Silver $50: Three Years After the "Shortage"

in 23-04-2014

April 2011 saw silver prices double from 6 months before. Why, and what happened next...?   SILVER PRICES hit $50 three years ago this week, writes Miguel Perez-Santalla at BullionVault.   It was on April 25, 2011 that silver traded $49.80 per ounce in the New York spot market. That means silver traded $50 somewhere. There was a lot of business going on at that time, but after holding above $49 for the rest of that week, silver prices began to retreat. Fast.   One of the factors that many traders were looking at was the Gold/Silver Ratio. Some believed that silver was much undervalued versus gold, and would recover its historical price parity of about 16 ounces of silver per ounce of gold.   So even though silver hadn't been so expensive in terms of gold for 28 years, and even though Dollar prices had doubled inside 6 months, some traders felt the move wouldn't be complete unless silver traded above the $50 price level it had hit in 1980.   The silver market environment of 2011's run to $50 per ounce was, however, very different to that of 1980. The principal driver back then was the continued inflation in consumer prices, plus the attempt by Nelson Bunker Hunt and his partners to corner the silver market – an attempt eventually brought to an end by efforts of the Federal Reserve Bank and certain members of the Commodities Exchange.   Thirty years later the global economy again faced serious concerns. Not only was the US economy still reeling from the mortgage crisis and 2008 Lehman Brothers collapse. Now the Eurozone faced break-up as Greece, Ireland, Portugal, Italy and Spain all reported serious problems with their finances.   In the United States confidence in the economy continued at record lows. The news out of Europe only heightened concerns of another financial crisis. Then the Fed announced another round of Quantitative Easing beginning in November 2010. Silver coin sales by the US Mint hit a monthly record, surpassed only by early 2011's surge in private-investor demand. Because this new QE meant printing more Dollars (or rather, their "electronic equivalent" as then Fed chair Ben Bernanke had said). So in the minds of many investors the Dollar was under the gun. Seeking safe-haven assets, likely to hold or grow their real value during a prolonged inflation, became of paramount importance.   Internal to the silver market, meantime, there were reports that seemed to support a bullish long-term view on silver's industrial demand. The photovoltaic industry for one began consuming silver in much larger quantities than in previous years. Solar panel production starts with silver paste, and that requires a finer grade of silver than the main wholesale market trades. As the sector's growing demand sucked in these 0.9999 fine bars, it drew a lot of attention. Because while there was no shortage of the more common 0.999 bars, there was a shortage of immediate supply of this higher purity. And because of the growing demand, and the coincidental rise in the silver price, the story stuck.   Then vice-president of sales at Heraeus Precious Metals Management in New York, I was asked to debunk this myth – the idea that the photo-voltaic industry was driving the silver price higher – for clients starting in January 2011. The bottom line was that solar-panel demand was only beginning to fill the major hole left in silver offtake by the ever-shrinking photographic industry, which had previously been the world's largest consumer of silver for many decades.   Still, the physical supply anomaly between standard wholesale bars and the finer .9999 metal did give the impression that stockpiles were tight. Additionally, as that story snowballed, the incredible private-investor demand for small bars and coins in silver due to the economic global crisis caused immediately-available retail products to go to higher premiums than product for later delivery. That carried into the futures market in February 2011.   Why? When demand exceeds expectations in physical goods, often it is difficult for the manufacturers to meet new customer orders quickly. If that makes supply become sporadic, it gives the impression that there is a shortage of raw material, when in reality there is only a shortage of product. But as silver prices headed for $50 per ounce 3 years ago, the idea of vanishing silver supplies – rather than just tight supply of small bars or coin – was frequently promoted by many retail distributors as part of their sales pitch.   Backwardation is when the price of silver in a future month is cheaper than the "spot" or immediate month. Silver futures normally trade in the inverse position, because the seller of metal has to pay the costs to carry the inventory until settlement, and those costs are reflected in the price. So this early 2011 backwardation, suggesting a lack of immediately available silver, put another feather in the cap of silver bulls.   Let's take a quick look however at the actual statistics of physical demand versus supply of silver. The photovoltaic industry did experience large growth from 2008 to 2011. In fact, in that time period the industry grew its silver demand by 338% according to Thomson Reuters GFMS. This of course was astronomical for the solar industry. But for silver demand more broadly, it barely registered as a fundamental market driver.   Looking at a chart of supply and demand for silver from 2003 to 2012 we can see that supply met demand annually. There was never any shortage. In fact, the silver market was in a significan surplus 6 times over that decade.   The leading data providers in the silver market, Thomson Reuters GFMS, used to call this "implied investment". It was, as they said, "the residual" between the supply and demand data they collected. Meaning it was a balancing item, included so that supply and demand matched, whatever the shortfall or excess recorded on the visible numbers.   GFMS are now calling a spade a spade, starting with their new Gold Survey 2014. Their new Silver Survey, due for launch next month through the Washington-based Silver Institute, will surely make the same change. And as you can see, if we view that old balancing item of "implied investment" as a market surplus or deficit each year, the excess of supplied metal over visible demand ran near 15% in each of 2010-2012.   Yes, investment demand grew along with silver demand from the photovoltaic industry. But even the combination of the two did not exceed the growth in supply, which constantly increased because of the higher prices in the marketplace. Miners and scrap collectors were more than happy to increase supplies.   So like the ancient Roman writer Phaedrus said, "Things are not always what they seem; the first appearance deceives many." And silver's seeming shortage in spring 2011 – which did so much to spur extra investment, especially from private households caught up by calls to "Buy now! Time is running out quickly!" – was in truth no such thing.   In the same chart above, you will note that fabrication demand decreased in 2012. This is no surprise considering the volatility and the high price of silver in 2011. This caused what is called "thrifting" in the industrial sector.   Thrifting is what manufacturers do when a commodity used to produce their product exceeds expected costs, or becomes too difficult to manage due to price volatility. To prevent losses due to wild market prices, the manufacturers begin to invest money in attempting to use the least amount possible of the offending commodity. In this case that offending commodity was silver. And the thrifting provoked by the high silver prices of early 2011...in good part provoked by that phantom shortage...led to lower industrial demand, as we'll see in Part 2.

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"Technicals Dominate" Gold Prices But "Algos Disappointed" as Trading Stays "Dull"

in 23-04-2014

GOLD PRICES gave back a $5 rally Wednesday lunchtime in London, trading back at $1282 per ounce as European stock markets reversed earlier losses following strong Eurozone manufacturing data.   China's manufacturing sector contracted for the fourth month running on the HSBC PMI index.   Gold prices are being "undermined by improving macro data and reports that China imports tied to financing demand," reckons Robin Bhar, analyst at Societe Generale, pointing to last week's comments on China's gold trade financing from market-development organization the World Gold Council.   "The only real support for gold prices," says Germany's Commerzbank in a note, "is coming from any tension that still exists in the Ukraine."   "In line with our expectations," says Russian investment bank VTB's gold-dealing desk, "the market has reached early April's lows already."   Gold prices "could still consolidate a little in dull trading this week," it adds, "unless selling intensifies on a sustained close below $1278/80 per ounce."   Also looking at gold price charts, "Technicals dominate direction," says the trading desk note from Standard Bank's commodities team – currently being acquired by China's ICBC – "and again technicals indicating trend is to the downside.   "With a decisive break under 1278," says Standard, gold prices "could see $1255/1240 next."   Tuesday's action questioned the importance of that level, however, "to the chagrin of the algos [computer programs] and day traders," says brokerage Marex Spectron's London team.   "The follow through was fairly non-existent and the market held reasonably well and closed back in the 1280s."   Looking at the US gold derivatives market, "technical trading" ahead of tomorrow's expiry of Comex options for May "[is] keeping gold from a vigorous rally," says George Gero at RBC Wealth Management in New York.   "Tomorrow night we may see beginnings of volatile up and down on Friday."   Meantime in China, the Shanghai Gold Exchange's most active contract ended Wednesday some 75¢ per ounce above equivalent London quotes, marking only the 6th such premium to international benchmarks in the last 9 weeks.   London gold borrowing costs today edged back, slipping for the second day running from last Thursday's new 8-month highs.

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Comex Gold hits 9 week low Silver up

in 23-04-2014

The most active June gold contract on the Comex division of the New York Mercantile Exchange was last traded down $6.90 at $1,281.60 an ounce. May Comex silver last traded slightly up $0.034 at $19.38 an ounce.

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Russia Ukraine geopolitical tensions not supporting Gold: Deutsche Bank

in 23-04-2014

Deutsche Bank has repeatedly dismissed the Ukraine crisis as a positive for gold. If anything, the bank argued, it might be negative, as sanctions (and the threat of more) squeeze holders of Russian assets and put a premium on liquidity.

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Gold Prices Slip Back to 3-Week Lows as Stocks Rise, Oil Falls Despite Fresh Ukraine Tensions

in 22-04-2014

GOLD PRICES slipped Tuesday lunchtime in London, dropping back to Monday's 3-week lows while world stock markets rose after the long Easter holiday weekend.   Earlier recovering $10 per ounce from Monday's drop to $1282, gold prices recorded their lowest London PM Fix since April 3rd.   Eurozone equities rose sharply, with Germany's Dax index up 1.5%.   Silver dropped two-thirds of its 1.2% rebound from Easter Monday's new 11-week low at $19.23 per ounce, as crude oil slipped 0.5%.   Security chiefs in Kiev meantime accused Moscow of "violating" the Ukrainian de-escalation plan agreed last week with the US and EU, claiming that Russian special-ops personnel led the weekend's violence in the east.   Russia must "stop talking and start acting," said US vice-president Joe Biden at a press conference in the Ukraine capital today.   "Today's Asian open was incredibly quiet," says a note from one local bullion dealing desk, adding that Chinese traders "were sellers once again."   Gold prices dropped 0.4% on US futures yesterday, with Europe and the UK's Bank Holiday putting global trading volumes in Comex contracts at less than 60% of recent averages.   Gold prices in Shanghai today edged higher, but the metal went to a discount of $1.60 per ounce below London as the Chinese authorities pegged the Yuan currency at its lowest exchange rate to the Dollar in 14 months.   That extended the run of Shanghai discounts to 8 weeks.   Plans to open Beijing to gold bullion imports leaked over the weekend are "part of the further liberalization of the market," said World Gold Council director Albert Cheng to CNBC late Sunday.   Landing gold in Beijing offers "a shorter route for metal from refineries in Switzerland," says Cheng. There are also "lots of consumers in the north who can be better served."   "We have already started shipping material in directly to Beijing," Reuters quotes one un-named source for the story.   Here in London, precious metals trading and services from bullion market-maker Barclays will likely move to the UK bank's foreign exchange team, a report in the Financial Times claims, as it winds down its commodities division.   The leak follows moves by fellow London bullion market-makers Deutsche Bank, J.P.Morgan and Goldman Sachs to reduce their commodities business.

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India raises import tariff value of Gold to $431 per 10 grams

in 22-04-2014

India has raised import tariff value on gold and silver to $431 per 10 grams and $646 per kilo grams on Wednesday.

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