A curious thing happened last week. The prices of both monetary metals
have been falling for a week and a half through February 15. No, that's not
the curious part. There is no law of nature that says the prices have to go
up, but if they go down it must be artificial somehow. The curious thing is
that the price fell while open interest in futures rose, which is not typical
of how the market has actually been behaving in recent years.
Now let's look at the data.
Silver loses about 6.6%, and gold about 4%; thus the gold:silver ratio gains about
2.6%.
Next, let's look at the open interest data, which is the number of
futures contracts in each metal.
One possible explanation is the notorious "naked short
sellers". If so, they made money. Prices did fall. However, there is
more data that doesn't quite fit this theory.
As we showed (http://monetary-metals.com/644/), silver open
interest was already quite high. It increased a few thousand contracts (under
2%) during the period through February 15. Gold open interest was not high by
recent historical standards, and its open interest rose by 25,000 contracts
(around 6%).
Now let's look at the basis data (here is a short tutorial on the
basis http://monetary-metals.com/basiscobasis/).
This adds additional color to the data provided above.
The gold basis has been falling for a long time (http://monetary-metals.com/gold-leaps-into-backwardation/).
The basis generally (but not always) moves in the opposite direction of the cobasis, and this linked article showed the cobasis rising. The falling gold basis is not news in
itself.
Let's look at the silver basis.
The silver basis for December has been in a rising trend since at
least last July (which uptrend is not yet broken, in our opinion). Here in
this graph, we see it is not much changed from start to end. The May basis is
falling, which is interesting as it occurs against the contract
"roll" from March-May, now occurring. The "roll" is when
"naked longs" must sell because they cannot take delivery, and
typically they buy the next month if they want to keep exposure to the metal.
The above data shows: (1) falling prices, (2) rising open interest,
and (3) falling basis in gold and slightly more ambiguously in silver. We
have provided all of the data comprising this curious circumstance. You can
form your own conclusion.
Or you can read Part II (http://monetary-metals.com/?p=721) of this
article (free enrollment required for full access) for our analysis and
surprising (though tentative) conclusion.
