Is China the long silver ranger?

Could China be the big silver long? Who else has deep enough pockets to endure the recent price weakness and the increased margin requirements that typically follow?

Nevertheless, the Chinese willingness to accept fungible dollars instead of precious metal seems to be waning. They are quietly accumulating metals.

Perhaps this explains why the silver open interest has remained stubbornly high throughout the most egregious washouts the silver market has seen in years.

Normally this has the effect of clearing out weak longs, often setting the scene for a price turnaround based on the COT structure.

This could be just a subset of a peaceful currency maneuvering plan.

China is Now a Net Importer of Silver

China used to export silver, but it has recently turned into a net importer. It would therefore make sense for the Chinese to seek delivery, especially given the difficulty of obtaining a reliable stock of silver these days.

Outside of the big ETF (SLV) and COMEX, no significant (government) stockpiles of silver currently exist. Furthermore, scrap flow is typically reduced in a soft market, since people are less willing to part with their recyclable silver metal.

Miner acquisition is also relatively difficult, and its feasibility can often be affected by politics and the lack of opportunity.

The silver miners — including the few primary silver producers — have long suffered from suppressed market pricing. Furthermore, what capital and financing they receive usually comes from the same bullion banks who keep the price of silver artificially low.

China and other sovereigns would naturally seek to reduce the level of their forex reserves denominated in U.S. dollars, especially considering the Fed seems locked into its role as lender of last resort to the world — and especially to the Eurozone.

A case in point is that $600 billion of QE2-generated electronic cash actually went to foreign banks as a way of building capital reserves in lieu of ECB balance sheet expansion.

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