Are Silver Prices Set Up for Another Heartbreak?

For long term investors and precious metals observers, the range-bound price action has rubbed salt into the open wound of short price sentiment. That is, if there is anyone left to remember the move up to $50 in 2011.

How long prices can remain relatively quiet and range-bound (in the face of growing fundamentals, geopolitical tension, and the rising awareness of inflation) is anyone's guess.
 
Restlessness is developing, perhaps correlated with the volatility and commingled with hope over news of the ending the "London Fixing".

Due to trading positions and willingness to overtly manipulate the market, combined with upcoming geopolitical tensions, it might be best to expect a move down over the short term.

Price Discovery

Price discovery is the main culprit. As long as positions held at COMEX remain dominated and concentrated, nothing is real and the darker mechanism out of London means very little.

It's not difficult to envision JPM, et al., walking unsuspecting weak-handed longs and seeking natural safety into this market in order to sheer them out of position and buy the HFT-induced dips. Producer prices surprised the market to the upside, while the BLS has just "discovered" food inflation.

Professional traders can play this game and come out as winners because they are nimble enough and can turn on a dime. But as weak (paper) hands play into the game, their losses will probably become the big bank's gains. This is the script.

In addition to range bound restlessness, traders are looking now toward volatility to gauge the next move.

Low Volatility

Forbes recently published:

"Just last week (silver) prices slipped to $18.685, the lowest level since mid-July on a continuation chart and a four-year low for a July futures contract. Prices rebounded, following the bounce in gold prices.

30-day silver options volatility is around 12% as of Tuesday’s close, coming just off a 10-year low made during last week’s price drop.

The last time silver volatility fell to the mid-teens was last year, just before silver prices broke in April 2013 and then in late 2010, ahead of the 2011 spike to record highs.

Comparatively, silver’s volatility is usually around 30%.

Volatility is always mean-reverting, so when volatility is that low, it’s ready for a big move, according the (obscure) source quoted."

Volatility is all about where the big banks want the price and perception to be in the short term.

Again, (viewed from the perspective of specs who are ultimately at the mercy of the big shorts), they can be harvested - they will be, independent of prices.

Having such low volatility is unusual for silver, and one analyst said it’s a situation that’s unlikely to last.

Does this mean anything more than an after-effect of what happens when each and every rally is stifled? When a range-bound channel works well for those seeking a profit, picking up nickels in a steamroller - and those who would rather not see the price move too far too fast?

Users are happy - and by proxy. And it works out for monetary policymakers, most who probably don't think or concern themselves with the metals.

Bernanke's answer to Ron Paul's question in 2012 said it all. His answer that gold was not money was probably less of an outright lie than an example of how far off the radar we've gone.

One must not forget is that the manipulation of gold and silver has been achieved by legal mechanisms. It's the equivalent of allowing a semi truck to drive through a regulatory loophole. Ultimately, by distorting fundamental expression (as well as cultural wealth expression) for so long, the resultant risk builds tremendous fuels for whichever ransom spark eventually ignites the fire.

What Fundamentals?

Here are few developments on top of the more obvious ones. For example, above ground investment grade silver amounts to less than one fifth the supply of gold, yet the price is inverse - to the tune of 65 to 1. Or that most silver used by industry is delivered just in time and, therefore, demand is totally underestimated. Or that silver is the only commodity that makes inflation adjusted high seem like some bizarre phenomenon.

A few others:

• Silver is more oversold now than anytime in the last 28 years.
• Silver eagle and silver maple leaf coins are selling at a record rate this year.
• Indian silver import in 2013 was 6125 t, an all-time record, up 189 % from 2115 t in 2012.
• Over 42% of the silver at the Shanghai Futures Exchange has been removed since the end of February.

With regard to investing alternatives, let us be reminded that there are always a thousand reasons to buy at the top; and a thousand reasons to sell at the bottom.

Most have a clear choice between buying into a conventional stock market, making all time high after all time high. Or buying an asset like silver that is off over 60% from its highs and 100's of percentage points from conservative inflation-adjusted highs. Markets (even rigged ones), contrary to what many are saying, do not fall forever.

What Do You Think?

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