Silver markets face downside risks amid self-resolving dislocations - TDS

The recent silversqueeze has shifted from a demand-driven surge to a liquidity-driven crisis, which appears to have peaked over the past week as metal flows are now incentivized back to London. While markets are currently self-correcting, the recent breakout in Silver may fail, creating downside risks and potential outflows, TDS' Senior Commodity Strategist Daniel Ghali notes.

Breakout in Silver likely to fail as flows normalize

The silversqueeze transitioned away from a demand boom, towards a liquidity crisis that has since culminated over the course of the last week. However, we think the liquidity crisis has likely peaked for the time being, as markets continue to incentivize metal to flow towards London. This is a function of the extreme dislocations observed over the last weeks now becoming self-resolving."

"With liquidity returning to London markets, we expect the recent breakout to fail, potentially leading to large-scale outflows. Risks are now skewed to the downside. This isn't necessarily the end of the Silversqueeze saga, but we think it will mark the end of this chapter.

"The next chapter would necessitate (1) an erosion of inventories in Shanghai and New York, or (2) forms of export controls that could inhibit the rebalancing mechanisms further. Section 232 tariffs are one such potential friction, but China's cancelation of tax rebates on platinum lends fear that such disincentives to critical mineral exports from China could rise. Nonetheless, for the time being: don't succumb to the FOMO, the risk/reward has reversed on silversqueeze."