Marius Paun | London, UK | Senior dealer | Friday 12th February 2021
The Lunar New Year Is Upon Us
We saw inflation data coming out in the US this week showing a rise of 1.4% vs +1.5% expected for CPI. But it was the employment number which was the main concern. The US Fed Jerome Powell reiterated this week that his central bank is strongly committed to doing everything it can to promote employment but that the monetary policy will not be tightened ‘solely in response to a strong market’.
On the other hand, the US Treasury Secretary Janet Yellen said the US could reach full employment next year(!) if the $1.9 trillion stimulus package is approved. If anything, her stance on inflation, that it is ‘ the most important risk’ was not doing enough amid too many small businesses closing.
The US stocks closed mixed yesterday but not far from all-time highs with the Dow Jones touching a fresh record high.
Beijing reported that foreign direct investments into China rose 4.6% year on year in January. Its CPI dropped 0.3% vs consensus 0%. Chinese markets will now be closed for about a week, starting on Thursday, due to the Lunar New Year holiday. As a result, the Asian markets are anticipating reduced liquidity.
The European Central Bank President Christine Lagarde also commented on inflation saying that January’s rebound was expected and figures will continue to improve in the next month. She added that fiscal measures should be temporary and that significant monetary stimulus ‘remains essential’.
The UK economy shrank by 9.9% overall last year, the most since 1709, we learned on Friday, with like for like retail sales +7.1% year on year vs +4.8% previously. Prime Minister Boris Johnson gave some worrying news ‘we should start to think about Covid vaccine as a regular jab’. Nonetheless, the pound sterling remains on the offence against the US dollar trading around 1.385 going into the weekend.
Gold prices tried to push higher but found good resistance at $1855 and subsequently retraced to $1823, marginally higher for the week.
Bitcoin is again making headlines surging to over $49,000, a fresh all-time high. The driver was Tesla announced that it bought $1.5 billion worth of Bitcoin and perhaps more importantly it plans to accept payment in Bitcoin soon. In reaction, Mastercard said will start supporting select cryptocurrencies. And more are expected to follow.
Marius Paun | London, UK | Senior dealer | Thursday, 11th January 2021
Last month social media-driven investors made headlines with their short squeeze on an obscure retail game seller, GameStop. They managed to push its price from under $30 to over $400 and triggered tens of billions of losses for a few hedge funds. And then the wallstreetbets Reddit group got confident and started talking about doing the same to silver. Its true silver went above $30 on Monday 01st of February, a rise of over 10% for the day. However, the price quickly retraced during the next few sessions, even falling below the original price when the hype began.
Why did they attempt to do it? Because it is supposed to be the most shorted metal, and the very reason for its significant lag relative to gold, for example, is this price manipulation, so we have been told. We have touched on the subject of the gold to silver ratio in previous correspondence. The natural ratio, based on the abundance in earth’s crust, is theoretically more like 16 ounces of silver to 1 ounce of gold which interestingly enough was the exchange rate established by royal decree from antiquity. Today’s that ratio is over 67, hence the sentiment that silver is undervalued.
Furthermore, for decades there was this story of a large investment bank allegedly suppressing silver supply on COMEX. The silver sold short is greater than annual production, so if enough investors buy the precious metal the bank could not deliver without massive losses.
Speculation aside, Gamestop was a $1 billion company at best, before the hype. By comparison, the market cap of silver is closer to $1.4 trillion. So not such an easy target for another short squeeze. On top of that, there are some particularities. Often mining companies want a bit of certainty for next year’s production, so they themselves lock in the price by short-selling futures. In the eventuality of seeing the Reddit boys push the silver price higher, even if temporarily, the likelihood is they will be happy to let it surge. Nevertheless, at some point, they will come back in as sellers putting renewed downside pressure on silver prices.
Looking at the fundamental picture, silver is likely to have an important role during the current commodities cycle. It’s known that it takes up to 10 years to get a new mine up and running, and yet due to the low prices 5 years ago, investments almost stopped. Silver is a by-product of industrial metals mining and yet a large number of industrial metals were already in short supply even before the coronavirus pandemic. It’s very hard to find a pure-play on silver nowadays, most of the traditional silver miners have switched either partially or almost entirely onto gold before 2020.
At the same time, the industrial uses for silver are growing and encouragingly are in the new technologies: smartphones, computers, battery tech, 3D printing, solar panels (photovoltaic cells used 1 million ounces of silver in 2000 and 50 million ounces in 2020). There are also new discoveries in healthcare against infections, bacteria even purifying water.
On the supply side, around 80% of silver comes from mining, with the rest from scrap. It’s been said the precious metal is often in deficit trying to match the demand of around 1 billion ounces per year. But even a marginal increase in demand could unsettle that gentle balance and send silver prices soaring.
So it seems a repeat of the same old story, great potential for silver and yet investors are having a nightmare when its price keeps falling and failing to deliver on that potential more often the not.
The chart shows a nice uptrend since last September’s selloff when silver reached a low of $21.65 with higher highs and higher lows. The price is now around the short-term moving averages which is above the longer-term one and both pointing higher. Despite reaching a fresh multi-year high of $30.09 on 1st of February 2021 we are now back around the same levels seen during August last year, $26.9.
On the downside, the bears will be looking for a push below the first support around $26.3 followed by $26. If they are successful the momentum could push to a further drop and potential retest of the selloff’s low at $24.86 which coincides with 38.2% Fibonacci retracement.
On the upside, the bulls next target is closing above resistance seen at $27.3 (today’s high and then within $27.5-$27.6 channel. The bullish momentum could also push for a retest of $27.92 the high of January 6th 2021. Ultimately the bulls would certainly want to see a break above the recent high of $30.09.