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Silver $11.015
(lowest price since September 2006)
Platinum $1,225.00
(lowest price since March 2007)
Palladium $222.00
(lowest price since late 2005)
HUI 260.25 (lowest
price since late 2005)
XAU 112.57 (lowest
price since late 2005)
TSX Venture Exchange
1621.26 (lowest price since late 2005)
What do they have in
common? Small ponds in terms of world finance. Ponds that until recently were
full of large-bodied swimmers who probably had no business being in there,
sort of like sumo wrestlers splashing around in a kid’s wading pool.
Joining the above
group are most metals (nickel, zinc, lead, uranium) and related investments.
Their current mauling is much worse than what happened in the mid-1970s when
it was gold bullion that actually took the biggest hit. So why is gold
holding up better this time? Bigger pond.
Curiously, copper is
also still holding up on a relative basis (making a mockery of my put options
that were meant to protect my long silver and gold positions) despite having
in my opinion the worst demand profile: 30-40% of annual demand is for
construction. I would suggest this too is because copper is a bigger pond.
The same goes for oil as well. Simply put, these ponds are large enough that
a few sumo wrestlers can’t make very big waves.
It doesn’t seem
possible that much more blood could be squeezed out but apparently there are
still sellers out there. And if these sellers are sumo wrestlers then there
could be some more pain directly ahead. I would note that silver has dropped
almost $3 since last week with virtually no change in COMEX open interest or
SLV bullion holdings, which basically tells me that the sellers are still
desperate and the buyers are still in no great hurry. If there is anything
more dangerous than sumo wrestlers in a wading pool, it is sumo wrestlers
with a sudden case of aquaphobia in a wading pool.
Besides sumo
wrestlers, the other problem seems to be that the people who are actually
buying the metals are doing so in ways that are not directly feeding demand
to that part of the silver market where prices are determined. I described
this situation as a Danger a while back. To sum up that post, it makes no
difference if retail investors gobble up a couple million ounces of silver
from coin shops at a premium of $2 over the spot price on a day when funds
are selling ten million ounces on the COMEX at a “normal”
contango (a premium of a few cents over spot). Until the COMEX selling is
done and people start to buy silver in true earnest, the massacre could very
well continue. Now, if you were to tell me that investors are out there
buying physical silver on the wholesale market ten million ounces at a time,
that would be different. Are they? In the absence of that kind of buying
volume, however, another 20,000 COMEX contracts (100 million ounces of paper
silver) could possibly be at risk of being liquidated based on the latest
Commitments of Traders report. If that were to happen and there wasn’t
up to 100 million ounces of physical silver being bought on the spot market
to offset it, such COMEX liquidation would have an easily predicted effect.
Indeed, at this point
it is possible that only a major market perception-altering event might be
able to reverse the ongoing slide. Something like China not having any more
reserves left to buy U.S. Treasuries. Or a horrendous surprise in a report on
the U.S. economy that locks up the credit markets again and forces the Fed to
do another emergency rate cut. The event can’t just be something huge,
it has to impeach the very credibility of the Federal Reserve and the U.S.
Treasury. Yet that might be a tall order given that the biggest market
intervention in the history of humankind just took place, one that is very
bearish for the dollar long term, and yet people are saying “so
what”.
Absent some
“black swan event”, it is also possible that the slide could be
stopped as a result of a technical capitulation, washout or exhaustion move.
The most likely target for silver should that happen would be somewhere in
the $9 range while for gold it might be in the high $600’s or low
$700’s. The washout would have to clear out a huge number of COMEX
positions (the aforementioned 20,000 contracts in COMEX silver and perhaps
100,000 contracts in COMEX gold).
Last and not as
likely as I’d like, the slide might be stopped simply because the
dollar is done moving up and oil is done moving down. That would be nice but
I’m not in the mood to be thinking nice thoughts.
Tom Szabo
Silveraxis.com
Tom Szabo was born in Hungary
during the Communist era and escaped to the West with his family, eventually
settling in California. After graduating from the University of California at Berkeley with a Bachelor’s Degree in Business Administration, he spent 8
years as a financial statement auditor with Deloitte & Touche, focusing
on financial institutions. He has co-founded several
precious metal related businesses and investment funds, invests for his own
account and runs the website at www.silveraxis.com. His specialty is
original, controversial, unpopular and contrarian thinking.
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