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    Silver Conditions in the US Market Tighten Considerably

    We may have a shortage condition in physical silver brewing in the domestic markets. We look at that today to determine what significance this could have on the silver price going forward.

    Gold and Silver Analysis

    Don’t look now, but the silver price chart from the American COMEX is having a short-term breakout. Contrary to what we would expect in the early summer, silver is rising and showing quite a bit of resiliency. This is great news for silver investors, while primary silver miners are no doubt jumping up and down about having some solid prices to work with on their projects. It is good news when silver stays above the cost to mine as it injects much-needed capital into what has been a capital-starved industry for well over a decade now.

    While the recent move upward does not solve all silver supply chain problems, it does at least encourage investors to inject some fresh capital into exploration and discovery projects that are sorely needed to keep future silver flows healthy enough to support increasing demand.

    The silver chart above shows the breakout. Silver is trending above its short-term technical moving averages, which just means it is in an upward trend. Silver price is also bumping up against two short-term technical indicators, the RSI and MACD, which indicates that the current trade is both strong and causing traders to take notice of the silver market when it is traditionally quiet.

    What is more interesting has been the moves into silver in the American COMEX trading markets. This is where traders from around the world gather to buy big lots of silver. In fact, the standard contract size for the most popular silver product on the US exchange is 5000 oz., which comes in the form of 5x 1000oz bars. That is a lot of silver!

    Let’s look at the latest positioning report from the CFTC, which regulates the market. The report is called the COT and stands for Commitment of Traders. We can see the two major movers in the silver market are the ‘Managed Money’ and the “Other Reportables’ groups of traders. These groupings sum up all the positions for traders in each group and provide a summary of their movements. I will explain who each of these categories of traders typically represents, even though we cannot name them all directly because that information is not provided in this report.

    The managed money category of traders represents financial institutions and trading houses that represent Wall Street and associated financial services. They include hedge funds and other financial companies. They are as close to the typical financial market participants as you will see on the COMEX. The other reportable group consists of smaller businesses such as family offices, wealthy individuals, and boutique trading shops.

    We can see that the financial houses added to their short position on silver, which tends to make sense. Gold and silver prices typically fade during the summer, and they are just playing the typical seasonal patterns trying to make some scratch on the expected price movements. They are largely disappointed right now; however, as both silver and gold prices are holding up during the summer.

    The other reportables are moving long silver in a big way, adding 6199 contracts to their position which now totals 19,783 contracts per the CFTC. That is a 45.6% increase in a long position from the previous week, which is substantial and indicates where the sharps in small to medium businesses see the silver price going. While this category of traders is by far not the largest, and therefore will not by themselves move the market, I find it interesting nonetheless.

    You see, in the previous COT report dated July 3, 2023, the bullion banks (swap dealers) group had also gone net long (drop shorts, buy longs) for the week to bring their aggregate silver positions to almost even. The last time they did this, silver had a nice bounce back in price. And that is precisely what is happening now on the market. Removing pressure from a previous strong short silver position by the largest group of traders will tend to have a positive impact on prices. That is exactly what we are seeing.

    Finally, we review the movement of over 15 million ounces of silver from the UK market. Why is this significant? In the pic below, you will see that this silver significantly affects worldwide available silver supplies. Investors sold ETF shares and took silver off the market. And it appears that much of that made its way over to the US to fill needs from larger US investors.

    Overall, I have been told by retailer friends of mine that gold and silver sales are down this month. That is typical of the early summer retail trade. But I will point out that retail investment trade is smaller than the industrial market right now and doesn’t offset the larger movements of metal across the industrial markets, which is what is really driving this early summer rally. Just wait until silver investors come back into the market!

    We will save the technical analysis on gold for next week as the silver price movements are too important here to distract from by looking at the other metal. We will get to that in time.

    The Macro View

    Economic data points are still mixed, which I expect will be the norm moving forward. We are in the ‘twilight’ hours of a teetering economy that looks to go over the edge into a serious market correction. So, I expect the data to bounce around as the economy begins to lose its footing. This occurs due to the human element of normalcy bias where participants take time to absorb new trends and adjust their own positions accordingly. Remember, we have literally billions of people conducting business and building markets across the world.

    Specifically, the empire state manufacturing survey (New York-based) fell to a 1.1 reading from last month’s very positive 6.6. It is still a positive print but obviously manufacturing activity in the Northeast slowed down last month. This indicator varies somewhat widely from month to month and is not a good stand-alone indicator of long-term trends in US manufacturing.

    But, adding in the Philadelphia manufacturing survey gives a bit of a broader picture. That index printed at -13.5 this time around and is mired in 11 straight months of negative returns. I believe the numbers indicate US manufacturing is starting to crater substantially, though we still have instances of positive movement. Again, the economy is doing its best to grow but simply lacks the capital needed to sustain itself.

    It is; however, a key data point that financial analysts and the Fed use to gauge economic direction, so we like to look at it as well. Further, pairing this with industrial production, which fell half of one percent last month, indicates that the nation’s productive capacity is not growing at all at present. Lastly, as a confirming indicator, the nation’s capacity utilization, measuring how much production we have as a percentage, stands at 78.9, 21% points off full production. It fell about half of a percentage point from last month as well.

    Real estate fell a bit as both housing starts and building permits fell from last month. And ending up the data review brings us the generically-named ‘US Leading Economic Indicators” index, a conglomerate of data points considered important to economists in gauging direction, ended down a disappointing 0.6% last month. That is not a horrible print but it is the direction that matters as it is trending down. It could be indicating the coming recession is almost upon us.

    Story of the Week

    This week we discuss Florida passing a law introduced as SB 7054 that limits the introduction of central bank digital currencies (CBDC) from being accepted as legal tender in the state. Here is a summary from the State of Florida Senate website.

    “The bill aims to protect Floridians’ privacy and other rights by prohibiting a central bank digital currency (CBDC), to the extent one is developed by the United States Federal Reserve or a federal agency, and any foreign CBDC, from being treated as money under the Florida Uniform Commercial Code (Florida UCC). The bill defines CBDC in the Florida UCC as a digital currency, digital medium of exchange, or digital monetary unit of account that is issued by the U.S. Federal Reserve, a federal agency, a foreign government, a foreign reserve system, or a foreign reserve system that is made directly available to a consumer by such entities, and includes when such digital currency is processed or validated directly by them. The bill excludes CBDC from the definition of “money” in the Florida UCC.”

    It is clear that Governor DeSantis and the Florida legislature are not interested in having either the US government or Federal Reserve dictating a digital currency as legal tender in any form. Proponents believe that the powers vested in the People and in the States through the 10th Amendment, which gives all rights not explicitly granted in the Constitution to the States and the People, as justification for the law preventing federal or foreign digital currency.

    Further, the language prevents the state of Florida from accepting CBDC as a definition of a type of ‘money’. This second part is crucial in arguing against the case against the Feds, as digital currencies have never been legally defined as “money”. In fact, the Constitution explicitly states that only gold and silver may be used as legal tender. The term ‘dollar’ used in legal terms of the time referred to a specific measure of gold, and not as a national paper currency unit, which would not manifest until over 140 years after the term dollar was originally COINED.

    Executive Summary

    The macro-outlook is far from rosy and needs improvement before we mention the word growth for the economy again. While data is not outright abysmal, directional indicators outlined above clearly indicate a faltering economy that really needs a recession to clean out all the gunk. We are going to get that sooner rather than later.

    Silver appears to be nearing a shortage condition in the US market, as US industrials are pulling stock over from the UK market. Adding in any level of worldwide investment demand due to economic shocks would likely break the silver market very quickly and send prices skyrocketing upwards. We are closer to a silver breakout than many may realize, though I suspect there are still enough physical supplies left to prolong the current market for a while. Expect fall investment demand to pull back the curtain on exactly how thin worldwide silver inventories really are.

    Florida leads US states in rejecting CDBCs by law. I smell a states’ rights conflict brewing and fully expect the Fed and Congress to pull out all the stops in fighting the states about digital currencies. The US government needs acceptance of CDBCs or else lose their franchise on money in the country. This will be a very interesting series of events to watch as they unfold.

    Coin of the Week

    I will recommend the 5oz SilverTowne bar which is on sale this week. Nothing better than silver on sale, especially from a recognizable mint. If you are a silver investor, it may be time to just buy whatever silver you can get on sale before any sort of squeeze or short physical conditions manifests, perhaps as early as this fall.

    Unfortunately for silver stackers, most of those are just paper positions taking positions on the potential future prices moving up and down.

    Disclaimer: All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.

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