Saturday, July 23, 2016

Silver And Gold These Days

Today a quick look at the precious metals market.

Since the start of a bull market in gold and silver in January 2016 it looks like now it is silver that leads the entire precious metals market:

At the beginning of the ongoing cycle silver was weaker than gold - look at the red line in upper panel of the chart.

Then, in April silver took a leadership. Since that time this metal was much stronger than gold (and silver related companies were stronger than gold related ones). And, in my opinion, it is nothing unusual. If this bull market is going to keep on, silver has to be stronger than gold.  

Now, let me look at a few sentiment indicators.

The first one shows that silver is a hot issue today. The open interest of the silver futures market is standing at its highest level in history:

It means that a lot of new money is entering this market. Is it something dangerous in the short - term?

Well, signals are mixed. The chart below shows the current net positions held by speculators in silver futures:

Of course, speculators are holding a net long  position in these futures. What is more, this position is standing at one of the highest levels in history, close to the readings indicating the excessive optimism. 

However, another chart shows that we are still far away from a bullish frenzy in silver:

I define a bullish frenzy in any commodity as the state when speculators are generally only long a specific commodity. It means that the number of their long positions held is much higher than the number of their shorts.

In silver futures a bullish frenzy is when the number of long positions held by speculators is around 13 times higher than the number of short positions.

Well, now this figure stands at 4.57 so speculators are not totally involved in silver buying.

How to summarize the entire situation? Well, before I do it, let me look at gold, represented by its largest ETF, GLD.

In July, for the first time since March 2016, investors were cutting their GLD gold holdings. The red line within the yellow area on the right indicates that the total amount of gold entering GLD is going down in July. It looks similarly to the situation visible at the beginning of March (another yellow area, this time on the left).

So, summarizing, I am not ruling out that we may enter a period of relatively stable gold prices (trading range). As for silver, well, this metal may be very tricky and I would not be surprised if it went its own way. 

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