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Bored With A Silver Spoon

Published 02/02/2021, 04:25 AM

Reddit-mania continued to hog the headlines overnight, with silver briefly trading above $30.00 an ounce before easing to 29.0300 an ounce, still a 7.55% gain on the day. Momentum is ebbing though, as the CME raised margin requirements on silver futures by 18.0% overnight, which will have a knock-on effect through retail derivatives across the world.

Even pre-Reddit, Comex silver futures traded a rough average of around $11 billion per day in 2020, (source CME ADV and Statista average silver price 2020), so we are not talking about a peripheral thinly traded stock here.

Unfortunately, despite that impressive number, silver's liquidity tends to be very one way when momentum is strong, and traders' speculative is myopic. So, while the retail hoards may be enjoying the momentum-driven day in the sun at the moment, they will also discover that the silver exit door is tiny when a large proportion of that $11.0 bio per day runs for it at the same time. The fact that silver retreated quickly from above $30.00 an ounce is a warning sign. Another is the Relative Strength Index (RSI), which edged into overbought territory overnight. RSI's work pretty well on precious metals and oil when it comes to predicting corrections.

I also note that copper and iron ore are struggling at present levels, iron ore notably, gapping lower last week. Gold also remains locked between its converging 100 and 200-day moving averages, receiving an infinitesimal silver afterglow.

The base metal weakness is mostly due to a stronger US dollar, which powered higher again overnight after the ISM Manufacturing Prices sub-Index powered to multi-year highs. That raised the hairs on the back of the inflation hunters' necks once again, even if equity markets completely ignored it. Nevertheless, a stronger US Dollar will make further progress by silver and gold higher challenging in the short-term.

All of the above suggests that the retail herd may be heading to a Waterloo moment with silver-mania. The Reddit Army is yelling "pump and pump", but reality will say "pump and dump." In that case, Reddit is likely to become bled it.

South Korean inflation also edged higher this morning, with the YoY for January hitting 0.60%, much higher than the 0.30% expected. It won't be enough to sound the alarms at the Bank of Korea and may be transitory. Reuters is reporting that the South Korean Government is preparing a fourth round of cash handouts and an extra budget to counteract the stubborn, COVID-19-induced contraction in domestic consumption. Much of that is likely to be saved though, and although inflationary pressures may rise, like elsewhere, I feel they are still very much overdone. Only wage-price inflation around the world will set my inflation alarms off, and we are a long way from that.

The Reserve Bank of Australia is certainly not worried about inflation in the near-term either. It has just announced its latest rate decision which left the benchmark unchanged at 0.10% as expected. Things get interesting after that, though. The RBA has committed to buying another AUD 100 billion of Government and State bonds once its present programme is completed in January.

It also noted that while the domestic recovery is pleasing "The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest."

That all sounds pretty dovish to me and is in keeping with similar outlooks from the Federal Reserve and is in some respects even more dovish. In the near-term, the statement should negative for the Australian Dollar, something that will please the RBA, but be bullish for local equity markets.

To cut, or not to cut, will be something the Reserve Bank of India will need to confront on Friday as well after the Government duly announced a massive fiscally expansive budget for 2021. Concerns within Government about India's investment-grade credit rating have been thrust aside to prioritise a COVID-19 recovery. Predictably, it was equities positive, the Sensex leaping 5.0% yesterday. Stagflationary pressures have eased of late, and the RBI will be cognisant of the Government's impending borrowing requirements. More so if credit agency downgrades mean a more significant amount of domestic borrowing. With the Rupee holding steady near 10-month highs in the face of US Dollar strength, the RBI may resume easing, which should give another boost to Indian equity markets.

The rest of the day's data is strictly second tier across the world. Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) will release results today with both expected to produce record numbers. That should be enough to keep the FOMO hoards engaged with equities, at least for another day.

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