New path for silver?

Will this be the week that the price of silver breaks upward to stay? By the history of the past five years, that should not happen. However, if silver and gold prices are not knocked down this week, you could see a quick surge in precious metals prices.

There are discreet times in the financial markets over the past five years that have almost always resulted in weak precious metals prices. Among such events are three- or four-day holiday weekends, meetings of the Federal Open Market Committee, expirations of COMEX gold or silver options, the release of the monthly Non-Farm Payrolls and Unemployment Report, days when the President or Federal Reserve chair make important financial or economic statements, and the last trading days of each month.

Two weeks ago, the news broke that Deutsche Bank admitted it helped manipulate the silver (and later also gold) London price fixes as part of its reaching a settlement in a class action lawsuit. This story broke almost at the same time that the Federal Reserve Board held three days of emergency secret meetings during which Federal Reserve Chair Janet Yellen held an unprecedented direct secret meeting at the White House with President Obama and Vice President Biden. It seemed obvious to me that some extremely scary financial crisis was looming, even participants in these meetings tried to claim that nothing significant was discussed.

Over the past two weeks demand for bullion-priced gold and silver coins and ingots has increased. The U.S. Mint’s sales of gold American Eagles this month were almost triple the amount sold in April 2015. Year to date, gold Eagle sales are almost 90 percent higher than the same period last year. Even silver Eagle sales are ahead of last year’s record sales pace.

During intra-day trading in U.S. markets April 21, the spot price of silver reached as high as $17.79 (an 11-month high), up more than 25 percent since the end of 2015. At the same time, gold neared its highest price thus far in 2016.

Gold and silver prices both then dropped significantly in U.S. markets on the same day. In two times before 10 a.m. Eastern, totaling seven minutes of trading, more than 39 million ounces of paper silver contracts were sold on the COMEX, an amount equal to about 5 percent of annual worldwide new mine output of the metal. Also before 10 a.m. Eastern that day, more than 770,000 ounces of paper gold contracts were sold on the COMEX in a two-minute time frame, equaling almost 1 percent of annual gold mine production. Such high volume of sales had the intended result of suppressing the prices of both metals.

Massive concentrated short selling like this is not something that would occur in precious metals markets that are not manipulated. Selling large quantities all at once is a guarantee of selling for the lowest possible price. Most real world sellers want to get the highest possible price. So, if a large position is being liquidated, the standard method is to break up the sale among multiple brokers trading in markets around the world and maybe even over multiple days. Doing so prevents any one broker from knowing the full scale of the liquidation, which information could then be shared with other traders.

Even before these huge sales last Thursday, April 21, the New York COMEX silver exchange was approaching all-time record levels of open contracts. For gold, the number of open contracts was close to a multi-year high. The further massive short selling looked to be a desperate move to cap the price rise. It worked, but not to the same extent it would have in years past.

This week could provide a clear sign whether the silver market will continue rising in the short term. There were three events this week that are on the list of times when precious metals prices almost always decline.

On Tuesday, the COMEX May silver options expired. As of the preliminary COMEX daily report on April 25, there were over 4,200 call options (involving more than 21 million ounces of silver) open with a strike price anywhere from $17 to $18. If the spot price had been above $17 at Tuesday’s close, at least a quarter of these options would have been “in the money.” What that means is that the holder of the call option would have been able to exercise the contract to purchase the physical silver at a price below the current spot market.

The more call options that are exercised, the greater the demand for immediate delivery of physical silver. Therefore, the U.S. government as part of its overall strategy to hold down the price of gold would also want lower demand for physical silver to help restrain that price.

On Tuesday and Wednesday this week, the Federal Open Market Committee met. As the announcement of any action comes out, gold and silver prices need to be suppressed to try to reinforce the idea that the government is competent and managing the strength of the economy.

Finally, today is the last trading day of April. Once again, the U.S. government needs prices to be as low as possible to discourage technical chart followers from deciding to purchase physical precious metals.

With these three major price suppression events this week, it is quite possible that the price of silver may dip below where it ended last week. It could happen that a great time to purchase physical silver will be any time up to the COMEX close about 1:30 p.m. Eastern on Friday.

If however, the price of silver actually rises, there would be a good chance the spot price may break above $18.50 fairly soon. Actually, analysts at Deutsche Bank released a statement late April 25 where it explained that the price of silver could reach as high as $20.50 in the short term. That would be a sign that the U.S. government has run low on its ability to arrange to hold prices down.

To summarize, whatever happens or does not happen to the price of silver this week will give you an idea of what to expect for prices in the following one to two months. So, yes it is possible that this could be the week when the price of silver breaks upward.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

More Collecting Resources

• Purchase your copy of The Essential Guide to Investing in Precious Metals today to get started on making all the right investing decisions.

• Download The Metal Mania Seminar with David Harper to learn more about the metals market.