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June 22, 2024
PI Global Investments
Silver

Silver: The Most Bullish Development Of 2024 Goes Unnoticed


The silver market has a very bullish profile. We would argue: silver is very bullish. This conclusion is contrast with the lack of bullish silver price action.

READ our detailed silver analysis to understand how we think about silver’s leading indicators, the physical silver market, silver price chart.

Silver price vs. silver market

Before looking at one of the most bullish developments in the silver market, we need to distinguish two concepts: the silver price vs. the silver market.

We are very bullish silver, meaning we expect the price of silver to move much, much higher, certainly to $50/oz, even though the exact timing of the start of the big silver run remains tough to predict.

The prospects for a rise in the price of silver is rooted in the physical silver market situation combined with the paper silver market conditions.

On the one hand, as said in the past, a silver supply shortage has been developing in recent years. It started a few years ago, and the tipping point was reached approximately a year ago, as per this research. The situation in the physical silver market might get out of hand if industrial demand for silver continues to rise.

This silver supply shortage is intensifying. Anecdotally, this news came out recently:

Silver futures market

While the physical silver market keeps on deteriorating (it is improving for silver holders and investors obviously), another bullish development is occurring in the paper market.

The paper silver market, particularly silver futures market, has a weekly report which highlights positioning changes of market participants. The position changes look like this:

The above data points require a different view before understanding what they mean.

That’s why we have to rely on charts that show position changes of different participants. It helps tremendously to look at repositioning, week by week, both on the long side and short side.

Below is one of the two very bullish developments in the silver paper market.

Silver – net 4 short largest short traders

While we mentioned that there are two distinct developments that are bullish for price, we will only feature one of the two. Below is the chart that says it all: the lower pane visualizes concentration of the net 4 and net 8 largest traders short.

Why does this matter?

Because the concentration of the net 4 and net 8 largest traders short determine the degree of upside potential in the price of silver. In other words, if the concentration of the net 4 largest traders short is low, it implies that the price of silver has lots of upside potential before short selling can ‘cap’ the price.

What you can derive from this chart is that the concentration of the net 4 largest traders short is at the lowest level in 10 years. The horizontal grey line, which reflects the current level of the net 4 largest traders short, goes back 10 years in time – only in 2015 and 2023 did we see slightly lower readings. Astute readers will remember what happened in 2016 with the price of silver (hint: it went up some 50%).

Chart courtesy: Goldchartsrus.

While there is a similarly bullish development in the paper silver market, we don’t want to disclose it out of courtesy (the chart above comes from the premium service offered by Goldchartsrus, we only publish some of their charts in the public domain).

Are futures traders influencing the silver of price?

One question may come up with readers as they put the elements offered in this article together. The question: how comes that the paper silver market determines the price of silver, and to which extent can short positions by market participants influence the price of silver.

This is the right question to ask.

It has to do with the dynamics between market participants called ‘commercials’ (mostly banks) and ‘managed money’ traders (mostly hedge funds and other players managing money on behalf of their clients). The expert in this field is Ted Butler, who explains it this way in his latest premium alert shared with his members:

Prices drops on the silver COMEX futures market exist to enable the commercials to buy. How can the commercial buying possibly cause prices to drop? Commercial buying, per se, does not cause gold and silver prices to drop – it has to be more than that. It’s the manner of commercial buying. It only occurs when the commercials are able to first rig prices lower by wide variety of dirty trading tricks (like spoofing) and induce managed money selling.

He continues:

In other words, it’s not the actual perpetual buying by the commercials on lower prices that is illegal and manipulative, but the manner and means by which the commercials arrange the buying on lower prices. Here I must invoke one of my most repetitive allegations, namely, that the COMEX commercials have to be collusive in their consistent behavior. There’s no way possible for the commercials on the COMEX to be able to always (always) buy on lower prices if they weren’t behaving collusively.

How will the silver price react to these bullish developments?

Ultimately, what matters to investors is the reaction to the price of silver. Let’s recap what we said:

  • Physical silver market conditions are getting increasingly tighter. Industrial demand keeps on rising, there was a pivotal moment about a year ago, it is only getting worse (better for investors). Physical supply is suffering as evidenced by recent news in Mexico, one of the top producing countries in the world.
  • The paper silver market allows for more upside potential in price because of low concentration by the top 4 traders short. Similar to 2015, low concentration by the 4 top traders short is a good thing for price, irrespective of the moral side of the story.
  • There is another bullish development in the paper silver market which we did not mention in detail.

All this leads to one and only one conclusion: the number of bullish catalysts is increasing, and some market participants in the paper silver market may need to hold off increasing their short selling activity. This, in turn, will let the price do what it is supposed to do, i.e. adjust in a way that it reflects the real world supply/demand situation.

 

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