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    Very Large Delivery in China Piques the Interest of Silver Investors

    Posted on May 24, 2023

    Gold and Silver are trading essentially sideways in the current market. Traders have cooled off since the banking crisis and are moving positions to later-dated contract months in the summer and to end the year in December. After a week of short covering by the bullion banks had reduced overall momentum in silver, they are back at it going net long this week. At the same time, they have renewed some of their long positions in gold. None of these movements indicate a big breakout coming, but we have had some interesting developments in the past week which we will share with you.

    Gold and Silver Analysis

    Looking at the commitment of traders (COT) report from the regulator, the CFTC, shows that gold and silver are being played slightly differently and in opposite directions. The bullion banks added net long over 5000 contracts in silver while the managed money went really short and dumped over 11,000 long silver contracts. If you were wondering who has been dumping silver, it is the financial companies and hedge funds.

    Gold is a different story. The bullion banks (swap dealers) dropped 8206 short contracts and added 198 long, for a net long swing of 8404 contracts to the bullish side. This substantial move was offset by the second largest mover of the week, the ‘other reportable’ category of trader, to the tune of 7545 dropped longs and 1452 added shorts. This marks a net move of almost 9000 contracts to the short side by the wealthy family offices and individual traders.

    It appears the bullion banks were motivated to go long gold, despite the recent fade in price over the last couple of weeks. No doubt they were taking some profits and positioning for another bump in price. While in silver, the bullion banks went very bullish while the rest of the market cooled a bit on the metal. It appears worries of recessions are increasing as silver is the more industrial metal of the two main precious metals. Price movements here are a better indicator of short-term economic headwinds, while gold is more of a long-term bet.

    You will also notice on the gold chart above that gold is responding to higher rates of US debt. Specifically, we have graphed out both the 2 and 10-year issuances which are the most liquid and participated in. Subtracting the yield on the 2-year from the 10 gives us the yield curve. When that goes negative, meaning that traders are demanding more money in the form of a premium on the short end of the curve, they are expecting a recession. You can see the status of that on the chart, and it is what we talk about next.

    The Macro View

    I have been claiming for quite some time that yield curve inversions predict recessions; and indeed, they do! They are the most reliable indicator probably because bond traders are some of the smartest out there. They really pay attention to the macro side of economics, and the bond market rates are a good indicator of overall financial system risk. We say that bond traders tend to be ‘smart money’ when compared with some others who may do a bit less due diligence in their everyday investment strategies.

    For instance, stock investors may be more focused on the industry vertical and specific types of companies within that vertical. Or if they are broadly focused, most often these days investors simply put their money into more passive funds like ETFs or mutual funds or index funds. These options spread risk without the burden of additional research. But they also fold in underperforming assets to the portfolio which can increase risk and therefore drag down returns.

    Bond investors tend to do a better job predicting recessions and positioning away from them. Bond rates: therefore, tend to indicate which way the economy is going. Therefore, we can say that bond and gold rates are also correlated when looked at through the prism of the broad macro picture. The following chart illustrates this relationship very simply and elegantly.

    We can see that two distinct events are displayed and how those events manifested in gold bull markets. In other words, when the previously discussed bond yield curve inverts and the 2-year costs more than the 10-year, we can expect gold to have a very nice bull run afterward. That would translate to the next couple of years from now when we expect gold to have performed very nicely when compared with the other markets. Stocks, bonds, and real estate will all likely finish behind gold during the next few years.

    One more chart I wanted to touch on has to do with unemployment numbers, and specifically the government’s ability to accurately track them. The following chart shows the adjustments that must be made to the roles based upon a ‘guess’ on how deaths and births affect the numbers. You see, people are born and die on an everyday basis, and these numbers may not show up immediately in population statistics. Consequently, the government ‘guestimates’ the numbers and then revises them when the real live data starts to show up.

    Per the chart above, in April there were 378,000 jobs added due to this model using the government’s best guess. That is a ton and reflects the amount of ‘slack’ in the system the government uses to provide their count of jobs. This should be considered, at best, a ballpark number and does not reflect actual reality in any given month. How far off are the unemployment numbers? I have no idea, but at this point, my faith in the precision of the government’s calculation is not strong.

    Story of the Week

    The story this week comes from the Shanghai Exchange in China, where gold and silver are traded in the largest Asian precious metals market. What is notable about China is that both metals, gold, and silver, are ‘delivered’ in physical form at a much higher rate than the Western markets of the LBMA and the COMEX. In other words, traders want the physical in China much more than they do here. And that means it is a more reliable indicator of both real market price and supply/demand factors.

    The chart above comes from the Chinese silver market, where we can see a LARGE physical delivery of silver on May 23rd. This drawdown is VERY significant when compared to regular daily deliveries and indicates a whale has moved into the Chinese silver market. Will similar whales show up in the US or London? Time will tell, but the data point is very interesting, nonetheless.

    Executive Summary

    While gold and silver have been trading down slightly for just over a week, data indicates that demand is strong in the physical. This is a theme I tend to harp on every week because it matters. I often say in the short-term, precious metals prices have very little to do with actual reality. It is when reality becomes obvious to the masses that we get the much-anticipated revaluation in the precious metals prices.

    Traders are repositioning both in gold and silver. Bullion bank trading, on its own, seems to indicate the dealers expect higher silver and lower gold prices. This is short-term trading noise; however, and should not be used by long-term holders (the stackers) from being discouraged and selling their stocks. On the contrary, this is a consolidation before the next big move and one that I will be using to increase my stack size in both metals.

    Yield curve inversions indicate oncoming recessions because bond traders are savvy and active. This is a huge market full of not only financial gurus but also large commercial banks, miners, and other well-financed ‘other interested’ parties like governments. Therefore, we can say that bond rates and gold are correlated, and this relationship should be closely monitored for indicators of a gold and silver bull move.

    We harped a bit again on job numbers, and that is mostly because I want you to have a healthy skepticism of them. The government does a fairly good job in many cases, but its sampling and mathematical modeling of data tends to leave a bit to be desired. Hence, their accuracy is not great and tends to worsen as they age the number and grow. This is because mistakes in their methodology and implementation of their models grow in scale as the economy grows and the data collection challenges are compounded.

    Lastly, we see a whale come into the physical silver market in China. Will this metal ever leave Chinese shores? It is very doubtful as China doesn’t allow a lot of precious metals to leave. Most likely this metal came from a miner or the Western markets and is being distributed to investors and other industrial interests in the country. This is a trend that has been going on for well over a decade, and this author suspects possibly much longer than that through bullion bank intermediaries.

    Coin of the Week

    I am going this week to recommend the 10oz SilverTowne silver eagle bar. The design is simply gorgeous and patriotic. Let’s keep our silver in the US, the Chinese have plenty already! The bar is on sale at the time of this writing, which is a nice bonus!

    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.