Is This The End Of The Silver Bull Market?

The CME raised margin requirements once again for silver to $16,200 per contract for Tuesday settlements. That is the third increase in two weeks for those counting. Non-commercial traders now need almost three times as much equity to trade silver as they did last year. Not surprisingly silver fell hard once again under the strain of forced liquidation. Since the weekend, when silver started to fall in electronic trading, it has fallen 15% from its recent intra-day high (of almost $50).

Last week I wrote in a precious sentiment update (Approaching Extremes):

Silver is most definitely the precious metal at much higher risk of serious correction compared to gold. At this point, I see gold bull continuing to push higher but at a slower pace. As well, any correction or implosion in the price of silver would undoubtedly spill over into gold so it is a real threat that must be noted.

That’s exactly what happened a few days later of course. As well, the long range declines in silver today and Monday did spill over into gold (and other precious metals). While many will no doubt blame the decline in silver prices on the CME or some conspiracy theory about fiat money, the more plausible explanation is that the CME is taking action as they would for any commodity which has sustained a massive price increase. To not act would leave the CME open to charges of incompetence and also present a much more significant threat of contagion in the after-effects of the implosion of the silver bubble.

One of the technical characteristics of an unsustainable trend in price is an acceleration in price appreciation. That is, the slope of the uptrend gets steeper and steeper over shorter and shorter periods of time. We can see this quite clearly in the recent silver chart:

As well, the relative distance from the 100 day trend was getting way out of hand even for a bull market. The recent two day declines have broken the third and steepest uptrend. As well, they’ve borne out the often forgotten market maxim that price tends to fall much faster than it rises.

Interestingly enough, the chart of silver priced in gold looks almost exactly like the one where it is priced in dollars. The most recent and intense uptrend has been broken to the downside but there remains quite a bit of space between there and back down to historical averages. So for those that averse to fiat, you have to stop and think when silver is going parabolic priced in “real money”.

So is this it for the silver?

To be perfectly honest, I do not know and neither does anyone else.

Looking at the reaction of retail traders we may gain some insight into this however. One sign that contrarians rely on is audacious nonchalance in the face of major price declines like we’ve seen in silver. If in the face of such price declines retail traders remain as bullish as ever or egads! get even more bullish, thinking that their favorite precious metal is now “cheaper”, this is interpreted as a sign of further price collapse.

But that is not what we are seeing right now. In reaction to the two day decline, sentiment metrics for silver have fallen quite precipitously. We are nowhere close to seeing a sign of pessimism or even neutrality. All we can say at this point is that silver bulls are not being tenacious in their conviction that silver has only one way to go on the chart.

As further proof that this is not merely a margin lead selloff, consider this: future traders obviously have to meet margin requirements and so their selling is understandable. But what about retail traders that had bought silver through ETFs? They obviously had no such conditions put on their trades. And yet, we see them reacting in the same way.

I pointed out two weeks ago (Sprott on Silver: Follow the Money) that the Sprott Physical Silver Trust (PSLV) was trading at a premium of 23%. Even if you are not a contrarian, any rational person would acknowledge that it is the height of lunacy for retail traders to pay 23% more to buy silver when they could easily do so at its current market price. That premium has now shrunk to just 13% as of the close today.

So again, this tells us two things. One, the selling is not simply caused by the CME margin requirement increases. It is, in fact, the other way around. Margin increases are the proper regulatory response to a dangerous bubble condition in silver. The selling is the inevitable conclusion of an extreme in sentiment. When everyone and their uncle is not only buying silver but willing to pay a premium of 23%; and even priced in gold the chart of silver looks parabolic? Then clearly things are getting out of hand. Mean reversion can get really ugly.

The other things this tells us is that retail traders are reacting with some fear and loathing, selling their silver in reaction and bringing the premium down to “just” 13%. That is obviously still irrational, but it is a bit more reasonable than 23%. But we are still not seeing a reaction that would push this silver fund to 0% premium or even negative, signalling pessimism. At best we can say that some of the irrational exuberance has been shown the door.

We have what could be the makings of a major top but at this point it would be premature to say that this is it for silver. I’d prefer to see more data, especially after the CME stops raising margins and lets the market re-align itself based on its own impetus.