It was another week of elevated volatility with sudden downdrafts in the markets fueled by several different narratives depending on what you are trading. Coming into Friday, Silver was down eight straight days, the S&P 500 having its worst four-month start in decades, while Gold and Platinum had begun to consolidate and break back above their near-term resistance points. The divergence between Gold and Silver pushes the ratio to the upside, leaving us wondering what is next.
Analyzing the latest CFTC non-commercial net long positioning in Silver, my suspicions are as follows. The 1-year average net long position is approximately 35,000 contracts, while the latest reading shows a positioning of 46,000 contracts. These excess speculators had likely been in the May front-month contract chasing the highs into the Ukraine/Russia conflict. With a lack of upside follow-through and contract expiration nearing, I believe these excess speculators had drastically reduced their positions and did not "roll over," therefore booking the loss this week. The liquidation created a snowball effect of lower prices. To further help you understand the macro environment, we created a free "Gold Trends Macro Book". This monthly updated booklet will provide you with all the quantitative analyses of the precious metal markets. You can request yours here: Free Gold Trends Macro Book.
Adding to the sell-off, over 50% of silver demand comes from industrial uses, and the primary consumer is China. Over the past two weeks, China has introduced lockdown measures in its two largest cities, crippling its economy. The best indicator to gauge the strength of the Chinese economy is Copper prices which are nearing three-month lows. Therefore assuming that the lockdowns lift in the next week and a new round of "investors" come into the market with a fresh look at sub $24 Silver, I would expect to see a stronger lift-off in prices back into the high twenties in May.
On the other hand, Gold is doing a far better job shrugging off Silver's weakness because it has the declining U.S. economic data as a tailwind. This week we saw GDP growth in the first quarter of 2022 fall by an unexpected 1.4%, following the strong 6.9% growth in 4Q 2021, which confirms that we are firmly in a "stagflation" environment. The Federal Reserve will meet this week and hike its first interest rate post-pandemic. All eyes will be on the Dollars reaction, and if weaker economic guidance comes out in the post-conference meeting, we could have a top in the Dollar. The current correlation to the Dollar is an inverse .90%, meaning Gold should rally if you see the Dollar correct. To learn more, we completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.
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