Silver is Holding Up Much Better than Gold During the Freezing of the Chinese Credit Markets


It has been well-broadcast over the past few months that China is draining liquidity out of its shadow-banking system. It began this process by ending the Chinese Copper Financing Deals CCFD on May 5. Up until May 5, Chinese investors could take advantage of the interest rate differentials by using copper as collateral. So, they imported tons of copper used it as collateral for letters of credit and rehypothecated that copper 10x in the first six months. Incredible leverage was obtained from this copper carry trade. With the end ofthe CCFD, Goldman noted the positive carry trade would become a negative carry. Goldman guesstimated the closing of the CCFD window would result in an unwind of these carry trades over a three month time window (though they said there was no certainty on this guess).
It may be that the closing of the CCFD window was a precipating factor to the freezing of the Chinese credit markets last Thursday. The freezing of those credit markets is creating much worse spasms for gold over the last 2 days than for silver. This should not surprise because the Chinese favor gold over silver, and if there was speculative froth over there, it would be worse for gold than silver. Nevertheless, it has been bad for both markets.
However, silver has steadied itself over the past three sessions after setting a low at 18.38 on Wednesday after declining almost 27% in 45 days from April 26 to June 28. This 45 day decline is almost perfectly symmetrical to the 44 day decline from Oct 28 11 to Dec 29 11. Even the time of month is similar. In addition, the decline into 1817 this morning is a 2.0 external retracement of the Dec 2011 to Feb 2012 range.
Notably, silver has begun to outperform gold as of Wednesday this week. This is a first for silver since February of this year. Silver tends to outperform gold when these two markets are moving higher. This is another preliminary indication that we are close to finding a bottom to this bear market in precious metals.

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Source: CQG, Inc. ©2012 All rights reserved worldwide.
John Bougearel CMT
Structural Logic CTA
Event-Driven Research for Risk Managers
John is a Chartered Market Technician CMT and member of the Market Technician’s Association. John is principal of Structural Logic Inc, a Commodity Trading Advisor CTA. Structural Logic incorporated in August 2000 as a financial newsletter and later became a CTA, offering managed futures accounts to clients in 2012.
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