Is China the long silver ranger?
Could China be the big silver long? Who else has deep enough pockets to endure the recent price weakness and the increased margin requirements that typically follow?
Nevertheless, the Chinese willingness to accept fungible dollars instead of precious metal seems to be waning. They are quietly accumulating metals.
Perhaps this explains why the silver open interest has remained stubbornly high throughout the most egregious washouts the silver market has seen in years.
Normally this has the effect of clearing out weak longs, often setting the scene for a price turnaround based on the COT structure.
This could be just a subset of a peaceful currency maneuvering plan.
China is Now a Net Importer of Silver
China used to export silver, but it has recently turned into a net importer. It would therefore make sense for the Chinese to seek delivery, especially given the difficulty of obtaining a reliable stock of silver these days.
Outside of the big ETF (SLV) and COMEX, no significant (government) stockpiles of silver currently exist. Furthermore, scrap flow is typically reduced in a soft market, since people are less willing to part with their recyclable silver metal.
Miner acquisition is also relatively difficult, and its feasibility can often be affected by politics and the lack of opportunity.
The silver miners — including the few primary silver producers — have long suffered from suppressed market pricing. Furthermore, what capital and financing they receive usually comes from the same bullion banks who keep the price of silver artificially low.
China and other sovereigns would naturally seek to reduce the level of their forex reserves denominated in U.S. dollars, especially considering the Fed seems locked into its role as lender of last resort to the world — and especially to the Eurozone.
A case in point is that $600 billion of QE2-generated electronic cash actually went to foreign banks as a way of building capital reserves in lieu of ECB balance sheet expansion.
The Irony of it All
The silver market has often noted a phenomenon of overnight dumping that is typically seen at the Asian open, but it is timed to occur before most Asians are actually awake.
It is now thought to be U.S. operators initiating the selloffs at Asian openings. Could this be yet another front in the trade/currency war?
New buyers for silver currently seem to be waiting in the wings to accumulate silver on the dips. Of course, the silver market has been a “buy the dip” market since the 1980s, which is the classic investment strategy employed in a long term bull market.
Short-Term vs. Long-Term Perception
The Chinese tend to take a long-term view and are notorious for being far sighted in their investment habits.
Not only is it necessary to go back decades to understand and gain perspective on the silver market’s currently situation, but it is also interesting to project forward several decades.
The key to doing this is using the measuring stick (the U.S. dollar) as the proxy. Furthermore, observing the persistent rise in unfunded liabilities should help any potential silver investor maintain a bullish long-term view on silver.
However, for those hoping for a silver rally in a shorter time frame, it might be helpful to be reminded of the (high open interest with a reduced, though still concentrated short) structural set up in the silver futures market that allows price suppression to exist.
by Jeffrey Lewis