Silver - Another Indictment As The Price Sits Around $17

November 24, 2019

Summary

  • An indictment on the sales side.
  • Silver goes nowhere fast.
  • The long-term picture looks very positive.
  • Getting ready for 2020.
  • Buying silver on weakness - SIL is leveraged without leverage.

Silver moved from its 2019 low at $14.245 per ounce to a high at $19.54 from May through early September. On the high, silver blew through the peaks from 2018 and 2017, but could not challenge the 2016 post-Brexit referendum peak at $21.095 per ounce. Even though gold broke through its 2016 peak, silver was unable to achieve that feat so far.

Silver is a highly speculative precious metal. Over the past four decades, the price climbed to the $50 per ounce level twice, once in 1980 and again in 2011. A continuation in the bull market in gold would likely cause a herd of buyers to flock to the silver market. At around the $17 per ounce level at the end of last week, the silver market was laying the in reeds and waiting for the next event or move in gold that will propel the price higher. If the price of silver is biding its time before an explosive move to the upside, shares of primary silver producing companies are likely to outperform the price action in the physical and futures markets. The Global X Silver Miners ETF product (SIL) holds shares in the leading silver mining companies.

Meanwhile, one of the other stories in the precious metal arena over the past years has been the crackdown on market manipulation. Spoofing, or pushing the price of an asset higher or lower to profit is illegal. The list of indictments in the precious metal arena has been growing, and last week it expanded by one who worked for the world's leading precious metals dealer and financial institution.

An indictment on the sales side

On November 15, another JP Morgan executive director found himself in the crosshairs of the US Department of Justice. Jeffrey Ruffo, a specialist in hedge fund sales on the bank's precious metals trading desk, faces charges of fraud conspiracy and racketeering conspiracy in a superseding indictment in federal court in Chicago. Mr. Ruffo worked at JP Morgan from around 2008 through 2017. According to the charges, he worked with other current defendants to coordinate precious metals transactions to benefit hedge fund clients. According to the indictment, in one instance, Mr. Ruffo alerted JP Morgan traders of an order to sell 93,200 ounces of gold or 932 COMEX futures contracts. The traders on the desk then placed deceptive orders to purchase gold futures to push the price of the yellow metal higher before executing the selling order. His arraignment will be December 5 in Chicago.

The charges are not likely the last in the expanding investigation as the US Justice Department is climbing the ladder of responsibility within financial institutions. The DOJ continues to establish a widespread conspiracy to manipulate the prices of gold, silver, and platinum. The charges are a stain on the precious metals markets as they continue to point to abuses. Mr. Ruffo was on the sales rather than the trading side of the business, which appears to be a first when it comes to criminal charges. Stay tuned for more developments over the coming weeks and months. The criminal charges are likely to lead to a slew of civil cases. Since Mr. Ruffo was servicing the hedge fund community, the DOJ could also be looking into its involvement in abuses.

Silver goes nowhere fast

After reaching its most recent low at $16.615 per ounce on the active month December COMEX silver futures contract, the price of silver has recovered to the $17 level.

Source: CQG

The daily chart shows that while silver has made lower highs and lower lows since the early September peak at $19.75 on the December contract, the price has been edging higher since the November 12 low. Price momentum and relative strength indicators have turned higher from oversold conditions and were approaching neutral territory at the end of last week. Open interest has been stable at around the 223,340-contract level. With the price at just over the $17 per ounce level on Friday, November 22, daily historical volatility declined from over 24.5% on November 13 to 8.90% at the end of last week. The price of silver has been going nowhere fast as the price continues to consolidate.

The long-term picture looks very positive

The long-term chart of the COMEX silver futures market continues to point to higher prices.

Source: CQG

The semi-annual chart shows that both price momentum and relative strength indicators have turned bullish. The slow stochastic remains in an oversold condition, but it has turned higher. Relative strength has risen to a neutral reading. Moreover, option interest has been climbing with the price of the precious metal, which could be a long-term validation of an emerging bullish trend in the silver market. At 20.2%, long-term historical price variance is steady as there have been no significant price spikes on the up or downside.

Getting ready for 2020

We may see a sideways trading pattern in the silver market for the rest of 2019. Next year, could be a completely different story. Gold broke out of its multiyear consolidation range in June 2019. If the yellow metal begins to climb to higher highs in 2020, silver is likely to follow.

Global interest rates declined in 2019 with both the US Federal Reserve and European Central Bank cutting short term rates. Further out along the yield curve, the Fed ended its quantitative tightening program, and the ECB started purchasing government and high-quality corporate debt securities again in November. Falling rates tend to support the prices of precious metals as they compete for investment capital with fixed income securities. At the same time, central banks around the world continue to add to gold reserves, which is bullish for gold and, by extension, silver.

Buy Gold and Silver - Money Metals Exchange

The trade war between the US and China will continue to be an issue facing markets in 2020. The most contentious Presidential election in US history will reach a crescendo next year as the incumbent President who faces impeachment will seek re-election against the opposition party that is likely to adopt a progressive agenda. Significant changes in tax, regulatory, and energy policy could be on the horizon in the US if the opposition party unseats the sitting President. At the same time, Iran continues to pose a clear and present danger to any hopes for peace and stability in the Middle East. These issues and more are likely to stoke the fear and uncertainty in markets across all asset classes that make gold and silver highly attractive investment vehicles.

From a technical perspective, gold has been in a bull market since the turn of this century. Silver tends to outperform the yellow metal on a percentage basis on the up and downside.

Buying silver on weakness - SIL is leveraged without leverage

I remain bullish on the prospects for the price of silver going into 2020. I would view any price weakness over the coming weeks as a buying opportunity. When it comes to investing in silver, shares of silver mining companies tend to provide a leveraged return as they outperform the percentage price gains or losses in the silver futures market. A diversified portfolio of silver mining shares can mitigate the idiosyncratic risk of holding individual silver mining companies. The top holdings of the Global X Silver Miners ETF product include:

Source: Yahoo Finance

SIL is a highly liquid ETF product with $525.91 million in net assets that trades an average of over 270,000 shares each day. SIL charges an expense ratio of 0.65%, but the annual average dividend yield of the ETF at 1.32% offsets the expense of holding SIL for longer-term holders.

The price of silver rose from lows of $14.245 to a high at $19.54 in 2019, a gain of 37.2%. The correction to $16.615 took the price 15% lower from the high of this year.

Source: Yahoo Finance

The chart illustrates that SIL rose from $21.91 to $32.26 per share or 47.2% from the low to the high in 2019 as SIL outperformed silver futures on a percentage basis. The correction took SIL to a low at $27.47 per share or 15% lower, as the price of the mining ETF kept pace with silver on the downside, which could be a bullish sign for the silver market.

SIL is a tool that adds leverage silver's performance on the upside without the time decay of a highly geared instrument. I would be a buyer of SIL on any price weakness over the coming weeks as risk-reward continues to favor the upside going into 2020. Meanwhile, the charges in the spoofing and manipulation scandal are likely to keep on coming. The DOJ's prosecutions are far from done.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER.com. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.

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