I often find myself wanting to discuss two or more interesting news stories, but struggle to find a pleasing way to link them. This week it’s much easier. CCP policy is the thread connecting two apparently disparate stories: China reigning in silver speculation on its exchanges, and Xi’s response to US foreign policy, which Chinese observers might think was aimed at China’s energy security or cost advantage. Last week I discussed (among other things) the CCP’s evolving attitude to speculation in precious metals, and Xi’s apparent hostility to such speculation. That hostility to speculation is no longer “apparent”. In a series of measures clearly designed to dampen speculation, the Shanghai futures exchange will require more rigorous proof of physical business (production plans and audited statements) for entities applying for hedging quotas. In addition, SHFE also penalised traders who fail to disclose they are operating multiple accounts in a “coordinated fashion”. It is suggested that SHFE has now suspended 22 accounts for what amounts to “conspiracy to short silver”. Judging by COMEX inventories, the game was not shorting silver but arbing the price difference between SHFE and COMEX.
While this story is interesting for the precious metals crowd (MI2 were here before it got crowded), it doesn’t really help much in assessing where silver is headed in the short term. I suppose if COMEX inventories keep coming down at the current rate, we will eventually reach a point where silver squeezes. But that would require that Chinese demand remains as high as it has recently been. Recent price action might have chilled Chinese retail investors’ enthusiasm a little. But if the underlying cause of the demand for PMs is investor discomfort with the dollar and global fiscal deficits, it’s only a matter of time before the PM bull resumes, albeit possibly from a lower base.
Onto Xi’s foreign policy, and forgive me, because I am going to discuss geopolitics, which I am about as qualified to do as figure skating. But it’s something I do follow keenly as a hobbyist, unlike figure skating. Oil prices have perked up a little, and one factor behind that was the threat of further military action against the Islamic Republic of Iran. While the US and Iran negotiate, we are told that the threat of military action remains very much on the table. The ask is that Iran gives up not just its nuclear aspirations (including enrichment) but also its missile program, which poses a significant threat to Israel and other countries in the region. However, that’s precisely the point: Iran’s missile program is its only strategic counterbalance, and without it the Islamic regime will not survive its external and internal threats. This is precisely why Iran suggests it is a red line. So, will Trump follow through on his threats? Well, I think he is bluffing and here’s why. First of all, the last thing Trump wants is the Straits of Hormuz closed, and if there is one thing the Houthis have demonstrated is that it’s very hard for a naval power to force open sea traffic. But Patti Marin suggests another excellent reason why military action is probably no longer feasible. Marin points out that China has sent a Type 055 destroyer and a Type 052 to the Sea of Oman to escort the Ocean No. 1 intelligence ship. The Ocean 1 is probably perfectly capable of fully monitoring the activities and locations of all US Navy vessels in the region and could potentially pass that information to Iran in real time. Iranian missile tech is good, and with that kind of intelligence, there is no chance of a surprise attack. Indeed, it’s by no means impossible that the Iranians could potentially cause serious losses to the US Navy. China may have signalled this to the US by releasing photos of US bases in the region, labelled with GPS coordinates for the relevant THAD radars and batteries. None of this would improve Republican chances in the midterms.
I am struck by the irony of the situation. In supplying Iran with intelligence, China is offering significant assistance to Iran, but without the risk associated with being a party to the conflict. The US takes much the same position with Ukraine.
I do happen to be bullish on crude, but not because I think Iran will be directly attacked by the US. Instead, pressure can be exerted on the regime in other ways. Marin tells us that “multiple Iranian facilities were hit by explosions, bringing the total to more than ten successful sabotage operations against the Iranian government in just the last ten days, including military targets”. And elsewhere, Lavrov has complained bitterly that the US is orchestrating a piracy campaign against Russian shipping. Forgive me if I think crying “no fair!” is indicative of weakness. If you ain’t cheating you ain’t trying!
