During the spring and summer of 2010, silver prices were caught in a trading range of $17-$19.50. That all changed at the beginning of September. From a rally low of $17.50, the price exploded to the $25 area in barely two months. Traders on the right side of this market move banked significant profits.
Such breakouts rarely happen in a vacuum. There often are sweeping and, in retrospect, obvious fundamental reasons for what took place (consider the bursting of the housing and dot-com bubbles). While what is happening in silver is unique to the market’s specific situation — as most big breakouts are — its study is helpful as a guide for identifying other price breaks.
Silver’s latest story, as it often has with the white metal, starts with claims of manipulation. From a fundamental perspective, as silver perma-bulls describe, the supply situation is one that cannot sustain demand, and a powerful rally to unprecedented heights is certain. Regardless, many speculators were hesitant. Likely, some of that hesitation was because of breakouts failing to materialize following past clamor for a silver rally. The bulls explained away the lack of an earlier breakout by citing bank manipulation. Those claims rang hollow, and the Commodity Futures Trading Commission (CFTC) brushed aside calls to investigate.
The story changed drastically last spring as three key events helped turn the tide.
At the beginning of April 2010, news of whistleblower and trader Andrew Maguire hit the media. This London metals trader warned an investigator from the CFTC in advance about a gold and silver market manipulation to be undertaken by traders for JPMorgan Chase in February to bring forth lower prices.
When the CFTC did not address the alleged manipulation publicly, the market dropped. Thanks to the work of the Gold Anti-Trust Action Committee and others, Maguire’s testimony was brought to a public forum during a CFTC review of position limits. This public testimony provided a floor for silver. The cat was out of the bag, and those suppressing the price would need to change tactics.
There were silver sell-off attempts in April, but they only lasted a few days. There were two minor attempts in May — the first lasting two days and covered $1.50. Another try knocked prices down for a six-day period. But silver again bottomed at the $17.50 area and moved up into the middle of June. Meanwhile, gold and silver exchange-traded funds kept adding ounces on investor demand.
Finally, to the bears’ relief, the seasonal aspects of the metals came into play in mid-June and a sideways move lower into the first week of July took silver back below the $18 dollar area (see "Silver on the run"). The summer selloff was underway, or so it seemed. The rally became a tight-ranged affair with each side holding off the other. The 200-day moving average became support, and each move above the 50-day average was contained.
Then something extraordinary happened to price at the early July bottom and lasted through August. It went into an even tighter trading range. It was the tightest range in three years as bulls and bears became locked in the battle for control. This was the final showdown where the long-term demand/supply dynamics played out. Short positions kept growing, but price would not break below $17. The underlying demand was like a brick wall. A last attempt to hold the market down resulted in this final tight price range.
By August, the seasonal end to metal weakness had arrived. The stage was set. The transfer of control was complete. The final shift took place on Sept. 1. After a strong two-week rally off the $17.25 area — and with silver at $18.90 — the following news hit: "JP Morgan Chase to close proprietary trading unit; Rivals may follow suit."
By itself, this news may not have made many waves, but combined with the strongest seasonal month of the year for the metals and considering JP Morgan was holding 40% of all silver shorts, this was the flash point that broke the bears’ resolve.
The key to solving any market’s fundamental supply/demand equation is correctly identifying the breaking point. Giving the shorts no ceiling position to short the market is like extending credit to a gambler in a poker match when the cards are not going his way. At some point, the credit limit is reached. This is the point we seemed to have reached in silver.
Part of the problem is that while we know about these fundamentals, we are at times reluctant to take a position. After all, the timeline above was constructed with hindsight. Had silver not rallied to $25, the chart would not have any significance.
One of the clues silver analysts seek is when silver takes the lead from gold. In this phase of the gold rally — gold up 100% from the November 2008 lows — speculation increases as gold gets closer to front-page news by making new highs. As more speculators and the public get involved, enough of them turn to silver, drawn by the fundamental picture, lower price, diversification and greed.
This sweet spot — when the break is about to occur — can be better identified with price charts. If doctors want to see how healthy or sick a patient is, they look at the data on the patient’s chart, not just the patient. We can say the same for commodity markets.