Forensic analysis of the Fed’s action on the price of silver

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Olivier Le Moal/iStock via Getty Images

Forensic analysis of the Fed’s action on the price of silver

The last few days of silver trading have been a wild ride.

Wednesday morning in New York, six hours before the Fed announce its interest rate hike, the price of silver began to decline. It fell from around $22.65 to a low of $22.25, before recovering around 20 cents.

At 2 p.m. (New York time), the Fed made the announcement. The price had already started to rise for about two minutes.

By the way, we kinda wonder how they keep privileged traders from peeking at such announcements before the rest of the world can see them. If there were not a central planning that governed our destinies with each of its edicts, this question would not exist.

Either way, the price rose 23 cents in 2:05. He moved sideways while waiting for the Fed press conference. Less than 11 minutes after departure, the price seriously increased. It eventually hit 80 cents higher than the low that occurred four minutes into the live video.

As an aside, imagine a world without such Kremlin surveillance.

Anyway, the next day (Thursday) the price was down, until it hit a brief peak at around $23.25, then fell quickly, reaching a low of around 90 cents from less.

Zooming in on silver price action

We thought we’d zoom in on the action, showing each day in its own chart. And we superimposed the basis (July contract) on the price. The base measures the abundance of the metal in the market. The basis is, future – spot. If the basis is rising, it could mean that people are buying more futures contracts than physical metal. This would be when the price increases. Or if the price goes down, it means people are selling more metal than futures. If the basis goes down, it means people are buying metal or selling futures.

July Silver Base, Spot Price - May 4, 2022

July Silver Base, Spot Price – May 4, 2022 (Monetary metals)

Here is the chart for May 4 (GMT times).

For the most part, basis follows price. This means that we see speculators in the futures market leading traders in the physical metals market.

The obvious exception is just a little after 2:00 p.m. GMT, which is just after 10:00 a.m. in New York. We see a significant increase in the base, from around -0.55% to 0.5%. These are speculators, whom we assumed to have bought in such a quantity because they anticipated a rise in prices. Correctly, in this case (speculators are often wrong as our charts show in all their inglorious detail).

After that, the basis goes down while the price finishes rising, then goes down, then goes up again. So we have metal buying, futures selling, then more metal buying.

Notably, when the price spikes during the news release, we see another spike in the basis. These pesky speculators try to anticipate what they expect from metal buyers (as is often the case). The basis then drops a lot, while the price continues to rise – so the speculators were right again.

The day ends with a price 40 cents higher than it started. And with the basis about 30 basis points higher.

The Effect of Speculators on Precious Metals Markets

This is very typical of how precious metals markets trade. The price is set at the margin, and since speculators can play with high leverage, they can build up a big margin. At least for a moment. They pay close attention to Fed announcements and other news, they often have a real-time quote screen, and they can press Buy or Sell buttons quickly. Unlike stackers, who have a longer time horizon, care less about what the Fed does from month to month and are more concerned with accumulating savings, instead of speculating to make a quick buck. .

Now let’s look at May 5.

July Silver Base, Spot Price - May 5, 2022

July Silver Base, Spot Price – May 5, 2022 (Monetary metals)

We are seeing several big base drops. When they occur with a slightly lower price, it is the speculators who sell – and the metal buyers who take over. The result is that the price doesn’t drop much – but the basis does.

After 7:00 GMT, ie 8:00 BST (we can assume that traders in Europe are online at this time), the basis moves with the price, so back to the typical trading pattern.

The price ends where it started on the morning of the rate hike. And the base ends around -0.35%, which is a bit lower than it was in the morning earlier.

What does all this mean?

There are three morals to this story.

First, these announcements often have little or no lasting effect on the gold and silver markets. Price can jump all over the place, but the move can be reversed in as little as a few hours to a few days.

Second, silver ended up a little less plentiful in the market than when it started. It seems that those who bought physical metal during this episode did not unload as quickly as the speculators. Speculators were quick to buy and quick to sell.

Third, the base for July is negative. This is well before the contract rollover, when speculators need to sell the July contract, and they can buy September if they want to go long on silver. Selling the future lowers its base. A negative base is an indication of tension in the silver market. Those interested in taking action on this indicator may want to read our previous article, “Time For A Silver Trade?”

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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