Nicholas Frappell reviews the market performance of the precious metals sector in May in the second part of ABC Bullion’s review of the month.
May had all the makings of a grim-looking month for silver. The price plunged from the $US17.22 open to hit a low at $US16.06 basis the spot price, before rallying hard enough to eclipse all of the losses made during the month.
The outlook for silver is hard to discern relative to gold, with some clear signs of technical resistance and the price yet to break out of the recent bearish behaviour – yet targets suggest a degree of outperformance may be likely in the future.
A key driver for silver may now be pressure from extensive short-covering.
CME positioning changed markedly, with 106.53 million Tozs of selling starting in the last week of the April and straddling the very start of the new month.
The first full week of CFTC reporting carried on in the same manner, with another 51.20 million of selling from long liquidation.
It was short speculators who really let rip, however, with almost 160 million Tozs of selling taking place between the April 25 and May 16, leading net futures only positioning to crash from 401 million long to 89.23 million long – a 312 million Tozs decline in length by May 16.
Those futures shorts were put on between April 25 and May 16 at a volume weighted average price (VWAP) of $US16.68. The next week saw 62 million Tozs of buying from CME short-covering at $US16.89, as some rushed for cover, having sold almost 81 million the week before at $US16.42.
There is still considerable buying power left from stranded short sellers who are ‘under water’ at current price levels.
Global ETFs attracted buying during May. While futures saw powerful selling, ETF holders added almost 24 million Tozs by the end of the month, taking advantage of the strong dip and carrying on adding through the late-month rally.
Price targets suggested a move towards $US18.88, with resistance at $US17.40, at $US17.90 and $US18.30. The option market at current spot and volatility levels is pricing a one-in-five chance of the price moving to $US18.88 or higher by early September.
Platinum finished the month near the open, having dropped sharply to challenge the December 2016 lows at one point.
The outlook suggests a move back to resistance around the $US1000 mark within a generally bearish down-move.
Platinum seems to continue to suffer from the fall-out from diesel, and the saturation of the diesel market in Europe.
May saw a strengthening phase in the South African Rand which has helped platinum recover.
Positioning on the CME has been defined by huge selling at the beginning of the month, as Managed Money shorts sold 948,800 Tozs between the April 25 and May 9, followed by a surge of short covering, as they then sought back 279,200 Tozs of metal between May 9-23.
Managed Money longs turned from being heavy sellers at the end of April and beginning of May to fairly substantial buyers, buying 112,750 Tozs.
This meant that by May 9, net positioning dropped to -539,000, the lowest level seen since December 2009. Net position did recover to -228,550 Tozs, which was still unusual territory.
Since last August, platinum investors on the CME have divested themselves of 2.687 million Tozs.
The huge lump of selling from Managed Money shorts took place at a VWAP of $US926.97. At current price levels, that big short is underwater, although not tragically so, but shorts are under pressure.
Some buying took place at a VWAP of $US920.67 and $US943.10 in the two reporting weeks since May 9, taking back the 279,200 Tozs referred to above, however that leaves almost 670,000 Tozs still under threat if prices continue to rally.
If the South African Rand continues to strengthen, there is a good case for further improvement in platinum, with the bear case resting on evidence of weakness in Chinese consumption.
Targets suggest a move up to $US1002 and $US1020 and at current spot and volatility levels, the option pricer gives a one-in-four chance of the price moving to $US1000 or better by September 2017, and an implied probability of one-in-10 of the price moving to $US1070.
Although significant downside targets do exist on long-term charts, the implied probability of reaching those targets within the next year is low.
May saw something of a correction within the large trend channel that palladium has moved within since the first quarter of 2016.
Nothing substantive appears to have changed, with palladium pulling back within this channel many times before and still returning to the core uptrend. However, with palladium approaching parity with platinum between May 5-8, there were signs of profit taking.
CME positioning shows that long liquidation dominated the Managed Money sector during May, with 422,300 Tozs of selling between May 2-23 CFTC reporting dates at a VWAP of $US777.
Managed Money longs had built up an additional 600,700 Tozs between March 14 and April 11, at an estimated VWAP of $US798, some of which speculators managed to squeeze out of between May 11-18 at $US791 levels.
Overall though the core long position seems to have served gross longs well. On the short side, sellers added about 72,000 Tozs in May so far, to take total short bets to 217,600 Tozs, or the long-short ratio to 9.64, nearer to the long-term average of 8.28 compared with the recent peak in mid-April of 18.02.
Support comes in at $US742, with resistance at $US823 and $US872. Price targets on the upside are still intact, pointing to $US874.
At current volatility levels, the option price implies a one-in-four probability that the price will trade there or higher by early September 2017.
On the downside, targets extend to $US725 and $US668, with options suggesting a one-in-five probability of reaching $US725 or lower, and $US668 is being priced at around one-in-20. Significant support for Palladium is $US725, forming the monthly cloud base.
Nicholas Frappell is general manager at ABC Bullion.
Click here to read part one, a review of the gold sector