Something is happening in China. Industrial commodities are plunging. It’s been a brutal week, and seems to be accelerating.
Too many traders underestimate China’s role in the global financial system. Often they are focused on Trump’s every word, yet they ignore big picture signals about China’s liquidity situation.
When China shows signs of tightening financial conditions, it is best to pay attention. And when their commodity markets begin trading limit down, it is time to think about lightening up on risk assets.
Right now, these sorts of warnings are falling on deaf ears. Stocks are soaring to new highs, bonds are selling off on economic optimism, and all seems great in the world. Yeah, I get it. I understand the factors driving investors to chase stocks.
But China’s tightening will eventually stall this rally, even in the United States.
In the meantime, I have been watching the silver market get beaten like a rented mule. The past few weeks have been ugly.
Almost every day has seen a lower close. As a long term precious metals bull, it has been difficult for me to sit on my hands and not buy with both fists.
But what has kept me on the sidelines was the knowledge that speculators have had their largest net long position in history.
This record large spec position could not have been put on at a worse time. China’s credit tightening has crushed industrial metals, and silver has been dragged lower.
In the process, the gold/silver ratio has spiked higher in one of the largest moves over the past few years.
There is no way the specs have held on during this carnage. Next week’s CFTC report will see a dramatic fall in the net long position in silver.
The real question is whether it is time to buy. I have been waiting like William Wallace with the English rushing at him on horseback, trying to hold on until the last moment to raise my spear. It’s been difficult, and the ferocity of the selling has me petrified.
But the hardest trades are often right ones. I am not sure if it is brave or stupid (and probably a bit of both), but I am going to be buying silver down here. I hope I suffer a better fate than good old Billy Wallace…