Silver- Always Expect the Unexpected

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My first boss at one of the world’s leading, and most influential precious metals trading companies in the world in the 1980s called silver a trading sardine. He explained that the precious metal was different than others. Gold is a reserve asset that central banks all over the world hold as part of the foreign currency holdings. Gold sparkles when the light hits the metal and its luster is the reason why people have adorned themselves with gold as a sign of prosperity for thousands of years. Platinum and palladium are industrial commodities. They are both dense metals with high resistance to heat making them suited for use as catalysts in automobiles, oil refining, as well as many other industries. Meanwhile, my boss at that time said that silver tarnishes, and it can easily be mistaken for another less expensive metal. However, to him, silver was the ultimate trading vehicle because when it decides to move higher or lower, the velocity and price change on a percentage basis can be like no other metal in its precious class.

In 1980, the Hunt Brothers took the price of silver to over $50 per ounce from under $1.50 in 1971. However, as they bought all the way up and their average price rose, when silver declined to under $8 in 1981 and less than $5 by early 1982, they lost lots of their fortune. From 1985 through 2006, the price of silver remained below $10 per ounce, but the trading sardine rallied to just under the $50 per ounce level again in 2011. The price of silver has not traded lower than $10 since 2008, and since 2009, the price has not been lower than $13.635 per ounce. 

Source: CQG

As the quarterly chart highlights, silver open interest in the future market has been working its way higher. Open interest is the total number of open long and short positions in the futures market, and when it moves higher it is typically a sign of increasing price variance.

I have traded precious metals and many other commodities since the early 1980s, and for almost four decades, no single market has been better to me than silver. The fast-moving silver market which loves to explode higher or implode lower has a habit of blind sighting market participants. I learned early on that I should always expect the unexpected in the silver market. Many other commodities prices move on fundamentals; silver does not care about that because it is a byproduct of other metal production. Many other metals depend on demand from industrial users; silver only cares about sentiment and bar hoarding from action junkies looking to buy low and sell high. I have learned that the most profitable opportunities in the silver market come from trading rather than investing in the metal. Right now, silver volatility is picking up. I will be trading silver from the long side, buying during periods of price weakness and taking profits when it looks like it is going to the moon. My experience in the silver market has been that trading with a contrarian approach tends to offer optimal rewards.



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