Is the silver bull back?

Notably in silver, bear squeeze conditions were evident this week. The likelihood of the bull market returning is now strengthened, particularly given gold’s improving prospects.

The classic conditions for a bear squeeze are a combination of bearish trader consensus and an unexpected rise in the price, leading to shorts being squeezed into buying back their positions. That’s a reasonable description of market developments this week.

The chart below of silver’s price and open interest on Comex illustrates the basis for these conditions.

Open interest has declined to levels not seen in decades. However loud the noise from the very small and vociferous band of silver bulls, this tells us that speculative interest is as negative as it gets. When that is the case, anyone who is a seller has sold, and the only prospective dealers are buyers. Those buyers are short sellers locking in profits, or when the price starts rising simply because it has stopped falling, they fall victim to margin calls.

In silver’s case, the price rose suddenly and sharply this week taking it from Monday’s low of $72.21 to a high yesterday of $82.12, a rally of 13.7%. Trading volumes picked up, while open interest less so accentuating the squeeze:

We shall return to silver later. Gold is a far more liquid market, and its price has faced a tussle between portfolio managers eyeing cash for risk protection while central banks, sovereign wealth funds and predominantly Asian wealth seek the protection of gold from a declining dollar. Nevertheless, the tide appears to be turning against fiat cash in favour of gold.

Despite its greater liquidity than silver, the Comex gold contract illustrates similar