If open interest is rising, then it means one of two things. Contracts are being created by fresh buyers taking the ask, in which case we should see prices rising. Or it could be that new sellers are selling on the bid, in which case we should see prices falling. Prices have been falling, so there are fresh new sellers. That would seem to be simple enough.
Selling of futures will depress the basis. In gold, this is straightforward. We see the basis for every contract month falling, which means the price in the futures market is falling relative to the price of gold in the physical, or spot, market.
In silver, it’s a little less clear. Other than the last two days, February 14 and 15, is not doing much falling. Could selling of physical been present to nearly match the selling of futures until the last two days? Since January we have been downright bearish on silver in gold terms and cautious on silver in dollar terms .
What’s curious about the falling gold price is that, unlike in silver, we saw little reason for physical gold to sell off and on Friday sounded the alarm bell about gold backwardation.
So we have physical silver and paper silver selling. And we have paper gold selling. Is this really naked shorting of gold? There could be some of that going on, of course.
But here is the question—and it is a question for discussion, not a certain conclusion by any means—could arbitrage be the larger force here? For a long time, the Internet has been awash with rumors of silver shortage, mints are out of coins, products aren’t shipping due to inability to obtain silver used in them, etc.
Might traders have put on a long silver futures / short gold futures position?
This is an extremely important question, because if so those traders are taking on water as the gold:silver ratio rises. As they hit their stops, they must unwind which will result in selling of silver futures and buying of gold futures.
We don’t typically see the silver price fall significantly on a day when the gold price rises significantly. If traders really did put on this trade (they obviously weren’t readers of Monetary Metals!), then the unwind could cause this to occur.
We encourage comments below. Maybe we can crowdsource an answer!