Silver investors have spent much of the summer disappointed thanks to what they consider “underperformance” in light of gold’s recent rally and general bullish trend. Silver is generally more volatile than gold, rising higher than the precious yellow metal when gold is on a rally and falling farther and faster when values retreat.
However, silver is not “behaving” as it should this time around. In fact, while gold has steadily risen by about 11 percent since last December, silver has actually fallen slightly. Conventional wisdom would have expected a 20 percent silver rally with gold up by low double digits.
Analyst Alasdair Macleod has a theory about what is making silver behave so strangely this year. Macleod looked carefully at the largest traders in silver, noting that in most cases those entities would usually “run short positions against speculators’ longs.”
Essentially, the big traders, who are almost always bullion banks or major producers themselves, tend to buy shorts to protect their investments when it seems as if speculators might be overconfident and tend to “go long” on investments when speculators appear to expect values the “big four” expect to be forecast too low.
The result of this behavior is that silver behaves predictably and, usually, on a similar trend pattern when viewed in light of gold values. However, silver also tends to have higher highs, lower lows, and faster reaction times.
Lately, however, something appears to be interfering with this long-standing pattern. Macleod reported in mid-July that one of the largest silver traders appears to be running an investment strategy directly contradictory to that of the other seven.
Once Macleod started tracking this oppositional behavior, he was able to deduce the “whale” in question may own about 7,775 tonnes of silver, which is nearly one-third of 2018’s global mine production.
You might assume the whale is trying to corner the silver market, but Macleod discounts this theory. “We can also rule out a large speculator taking a punt on silver,” he added. Instead, Macleod said, the whale is probably a commercial entity that uses silver for manufacturing purposes and has a need to hedge against future price increases.
This leads, he said, “to one conclusion: It is probably the People’s Bank of China, the state institution charged with managing all China’s silver distribution.”
Macleod surmised, although he emphasized that he does not have proof, that the People’s Bank of China likely may be using its ability to buy silver at depressed values to shore up precious metals reserves outside of gold, which many analysts consider to be overbought.
The move has “protected [China] against an increase in silver price, which normally rises nearly twice as much as gold,” he wrote, adding, “The message for silver investors is…the largest traders appear to have become complacent.”