Chinese day traders love silver — as long it behaves
- Silver surged to a two-year high Monday before the rally hit a wall above $21/oz
- Precious metal was up nearly 50% year-to-date at its intraday peak
- Surge occurred in Asian session as commodity trading venues in China proliferate
- Silver's rise mirrors a similar surge in steel rebar and iron ore futures in April
- Silver unlikely to repeat the extent of the April correction for steel and iron futures
When Chinese buyers start moving in one direction, it can create distortions. Photo: iStock
By Ole Hansen
The biggest two-day surge in silver since 2011 has raised a few questions about the sustainability of the current rally and what is driving it.
Macro economic developments which have been highlighted on several occasions during the past few months continue to attract demand for precious metals from retail, real money and hedge funds.
Speculative positions held by hedge funds in both gold and silver have reached record levels while demand for exchange-traded products especially those in gold have continued to rise on an almost daily basis.
The 13% bottom-to-top rally from Friday to Monday in silver could represent a short-term top in the market, not least considering the 44% year-to-date rally seen already. During the rally in Asia Monday, several major stop levels got hit on Comex silver which could indicate that many short positions have now been flushed out.
As markets got increasingly disorderly, the regulators stepped in and raise the amount of colleteral required to trade and hold a position. This led to a collapse in activity and the price of iron ore and steel rebar collapsed by 25% and 33% respectively before recovering.
A major move in SHF silver may attract the opposite interest from investors using other silver instruments from COMEX silver futures to spot and exchange-traded products.
On that basis, continued demand for precious metals should see silver continue to outperform but at a much slower pace with the relative value increasingly coming back into line with longer-term averages.
Ole Hansen is head of commodities strategy at Saxo Bank