Government Distorted Markets, Silver Edition
Manipulation is only one type of government distortion. Government’s mere existence is another.
Silver Selling and Government Distortions
This is a 3 month outlook. Continue to expect pressure on metals that defies economic expectations right now for several reasons, not the least of which is Sell Season is here.
Facts and Observations
The very big funds are just beginning the process of unwinding their futures positions slowly.- Fact
Many of them end their fiscal year in November, in order to prep for the new investing rounds that come in December.-Fact
This usually means a mechanical downdraft begins between now until October. This can be offset by real events like war, credit problems etc. But absent meaningful news.. the markets are held hostage by Fund mechanics this time of year.- Observation
The Silver lining is: not just the buy season that comes in November.. but sometimes in metals like Silver, we get an opposite effect during “Sell Season”.- Empirical Observation
While the bigger funds are selling their Gold and Silver longs, sometimes the CTA crowd is also initiating positions by selling Silver and Copper. Why are they initiating? Because their fiscal year ends on Dec 31. They also react to economic data like inflation and recession more aggressively since they are long a load of stocks.- Observation
For example, last year Silver was in a particularly nasty downdraft this time of year. It started in April when the Fed began rate hikes which were presumed to slow the economy. in August it got a boost from those very same CTAs who, late to the party, decided to hedge their long stocks by shorting Silver, Copper, and Gold.- Empirical Observation
But. and here is the kicker.. The CTA shorts then close their year out starting late September/October. And when that happens, you get a rally during Sell Season.
Putting it all together it goes like this:
When that is CTAs closing shorts, we can get counter-moves in Silver during Sell season.
We could, although we are not predicting, have a repeat of that this year. Why?
This is most of the recipe for a short covering rally in September/ October before buy season. But not all of it.
We had a proper catalyst— Large physical demand from China skewed the EFP positive giving us a sign the market was underpinned and due to rally.
We have allegedly more Silver Eagles hitting the market by November, and a potential slow down in China Silver buying based on their economic worries.
We also do not know if “Buy season” will be as robust for metals as last year. This due to the Fed and China behavior and renewed Bitcoin competition. This is a big unknown.. the data does not look good for allocations so far.
Thank the IRS
If this sounds unnecessarily complicated.. it is.
All of it.. I mean all of it is because of End of Year tax allocations. If there were no IRS, there would be no reason to Buy or Sell before the End of the year. So do we hate the IRS or like them because of that? The point is— government intervention always creates opportunity— finding that opportunity is the hard part. Hate them if you must.. but profit from their ineptitude wherever you can.
3- Zen Moment
*RIP James Caan
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