The silver market is still
reeling from its fall from
$50 to $34 over a very short time. The move was driven by at least one investor selling around 1,000 tonnes of silver over a two week period. Silver had climbed
quickly from around $25. The charts supported a rise to $29, but as
silver went higher, it climbed
out of technical range into
new territory. All the time thereafter
it was vulnerable to a selloff back to
support around that level.
Many felt it could easily fall to $20 before recovering, but it bounced off $32 and has been consolidating
above $34 since then. The selling then stopped and buying started, but the
consolidation at this levels indicates that the market has to get used to these
prices for a while before they establish
a ‘floor’ that permits cautious buyers to re-enter the market again.
Investors must ask themselves…
Ø Should silver be considered as financial security, like gold?
Ø Will it ever
reach that status of being a monetary metal, in the eyes of central banks and
global investors?
Ø Some may feel that the biggest question mark hangs over its volatility in the future. Can the silver
market be manipulated, as the large US banks
have done in the recent past?
Ø Can the silver market
be cornered, as the Hunt brothers from Texas once tried to do?
Financial Security the
silver and gold investing
world is divided in two…
In the developed world, investments
are not looked at as financial security, but rather as sources of profits. Investors
make their own financial security through the profits they make over the years. This implies that investments are held for eventual selling unless they continue to grow and make capital gains and income
for the future. Investors must constantly
monitor their investments
to ensure they make profits. The reins remain firmly in the investor’s
hands.
In the emerging world, wealth is new to most and the investor is constantly
reminded of the recent poverty and the uncertainty of retaining wealth. Bank deposits in China were the usual investment avenue. That was until food
and energy inflation brought
back uncertainty and poor
performance and doubt in the safety
of their savings.
Gold has always been considered an
important place to hold ones
wealth, as it protects against uncertainty and the attrition of wealth
by inflation. New investors have watched the performance of gold over the last decade, through boom times and uncertain times. They have seen gold and silver persistently outperform other investments in a confidence-decaying world. With burgeoning middle classes
for the next decade and
more, investors in gold and silver
are likely to expand and perpetuate the belief that gold and silver should be considered
financial security and
real money.
Silver as Monetary Metal
for central banks global investors?
The presence of gold in the foreign
nation’s exchange reserves
is proof enough that gold is a monetary metal. We see the number
of central banks across
the world buying more of it
and no longer selling it.
But there is no silver in the central bank vaults. It hasn’t even been a valuable means of exchange in the dark past.
It
most likely will not come back as a monetary
metal or as part of central bank
reserves until the entire present monetary system sits in disrepute. It is too much of an industrial, consumable metal to
provide the features that a monetary
metal should have. At a price beyond
well above the current level, it could make
a comeback, but this is unlikely. The status of ‘monetary metal’ can only be given
by central banks, and not investors.
If investors treat silver as money –a poor
man’s gold, as it were—
then it rises to the status of real
money in those investor’s
eyes. The central banks wouldn’t be an issue. In
the developed world silver
is nowhere near that status,
except in the hands of a select few. In the emerging world matters are different.
Emerging world investors are finding that gold is getting out of their price range. They have no option but to turn
to a cheaper alternative. In the past, Ag has always been a metal that is
real money and represents financial
security. Its performance
over the last few years is
confirmation enough.
Asian Investors haven’t
been disappointed, considering
the silver price once stood at $6/oz. A pull back from $50 to $34 was not totally unexpected. It went too high,
too fast.
But the nature of investors in the emerging world
(i.e. India) is such that when
they see a ‘spike’ in prices, they sell and hope for a good fall and the
establishment of a new ‘floor’ price. Then they
buy back and continue to hold. It is rarely their intention to exit
the precious metal markets. Proof of such an
attitude can be found in recent Chinese import of silver.
April demand for silver bullion was 339.4 metric tonnes. This compares to 302.09 metric tonnes in April 2010 or an increase
of over 12% from the same
month last year. It
compares with silver
imports of just 132.5 and 127.3 metric
tonnes in April 2009 and April 2008, respectively.
The record demand for silver
bullion seen in 2010 is continuing
in 2011 and higher prices are not deterring Chinese buyers. China imported 3475.4 tonnes of silver
bullion in 2010, a
massive fourfold increase
from 2009 when imports were just 876.8 tonnes.
China was a net exporter of silver bullion up until 2007. We expect the numbers to India to reflect the same trend.
Consolidating in the lower to mid
$30, silver will re-attract emerging world buyers in greater volume.
Manipulation
In short, yes, it can. With silver at a low
price relative to the volume of investment
funds out there [such as in the top five U.S. banks]
it does not take a very large amount to push prices up and
down. Regulators
themselves have pointed
out that there has been
manipulation of the silver price
in the past. But regulations
and the media have certainly chased
a measure of that out of
the U.S. market [but the world is
a big place].
However, we have to qualify
that statement, by saying that the number of silver investors out there with 1,000 tonnes of physical silver to sell are few and far between!
Once they have sold,
their silver has
gone. They
have to hope that the silver price will drop back and allow them to buy back in at lower prices
or remain out of the market. Many
have hoped that the silver price would fall back to $20 but the fall halted at
$32 and in came emerging market
and other buyers. This makes
really effective price
manipulation very hard. With
the trend of silver up, anybody
shorting the market, will usually get hurt. The best a
manipulator can do today is to go with the price waves that we
see in all markets, but avoid fighting the trend.
Over time, and with prices trending
up, there will be a day
when such manipulation will be very
difficult to achieve on a
continuous basis. But silver
will continue to be very volatile and much more so than gold, for a long time still. Until we see
considerably more liquidity
in the silver physical market price swings could remain frightening.
Once liquidity rises
much more than seen now, a
seller or buyer of a large amount
can do so, while producing only small swings in the price. Then silver’s price will become
as stable as that of gold. But the pattern of silver price movements that has been established by silver, all the way up, has been to move up with
gold and to fall with
gold, albeit in a more exaggerated manner. This has been the case for
some years now.
There is no reason
to think that this pattern will stop.
Cornering the Market
the Hunt Brothers…
They succeeded in driving the price up to $50/oz. They were then pressured
by the silver regulating
bodies and forced into a
position when they had to sell. As the only buyer at
anywhere near those prices there was nobody
else to buy the silver from them.
As they began to sell, the price dropped back to the level it had been when
they started.
Hence developed world investors
need liquid markets so they
can sell at higher prices
without hurting the price too much.
When they sell too much
too quickly, the price falls (i.e. recent drop from $50 to $32).
Similar to the Hunt Brothers is another type of cornering: dominate supply without any intention of selling any at all. To be a perpetual seller of a huge stockpile would hold the price down, as long as you have
stock. India, China and Russia
were sellers of their huge silver
stockpiles left over from the days when silver was
used as a ‘means of
exchange’ (i.e. pocket change). This has held prices down since the Hunt brother days.
We saw a similar
situation in gold when up until
2009 the central banks of Europe stopped gold sales. As sales were
slowing down, the gold price
rose from its low, manipulated price of $275 (Britain sold half of its reserves) to around $1,200/oz. Central banks
now either hold or buy gold, unlikely to sell again…
With no intention of selling, Gold-producing nations are buying up
local production and reducing supply
to the market –not for profit, but for the
protection of national reserves. If this extended to all gold-producing nations then you would have a true cornering
of the gold market. If the central banks of silver nations decided that silver should be a reserve asset, then they
would have to take off newly produced silver for a very long time to make a significant
contribution to their reserves.
For an individual or even a single
institution, cornering would
be nigh-on-impossible. It
would be possible (although extremely unlikely) if the central banks
of silver producing
nations decided to act in
concert and corner the silver market.
With so many important industrial
applications, such an attempt
would produce global anger. Cornering the market in this day and age would not be successful.
The silver prices rises with gold…
$200 Silver – Is that
possible?
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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