Forensic Analysis of Fed Action on Silver Price

Zooming In on The Silver Price Action

We thought we would zoom in to the action, showing each day in its own chart. And we overlaid the basis (July contract) over the price. The basis measures the metal’s abundance to the market. The basis is, future – spot. If the basis is rising, it could mean that people are buying futures more than physical metal. This would be when the price is rising. Or, if the price is falling, it means that people are selling metal more than futures. If the basis is falling, it means either that people are buying metal or selling futures.

Here is the May 4 chart (times are GMT).

For the most part, the basis tracks the price. This means that we are seeing speculators in the futures market lead traders in the physical metal market.

The obvious exception is just a bit after 14:00 GMT, which is just after 10am in New York. We see quite a move up in the basis, from around -0.55% to 0.5%. This is speculators, whom we assumed bought in such quantity because they anticipated a move higher in price. Correctly, in this case (speculators are often wrong, as our charts show in all its inglorious detail).

After this, the basis falls while the price finishes rising, then subsides, then rises again.

So, we have buying of metal, selling of futures, then more metal buying.

Notably when the price spikes during the press release, we see another spike in the basis. Those pesky speculators are trying to front-run what they expect the metals buyers to do (as is often the case). The basis then falls a bunch, while the price keeps rising—so the speculators were right again.

The day ends with the price 40 cents higher than it began. And with the basis about 30bps higher.

The Effect of Speculators on the Precious Metals Markets

This is very typical of how the precious metals markets trade. Price is set at the margin, and since speculators can play with big leverage, they can be a fat margin. At least for a while. They pay close attention to Fed announcements and other news, they often have a real-time quote screen, and they can hit the buy or sell buttons quickly. Unlike stackers, who have a longer time horizon, care less about what the Fed does month to month, and are more concerned about accumulating savings, instead of speculating to make a quick buck.

Now let’s look at May 5.

We see several big drops in basis. When they occur with a slightly falling price, this is speculators selling—and metal buyers mostly taking up the slack. The result is the price does not fall much—but the basis drops.

After 7am GMT, i.e. 8am BST (presumably traders in Europe are online by then), the basis moves with the price, so back to the typical trading pattern.

The price ends around where it began the morning of the rate hike. And the basis ends around -0.35%, which is a bit lower than where it was the morning earlier.