Zubair Bukhari

27th May 2020

Talking Gold, with Andrew Maguire

This post is a summary of ‘Talking Gold’ – a fortnightly update from Kinesis Director and precious metals expert, Andrew Maguire, providing a detailed round-up of the recent action in the gold and silver market – a regular feature from the Kinesis Youtube show ‘Live from the Vault’.

For the full analysis into the gold and silver markets, presented in illuminating detail, have a watch of the full segment of Talking Gold in Episode 12 of Kinesis’ ‘Live from the Vault’.

In this episode’s dive into the gold and silver markets, Andrew Maguire casts his expert eye on the impact of a breaking officially-run algorithm on the silver market, with a view ahead to the silver price beyond the upcoming Opex options expiry.

bullion

A Breaking Algo in the Silver Futures Market

Over the last two weeks, the officially run ES – SI algorithm – the S&P 500 correlated with silver futures contract – has been observed showing intermittent signs of breaking. However, despite the cracks appearing in such a visible algo, there seemed to be no effect on the price of silver whatsoever.

An algo that captured SI to the fate of rises or falls in ES,( the S&P 500). every time ES fell SI fell with it. However, this correlation failed as the paper drivers selling SI were overrun by the strong physical drivers. So as ES fell SI would do its own thing and rise, reflecting tight physical supply.

It’s important to recognise that the algorithm in question is the same directional algo that sucked in dangerous amounts of naked short bearish options bets, held by the specs.

On Thursday 14th May, the captive algo finally broke, forcing very large delta hedge futures buying to offset losses.

For a detailed breakdown of the major Chinese banks set to establish a Loco London over-the-counter physical gold bullion market watch Talking Gold’ from Episode 11 of Kinesis’ ‘Live in the Vault’.

markets

Momentum bets under attack

On May 19th – 20th in the Silver Futures Contract (SI), the momentum bets we had observed two weeks prior at $19.95 looked to be under attack.

An inspection of the pricing and the options structure reveals the naked short options bets are largely in the hands of the sucked in specs, with the house holding the long side.

Historically, such bets have provided good alpha for the specs. In fact, until March these bets were largely protected by similarly structured insider capping bets, positioning the house on the same side as large investment banks, such as JPMorgan or Goldman Sachs.

In the past, it suited the house to play these specs, while at the same time building a cheap strong physical position. However, recognizing a change in behaviour, industry insiders have begun unwinding remaining naked short bearish bets, and taken a long side of these spec bearish bets.

What does this mean for the silver price?

All clues point to a compelling rinse of very large short bets that the specs assumed was profit in the bank, when they sold these calls.

Andrew Maguire’s parting thought:

In the medium term, the bulk of liquidity providers see silver, as we do, at a minimum price of $21.50. I’m not saying this month I’m talking about after options expiry. Although, when silver starts to run, it is hard to stop.

Next Episode: Andrew Maguire reassesses the gold and silver markets after the upcoming options expiry points.

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