- SLV undermined by a firmer dollar.
- Speculative positioning becomes extremely stretched on the short side, the CFTC shows.
- ETF investors continue to express a strong buying appetite for SLV.
- Macro backdrop turns negative for SLV after hawkish Fed Chair Powell.
- SLV is set to enjoy a powerful short-covering rally in the course of 2018.
Welcome to my SLV Weekly.
To do so, I proceed in the same way as for my Gold weekly. I start by analyzing the changes in net speculative positions on the Comex (based on the CFTC statistics) and ETF holdings (based on FastMarkets' estimates) on a weekly basis to draw some interpretations about investor and speculator behavior. Then I discuss my global macro view and the implication for monetary demand for silver. I conclude the report by sharing my trading view on SLV.
While the CFTC statistics are public and free, the data about silver ETF holdings are from FastMarkets, an independent metals agency which tracks ETF holdings across the precious metals complex.
According to the latest Commitment of Traders report (COTR) provided by the CFTC, money managers cut their net long position in Comex silver for a third week in a row over the reporting period (Feb 13-20), during which spot silver prices edged down 0.5% from $16.61 per oz, to $16.53.
The net spec length - at minus 1,491 tons (net short fund position) as of February 20 - dropped 316 tons from the previous week (w/w). This was driven by a combination of long liquidation (for a 6th consecutive week) of 186 tons and short accumulation (for a 3rd straight week) of 131 tons.
The net spec length is down 473 tons in the year to date after tumbling a massive 7,587 tons or in the whole of 2017.
Silver's spec positioning is extremely stretched on the short side, with its net spec length very close to its historical low of minus 2,091 tons reached in July 2015.
ETF investors bought ~85 tons of silver over Feb 16-23, while silver prices edged down 0.2% from $16.62 per oz, to $16.59 over the corresponding period.
This was the largest weekly net inflow since December 2017 when ETF investors bought a record of 306 tons of silver in the first week of the month.
Last week's silver ETF buying was concentrated on Wednesday 21 February (+39.22 tons) and Friday 23 February (+37.80 tons).
The inflows came mainly from the iShares Silver Trust SLV, whose holdings surged ~79 tons or 1% over the period.
ETF investors are net buyers of 175 tons so far in February but remain net sellers of 179 tons in the year to date, due to substantial outflows of 355 tons in January.
As of February 23, 2018, silver ETF holdings totaled 23,029 tons, according to FastMarkets' estimates.
Global macro backdrop
The macro environment for SLV has turned negative following Fed Chair Powell's testimony before the House of Representatives' Financial Services Committee (see the full testimony) on February 27.
The negative macro backdrop for SLV has been reflected in an accelerating appreciation in the dollar (DXY as a proxy), although US real rates (10-year US TIPS yield as a proxy) have retreated somewhat, as can be seen in the charts below.
Fed Chair Powell's notes in his prepared speech and his observations/conjectures in the Q&A were interpreted by the market as slightly more hawkish than expected.
While investors had hoped that the volatility spike in equities earlier in February would have prompted Powell to emphasize on a "gradualist" approach with respect to the present Fed tightening cycle, rather he decided to stress the current Fed's dilemma between "avoiding an overheated economy" and "bringing PCE price inflation to 2% on a sustained basis".
The dots from the December 2017 FOMC meeting
Source: Danske Research.
His comments have therefore raised the likelihood of a steeper path for the Fed funds rate in 2018 (4 rate hikes instead of 3) and in 2019 (3 rate hikes instead of 2). The hawkish tone from Fed Chair Powell reflected his view that the US economic outlook has strengthened in recent months thanks to stronger global growth momentum and the domestic fiscal stimulus.
While the forthcoming March 20-21 FOMC meeting (associated with updated dots and a press conference by Powell) will clarify further the Fed's stance, I remain of the view that the Fed is likely to stick with its "3 rate hikes" this year, principally because the FOMC may need to see clear evidence that inflation is back before being ready to tighten its stance a stronger pace than initially envisaged.
Finally, while the Fed officially says that the recent fall in US equities was "small potatoes" (New York Fed president Dudley's comments), FOMC members are cognizant of the feedback loop between the financial markets and the real economy. Although the spike in volatility was essentially technical, stemming from an overstretched positioning from financial players, the Fed is likely to take into account the sensibility of risk assets to the rise in yields. As such, a cautious Fed stance will most likely persist through the course of 2018. Consequently, this should be conducive to a friendlier macro backdrop for the precious metals, namely a weaker dollar and lower US real rates, supportive of monetary demand for SLV.
The sharp run-up in the dollar has hastened downward pressure in the iShares Silver Trust ETF SLV.
Source: Trading View.
Although I have turned bullish on the broad-based precious metals complex since the summer of 2017, I have been cautious towards SLV since the start of the year.
One of my concerns stems from the technical picture, which I deem unhealthy. Earlier this year, I observed that SLV was unable to break firmly above the downtrend line from the 2017 high (purple line). This was a sufficient condition for me to stay cautious. I have been proven correct as SLV has weakened notably since then.
That said, I am not inclined to take a short position in SLV because my intuition is that SLV is currently forming a base. Once sufficient energy is built, investors should prepare for a strong rally, with an eventual break above this downtrend line and a rest of the 2017 high of $17.59. The fact that silver's spec positioning is overstretched on the short side reinforces my view in so far as it means that there is a high likelihood of a short squeeze in the course of 2018.
To sum up, I do not think that this is now the right time to establish a long position in SLV as momentum-based indicators remain bearish. But a strong short-covering rally should emerge later this year. Be therefore ready for a strong short squeeze.
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