A Soft Squeeze…But Give It Time

At first glance, the March squeeze on silver has failed, or so we might be told in the knee-jerk reflex school of comment. The price of both gold and silver reached new recent lows right at noon on Friday, to leave many of the recently hopeful short term traders no longer wearing their earlier smiles. Is what had happened last week going to be a replay at every option expiry and futures FND for the medium to even longer term future? The COMEX PM longs being played like well hooked fish as has been happening for such a long time? Perhaps not.

As discussed last week, the turning of the tide rarely happens with a large change in the trend that is immediately visible; it requires some time to take effect until it is noticed that a change has been under way. Forcing a sudden change requires a big shove to halt the trend and even the change still takes time. An author with the name Happy Hawaiian had a long post on social media to inform the throng of new silver buyers from the REDDIT groups firstly why the recent squeeze they attempted had failed and how to do it better this time around.

The post was soon removed, but a copy appeared at Zero Hedge. In it he said:

As part of my research for this post, I was actually able to get in touch with silver industry veteran, David Morgan (thanks for answering a random guy's Twitter DM David). He told me an anecdote from back in the previous run-up during 2010-11 where he had a conversation with Eric Sprott who mentioned that Sprott Inc's purchase of just 22 million commercial ounces to start their ETF of PSLV was enough to drive up the price by over $2 an ounce. Unlike the other silver ETFs which just allocate silver off of the LBMA, PSLV actually sources silver in the open market to add to their vaults, which is why investing in PSLV can actually cause the silver price to rise much more directly than the other ETFs.

He had estimated, based on COMEX data from earlier that week, that perhaps as many as 40k contracts could be standing for delivery – more than sufficient to absorb the silver metal in the COMEX vaults. As it turned out, after Thursday about 11 000 contracts stood for delivery, of which about half had disappeared on the preliminary COMEX report for Friday; the silver price had sunk too low for many of these contracts. The Cabal again came off nearly scot free and can count their profits with a smile, while the longs shed tears for what could have been.

The shorts have won a battle, but that victory could harbour the seeds of their soon losing the war. The price of gold around noon on Friday was about $1720, lower than it had been since early June 2020. The slaughter among March gold contracts must have been substantial! The price of silver was pushed low enough at that time to about $26.20, well below the hard defended $27. However, late September, after the first test of the $30 level, the price of silver twice reached a low near $22.25. Many March contracts which were purchased between September 2020 and the end of January, were deep in the money above $27, but by Friday they had no value

The Happy Hawaiian published this table on March – May silver contracts that are in the money at different prices, starting from $0. His first cut-off price was $27.25, but that turned out to be wishful thinking:

The first column is interesting; March 2021 contracts have been accumulated for a long time at low prices, lower than $27,25. While many of these would have been out of the money at $26.20, the relatively small increases in the number of ITM contracts as the strike prices move higher show an even spread across the strike price range as the strike price increases.

The same is true of the May ITM contracts, with the numbers being higher than for March, perhaps because of early roll-overs. This leads to the first clue as to why the Cabal have won the battle of the March futures, but should face a more hazardous expiry in May.

Firstly, the base numbers for May are higher and secondly, many new contracts can be expected to be purchased below $27 as the Cabal typically defend the low price they have achieved last week. Among the buyers will be many new players who received detailed instructions of how to register at COMEX and what is required to purchase contracts for delivery. As they gain experience and with their support, the Cabal will become more vulnerable two months from now.

Their vulnerability will not only stem from COMEX. The now widely communicated difference between the PSLV fund and others who predominantly hedge in paper contracts, will persuade many investors to switch to PSLV and also draw many of the smaller players who helped sink the Gamespot shorts and do not wish to make use of COMEX. The inflow into PSLV should increase with the new low price and continue as word that the Cabal is vulnerable to a squeeze is spread. Purchases of silver in large volumes over time, as per the quote above, will help to clean out all silver reserves and reduce the ability of the Cabal to repeat in late April what they have just done during the last week of February.

The March squeeze that failed necessitated the Cabal to launch a major attack on the price of silver, with limited success. They even had to hammer the price of gold to help force the price of silver below $27, with at least some success. Yet silver remained quite resolute, perhaps as a sign that the tide was due to turn and may even have already done so. With what happened last week the odds that the PM metals could break free by, say, the end of June, as they had done in 2020, have improved markedly. The next major battle for silver, two months from now, seems near certain to have a different outcome and even to precipitate a crisis.

Inflation is well on its way to becoming a four letter word, no longer mentioned in polite society. Early warning signs are out: the yield on the US 10-year Treasuries is increasing slowly, taking small but steady steps. The price of crude is also angling higher and the dollar index again is relying on intervention to hold the 90 level. The Fed can keep rates as low as they are promising, but major local and international players in the bond, currency and energy markets will plan ahead and do what they believe necessary to protect their assets.

Britain 40 years ago and now GameStop among many others have shown the risk of being caught too short of some commodity and suffered punishment. Much the same can happen to institutions on the wrong side of the Treasuries and the dollar, or not well prepared for a rising cost of energy. And best not to forget about Wall Street being in the stratosphere while the economy still languishes below historical performances and the new administration apparently not properly cognizant of the potentially negative consequences of their ideologically driven regulations.

Euro–Dollar

Euro–dollar, last = $1.2074 (www.investing.com)

Dollar weakness into last week had the euro breaking above its bear channel UV, but a late dollar rally then had the euro back to test the support at line E and also give what could become a goodbye kiss on channel UV. For that to happen, the euro now has to strengthen again and resume the trend higher.

The earlier break out of the steep euro bull channel JKL, which then helped identify bear channel UV, probably happened when it was decided that the dollar needed a bit of covert assistance to hold at and above the 90 level. There were already too many complaints about decisions that were counterproductive for the economy and a weaker trending dollar would confirm that the complaints had substance.

DJIA daily close

DJIA. last = 30932.37 (money.cnn.com)

On Friday the DJIA closed down by 470 points, not much above the day’s low at 20 points lower; this despite several attempts to rally the stock market which managed to cut the day’s loss to less than 200 points, but then failed to make more progress or even to hold at or near that level.

The several steep rallies and the day’s volume, much higher than the daily average, might also be a sign of the month end and probably a year end for many funds and corporations, all looking for a favourable price for their favoured stocks. That the DJIA still ended much lower on the day, as did the S&P500, implies significant profit taking and fleeing the stock market. The NASDAQ Composite bucked the trend to add 73 points, apparently on the strength of a few outliers.

Gold London PM fix – Dollars

Gold price – London PM fix, last = $1742.85 (www.kitco.com)

Ooops! The PM gold fix has broken well below a significant chart pattern and other strong technical support to make a bottom spike – largely in a single steep move lower on Friday when the COMEX March contracts had their first notice day. When a well defined and chart pattern is broken by a sudden large mover, it most often is associated with a wrongly priced market – either too cheap or too expensive, and when this is realised the correction is steep and sudden.

So either the price of gold was too expensive, or an alternative explanation for such strange and unexpected behaviour must be employed, namely there was a strong intervention in the market. Time distinguished between the reason for a spike; if the market was mispriced, the spike extends and becomes a new trend. When it was due to intervention, the spike begins to correct as soon as the intervention is reduced or market forces rally to defeat the intervention – which already seems to be happening.

Euro–gold PM fix

Much the same comment applies to the euro price of gold. It also shows a spike low below significant support along line Z, which – given the weaker euro on Friday – is due to the weaker dollar price of gold. The euro price too should reverse higher and recover, in due course.

Euro gold price – PM fix in Euro. Last = €1438.20 (www.kitco.com)

Silver Daily London Fix

Silver daily London fix, last = $26.685 (www.kitco.com)6

The price of silver held steady near its recent highs much more than that of gold, as can be seen by comparing the two charts. It did suffer a steeper and more lasting decline after making the first attempt on $20 last year, but recovered much faster in 2021. The first attempted short squeeze had much to do with this, of course. It does, however, look as if the greater awareness of the silver short position had not gone away again.

The lure of tenfold profits if a squeeze could be successfully built is too strong to disregard. In the case of silver, as discussed above, it will require some time to set everything needed to achieve this objective in motion, but the prospect to do so is very good.

U.S. 10–year Treasury Note

U.S. 10–year Treasury note, last = 1.407% (www.investing.com )

The rising trend in the yield on the US 10-year Treasury note since the break above channel WX has straightened out, with practically no hesitations. While most of the steps are small, the trend is holding and is moving away from the initial steep trend along line G.

The acceleration might not last beyond a possible key break above the cross-over of lines R and Y and – if that break should happen – beyond a break to above the medium term and quite steep bull channel AF.

West Texas Intermediate crude. Daily close

WTI crude – Daily close, last = $61.50 (www.investing.com )

The price of crude has now achieved a significant technical break above the broad bear channel XYZ. It is holding within the steep bull channel JKL, moving closer to a potential break into the upper band JK of the channel. As regulations that have the effect of reducing US oil production have greater effect, any increase in economic activity – say as more stimulus money gets spent – should also promote further increases in the price of crude. 

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