by Craig Hemke, Sprott Money:
Volatile Few Months for Silver Prices
It has been a volatile few months for the silver price. After a solid rally in April and May, prices have pulled back thus far in June. So is this just a minor correction or the start of a significant pullback? We might be better able to answer that question by the end of this week.
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Important Events Impacting Silver Prices
Why is this week so important? Let’s start with the calendar of events. Wednesday brings the latest update on inflation at the retail level in the U.S. (CPI), followed by the conclusion of the June FOMC meeting, Powell’s press conference, and quarterly Summary of Economic Projections. The next day, we get the latest update on inflation at the wholesale level (PPI). How these headlines affect the bond market and dollar index will have a major impact on COMEX silver prices.
Chinese Market Impact on Silver Prices
But it’s more than just that. The Chinese markets were closed on Monday, June 10, for observance of their Dragon Boat holiday. Once they reopen on Tuesday, June 11, how will prices respond to the beating they’ve taken since trading concluded early last Friday? We saw a massive selloff in the “paper” markets of London and New York, with COMEX silver trading volume last Friday nearing 100% of the total global annual mine supply.
Understanding COMEX Silver Contracts
If you’re unclear of the math, each COMEX silver contract is alleged to represent 5,000 ounces of silver. As such, the total volume last Friday of 169,885 contracts equates to 849,425,000 ounces trading hands. As you can see below, The Silver Institute estimated total global mine supply for 2022 and 2023 to be around 830,000,000 ounces.
(As an aside, if the information above makes you think that the COMEX price, derived by trading derivatives which are only partially backed by physical metal is a scam, you might be onto something.)
So when the physical metal-based Chinese markets reopen on Tuesday, how will they respond? After the selloff on Tuesday last week in New York, Shanghai responded with a lower price the next day. However, by Thursday, the price was right back up to where it began the week. So will a similar bounce be seen this week? Maybe.
Shanghai vs. NY/London Price Premium
But how far can the premium of the Shanghai price versus the NY/London price be stretched? As you can see below, it’s already near its historical maximum. Some claim that an arbitrage trade will close this gap, but making that trade is far more difficult than assumed, so don’t expect this premium to evaporate unless Chinese demand wanes.
Technical Analysis and Support Levels
The price action last Friday drove COMEX gold, COMEX copper, and the GDX below their respective 50-day moving averages.
