Posted on December 21, 2022
The most popular question I have been getting from my subscribers lately is what will we see in the price of silver at the end of the year? It is a good question for several reasons that I will explain below.
I have written several articles on how the spot price is calculated in the derivative markets where traders get together and buy and sell future positions on the metal. Rarely is any actual metal exchanged this way, but it does indeed happen. Most of the metal is exchanged outside the COMEX where spot price is largely determined. So, when figuring out what the price of silver might do, it helps to understand how it is traded and who is doing it.
The players on the market are made up of four basic groups. On the one hand, you have those that actually mine the metal or use it to develop products. They fall within the producer and merchant category. Typically, those guys buy short contracts in silver to protect against the price falling. How does this work?
Well, say a miner is worried that silver will fall from $24 to $20 between now and March when they have their silver produced and ready to sell. They often take a short contract on silver, so if the price falls, they sell the contract for money to offset the prices they will get from the actual silver sale will be lower than projected. In this manner, miners get to offset their price risk with a paper futures contract.
Other players include financial houses and hedge funds. Their role is to take positions on gold and silver for their clients either to make money or to offset the risk they have in the rest of their portfolio. Say a person owns gold miners in their retirement account and wants to offset a down market in mining with a futures position.
Another type of player includes bullion banks or swap dealers. There are four large banks that dominate most of the swap player trade on the COMEX. Their role is to represent various clients that want to participate in the futures paper market for financial gain. And lastly, we have wealthy individuals and family offices that invest for long-term price appreciation, or what we would consider a typical buy-and-hold investment approach.
The picture above comes from the CFTC COT (commitment of traders) report which tells us how everyone is playing the market. And what is interesting is the movements from week to week for each of the players in the market. The most interesting section is the increase in long positions for the managed money category, increasing by 3,488 contracts each covering a potential 5000 ounces of silver. The managed money also reduced their short positions by -2,872, resulting in a net increase long of over 6,000 contracts of gold.
Clearly, this group is expecting the price of silver to rise. They are expecting even stronger silver sales prices than before, and likely expect silver to continue to rise in 2023. Most of these contracts, based upon futures prices, are settled in the future. In this case, February is the contract month and traders will move their positions around through the first few days of February before rotating to a new futures month.
The financial houses believe in higher silver prices, but the bullion banks (swap dealers) have repositioned slightly on the short side by about a thousand contracts. They appear to be saying that silver prices will moderate through February. I call the bullion banks the sharps (aka smart money) because they a) trade for lots of other customers and therefore hold all that position information and b) they do the research on what is likely to happen next in the metals markets.
This article has focused on the futures markets because that is where the future price of silver you pay will be determined. While physical trade affects this market, it isn’t typically until there is a shortage or overabundance of metals, that will affect trade positioning on COMEX that ultimately determines the prices you pay at the store.
Given that the bullion banks are moderating their silver positions, I can see it going either way. They are not so net long or short that they will take a beating if the price moves in either direction. I see them saying here that silver will be in a range-bound condition, say between support at $22 and resistance at $24.50 or $27. See the chart below.
The chart above depicts silver support and resistance lines that I have graphed out dating back over 12 years to the last silver bull market. There are several key support and resistance levels in the 20s because that is largely where silver has traded at, post the 2011 high of nearly $50. With exceptions, silver has been contained in this range.
The downside was about $11 while the upside appears to be $30. I believe the latter level to be a false one since it was the level at which the CFTC involved itself last time silver ran high, in February of 2021. What they implemented was essentially a reverse circuit breaker where silver trades were temporarily stopped (tamped down) above $30, per the CFTC commissioner peaking at an industry conference. This level is important in keeping silver free flowing on the exchanges given how much demand can empty COMEX coffers very quickly.
Current prices seem fair to me given the dynamics we have had in the silver market this past year. There is much more demand currently than supply from the mines, so the expectation on futures prices has risen. Hence, the higher spot prices of late.
However, these markets never move in a straight line. And typically, they change in the new year. I expect prices to moderate a bit heading into 2023 as we see what early demand is going to look like in the new year. This largely depends on the demand in the products market, as physical silver is used for thousands of products, we use every day. If we go into a recession, we could see silver’s price remain relatively weak from the reduction in industrial demand around the world.
However, silver is unique in that it is also seen as both historical money and a safety asset. If we do enter a recession and gold gets bid up, I expect to see a LOT of spillover into the silver market from gold. And silver prices could spike abruptly, given how short our above-ground physical stockpiles are at the moment.
For 2023, I expect silver to continue to shine and would not at all be surprised if demand in the market pushes silver spot prices to around $30. I also think the market will consider whether to implement price controls again should that occur, and that largely demands on how big the mine supply shortage is in 2023.
Silver will go largely as the economy goes as it has been so industrialized as to be a marker for economic health. We will report more on silver as the year goes on. But certainly, gold and silver are ending 2022 on high notes when the rest of the investment complex has come under tremendous pressure. That’s a good sign for silver investors heading into the New Year.