Silver is in big demand as we will discuss in the story of the week. That is good news for silver investors right about the time the silver and gold markets go into hibernation for summer. It highlights the need to understand the precious metals market cycle despite short-term price movements. I will discuss what I mean by that next.
Gold and Silver Analysis
A common factor on the gold and silver charts is the downside move below their moving averages. Moving averages are a rolling measure of the last 50 and 200 days (or any length of time you prefer to measure) of the trend of gold and silver prices. When prices move above or below these trend lines, traders tend to take notice.
It typically means the market wants to reverse its direction, if only for a short time, due to supply and demand factors in the FUTURES market. Please remember from previous articles where we talked about spot prices being tied to paper trading, and not the secondary physical markets.
The above chart on gold shows prices moving below the 50-day moving average, which is slightly less than the two-month view on price trends. Gold is also challenging the longer 200-day moving average to the downside, which is considered more of a serious indication to traders that the price is reversing direction to the downside.
However, we only have a challenge to the 200-day and not a confirmation, so we are not calling for a downside reversal in gold just yet. We have surmised that the news cycle would provide support for gold and silver prices this summer, and so far, they have. Another indicator that consumers are interested in physical metals is our social media view rates which have been trending strongly so far this summer. It is an indication that gold and silver are still on the minds of the public who are searching out information on the market.
The usual move in metals for the summer is down as people take their vacations and focus on outside activities. We shall see whether the markets hold up for the next two months before school kicks back in, and the summer fun season is over.
The COT report for gold, from the CFTC, shows that we have reduced interest in the metal. Overall open interest fell over 6000 contracts. The big moves were producers and merchants shedding an equal amount of longs and shorts for an overall net neutral change in position, the bullion banks dumping over 10,000 short positions on gold with the managed money absorbing about half of that trade by increasing longs by over 4200 positions, and lastly the “other reportable” category of family office trading dropping an astounding 6000 contracts to the long side.
In sum, it appears the bullion banks are going long while the rest of the market takes the other side of the trade. I can tell you whom I believe there, and it is the bullion banks. If they think gold is going higher, or at least not trading below the current market, then I will stick with them until the markets prove otherwise.
I liken the bullion banks to the Vegas line setters on sports betting who move the trade around to maximize profits. The bullion banks make a little bit on a lot of trades and will position themselves in the direction of the market in the efforts of picking up pennies on each of their positions. While the current contract moves do not indicate long-term positioning in the gold market, they do indicate that the market will be more active for the summer of 2023 which is almost always positive for gold.
Silver’s price chart is moving in the same direction, downward through its moving averages. Silver has also breached the 50-day and is challenging the 200. While the chart is teasing a downside price reversal, we do not have confirmation yet. We may need to see a week of price data before we can confirm whether the metals are going to fall through support and continue to lower levels, or whether the news cycle will keep traders engaged in the market through the summer.
The silver COT report, as reported by the CFTC, has players reducing positions. Open interest fell almost 30,000 contracts in the previous 10 days of trading. This indicates less overall interest in silver paper positions, though prices are not being smashed down. I read this as simply a reduced interest in short-term (90-day) silver price movements, but not negative market sentiment on the metal. Now if traders start printing a lot of short paper positions in the next few weeks, we know the silver prices are going to perform their typical summer fade.
The most interesting part of the silver COT report is the bullion banks dumping almost 6,000 contracts of silver short positions. They are appearing to be moving along again, now only a few thousand contracts short of being in a neutral position where long and short positions match. This would indicate that bullion bank clients still need a lot of real silver, or at least price exposure for the summer season. This makes sense as estimates have the mines short over 200 million ounces of silver from demand for this year. While the paper futures can fade the price, physical demand is forcing the hand of some traders to stay long further into the summer season than they normally might have.
The Macro Outlook
We continue to have a mixed bag on the overall economy. New home sales have accelerated in June while pending home sales are falling. This is a bit of a weird dynamic where people are trying to buy homes but failing to finish the deal. I do not know where the housing market is exactly other than to say the momentum is gone and the market is trying to find its footing on which direction it wants to turn. Since this is a large and important indicator of consumer health, we will be following it as developments occur.
The ADP report on employment this week reported an increase of almost 500k jobs on private payrolls. The government’s report, known as non-farm payrolls, was less enthusiastic. The report had 209k new jobs which fell significantly below economist’s expectations. I have said many times that the payroll reports are flawed and do not reflect reality. But the divergence from the two largest and most respected reports indicates that we do not really know everything going on in the employment market. I get the sneaking feeling that some important news will break this summer on employment at a time when people least expect it. The reporting is just too schizophrenic in nature to indicate a stable market exists right now in either direction. I sense that an inflection point is coming here; stay tuned for more.
US manufacturing continues to decline, with the index holding steady at 46.3 this month. While the print indicates contraction, at least we have not lost any productivity here since last month when we got the exact same print. Construction spending is up slightly, but not enough to write home about in terms of any sort of recovery. It is a baby bounce in an otherwise tough market.
Story of the Week
The most interesting story of the week in silver is research indicating that the demand for solar cells is going to use up an astounding 21% of global silver supplies in the future.
According to a research report published recently by Wiley, silver demand is going to explode in order to keep up with green energy programs. To wit, the articles note the following:
“In 2022, the world reached a cumulative photovoltaic (PV) installed capacity of 1 TW,1 accounting for >4% of worldwide electricity demand.2, 3 However, techno-economic roadmaps4-6 predict that to fulfill the Paris Climate Agreements to mitigate climate change, between 15 TW6 and >60 TW2, 7 need to be installed by 2050. Annual growth rates for PV installations of 23–30% are required2, 8, 9 to reach at least 15 TW by 2050, which the industry has consistently demonstrated for decades.”
The sum of the article is that solar power will need 21% of existing global supplies and will increase substantially over the next 25 years, with the industry needing about 1/5 of global silver output by 2030.
“By 2030, PV production capacities could exceed 1 TW/year with the broad electrification scenario (IRV21 Broad), which would require 21% of annual global primary silver supply (5 kt/year) even with silver consumption of only 5 mg/W.”
Using estimates from five leading bodies in the field, the research is a good indication of expected silver demand moving forward. The research considers the trends in reducing silver needed for solar generation and expected growth rates in overall panel demand.
Given the lack of primary silver mines that can make up the difference in direct-to-market silver supplies, the additional silver needed must come from base metal mines that produce silver as a byproduct. Depending on how the global economy goes over the next few years, we may see shutdowns or reductions in output in some base metal mines. This would significantly reduce worldwide silver supplies, as about ¾ of the silver supply comes from non-primary silver mines.
Executive Summary
I predicted this summer in the precious metals markets would be different, and so far, they have been. While we have noticed a small fade in the metals prices, they are holding up better than expected. Physical demand in silver continues to drive physical deficits which will eventually lead to a blow-off top in the silver price. While not expected to occur this summer, the market cannot ignore the lack of available fresh silver supply for much longer.
The economic fundamentals are still deteriorating, with more interesting data in unemployment and real estate leading the way. I suspect both of these indicators will give us some surprises this summer, as well as cluing us into what the fall may bring when financial markets ramp up once again.
Research indicates that physical silver market demand remains robust and growing. Buoyed by sharp industrial demand, traders aren’t fading silver prices as much this summer, thus far. That could change though it would likely just exacerbate the pricing problem in silver. Prices are simply too low right now to spur new exploration and development of silver mines at a time when mine output is severely lacking. This will break eventually, and you will want to own silver when it does.
Coin of the Week
The 10 oz SilverTowne silver bars are on sale this week, and you couldn’t find a better time to stock up on silver than now. It’s a no-brainer for me and the reason I am recommending you take a look at Silver for your portfolio.
