for a silver price rally mentioned for so
long by the bulls but had never materialized. Indeed the coming
of this day has been forewarned for a long time now, almost to the
point of the “boy who cried wolf” story. The explanation
was always how the silver price was being manipulated by a few big
banks doing the work for the shorts in the market. Nothing ever
changed and each claim would get brushed aside by the CFTC as they
would do an “investigation” and report of no manipulation.
But the story changed drastically last spring.
there were three key turning points over the past year that finally
turned the tide on this market.
The first turning
point for silver arrived near the beginning of the April time frame
when news of whistle blower and trader Andrew Maguire hit the internet
and even the paper press. This London metals trader warned an investigator
for the U.S. Commodity Futures Trading Commission in advance about
a gold and silver market manipulation to be undertaken by traders
for JPMorgan Chase in February to bring forth lower prices.
event ended up providing the lows of 2010.
turning point came when the CFTC did not address the Maguire information
and the market dropped in February. But thanks to the work of GATA
and Bill Murphy, Mr. Maguire’s testimony was brought to a public
forum during a CFTC review of position limits. This public testimony
provided a floor on silver – as the manipulators – being very
short the metal – had to now be much more careful of their moves.
THE COLUTION WAS OVER. The attack was coming from another source
as well – the shorts were heavily concentrated to four banks –
and GATA began to pressure the CFTC to address the position limits
that these firms were taking. But it didn’t matter. The cat
was out of the bag on silver and those suppressing the price would
need to change tactics.
sell off attempts in April on silver, but it only lasted a few days.
There were two minor attempts in May – the first lasting 2
days and covered $1.50 – another try knocked price down for
a six day period. But silver again bottomed at the $17.50 area and
moved up into the middle of June. Meanwhile the Gold and Silver
ETF’s kept adding ounces on investor demand.
the bear’s relief – the seasonal aspects of the metal’s
came into play in mid June and a sideway’s move lower into
the first week of July took silver back below the $18 dollar area.
sell off was underway or so it seemed – but the rally became
a very tight ranged affair with each side holding off the other.
The 200 day average became support –and each move above the
50 day average would be contained.
extraordinary happened to price at the early July bottom and lasted
through August. It went into an even tighter price trading range.
The tightest range in three full years as bull’s and bears
became locked in the battle for control of the MARKET. (See yellow
circled area on chart).
into a trading range of 17.50–18.50 and remained there through
the summer. THIS WAS THE FINAL showdown area where the long term
demand/supply dynamics met. The tight consolidation persisted and
the short positions kept growing and growing – but the price
would not break below 17. The underlying demand was like a brick
wall. A last attempt to hold the market down resulted in this final
tight price range.
By August the
seasonal end to metal weakness had arrived on the calendar for metals.
The stage was set. The transfer of control was complete. Was it
the bulls or the bears who had gained control?
The final turning
point for silver took place on September 1st. After a strong two
week rally off the 17.25 area – and with silver at 18.90 – the
internet waves hit with this story:
JP Morgan Chase
to Close Proprietary Trading Unit, Rivals May Follow Suit
I cannot tell
you exactly how big of a part this may have played, but when combined
with the strongest seasonal month of the year for the metals, and
the fact that JP Morgan was holding 40% of all silver shorts, and
with price so compressed, that a flash point occurred in the market.
us to the second part of the story.
After a review
of the chart above and we can see how this scenario played out.
Yes, it came as supplies where dwindling already and all the other
fundamental bullish arguments. I am not downplaying that. But the
point is no matter what the reasons are – the fundamental demand/supply
equation has to come to a head at some point. Giving the shorts
no ceiling position to short the market for the length of time it
went on is like extending credit to a gambler in a poker match in
when the cards are not going his way. At some point – his credit
limit is reached. It seems the limit may have been reached by the
shorts. It seems as we have seen the flash point. With every other
asset in fraud or manipulation on earth – was it any wonder
the metals weren’t?
There are two
types of silver bulls. Those who bought and have been buying and
those who have always planned to buy some – or add to existing
positions but haven’t.
Part of the
problem is that while we know about these fundamentals we are at
times reluctant to take a position for one reason or another. After
all, the chart time line above was constructed with HINDSIGHT. Had
silver not rallied to $25 the chart would not have any significance.
One of the
clue’s analyst’s look for to find the sweet spot of metal rallies
is when silver takes the lead from gold. In this phase of the gold
rally – (gold is now up 100% since the November 2008 lows) speculation
increases as gold gets closer to front page news by making new highs
and taking the lead in the financial world. As more and more speculators
and the public begin to arrive, the tendency is that enough of them
turn to silver as the lure of the fundamental picture, the lower
price, diversification (if they already own gold) and the greed
factor all come in to play. This overrides demand at a key time.
But how do
we know when this sweet spot occurs? How can we better understand
the timing of when the fundamentals of supply/demand meet? The answer
is the same way we visualized this story so far – by use of the
PRICE CHART as in the one above. Charts are where price DISCOVERY
works for me. If a Doctor wants to medically see how healthy or
sick a patient is – they look at the chart and the data–
not just the person. We can say the same for commodity prices to
a great extent. Charts are important.
One of the
things we do a lot of in this fast paced, got to have it today world,
is that we spend an awful lot of time on the short term fluctuations
of price. We are so prone to this effect that we consider looking
at a weekly chart for 3 or 4 years to be a long term look at price,
and certainly it is a long term look. But I am talking about a LONGER
If you have
a little experience (or a lot) in charting – you know that
price breakouts are certainly important. If they are important on
a daily and weekly chart – they are also important on a monthly
chart. In fact, if we think about it, wouldn’t the BIGGEST
MOVES then come when a real long term breakout develops and a major
price zone is violated? Isn’t that the definition of a bull