Ole Hansen, head of commodity strategy for Saxo Bank says Chinese day
traders are what’s behind the limit move up on silver, yesterday.
The biggest two-day surge in silver since 2011 has raised a few questions
about the sustainability of the current rally and what is driving it.
Speculative positions held by hedge funds in both gold and silver have
reached record levels while demand for exchange-traded products especially
those in gold have continued to rise on an almost daily basis.
The 13% bottom-to-top rally from Friday to Monday in silver could
represent a short-term top in the market, not least considering the 44%
year-to-date rally seen already. During the rally in Asia Monday, several
major stop levels got hit on Comex silver which could indicate that many
short positions have now been flushed out.
It was not a coincidence that the Monday surge occured during Asian
trading hours. When it comes to commodity trading, the Asian session was
often in the past a period of tranquility with limited market action.
During the past week, volumes have spiked to levels last seen during the
April frenzy. What happened Monday was that silver fairly quickly went limit
up at the 6% daily cap in response to the strong COMEX close on Friday. This
helped trigger a spill over surge on Comex silver which went through several
major stop levels before retracing after hitting a two-year high above $21.
The fact that the traded volume goes up while the open interest goes down
is a clear indication that day traders have taken over for now. As long this
continues, we are likely to see bigger daily price swings with the Asian
session seeing most of this.
Do these observations lead to a warning that silver could be in for a
collapse similar to that in iron ore and steel rebar? No is probably the
shortest answer. Silver is a much more globally traded commodity than some of
the other futures currently available for trading in China.
The latest surge has triggered a great deal of attention and with both
XAGUSD and XAUXAG reaching and temporarily breaching their technical
extension levels, further upside now hinges on the support from a continued
rally in gold.
The XAUXAG ratio completed the extension of the March to April move
yesterday when the ratio temporarily hit a low around 64.2. With the ten-year
average at 60, silver is no longer as cheap as it was back in March when it
hit 84.
On that basis, continued demand for precious metals should see silver
continue to outperform but at a much slower pace with the relative value
increasingly coming back into line with longer-term averages.
