Posts Tagged ‘silver’

Is Silver (NYSE:SLV) Targeting $50 Next

Monday, April 25th, 2011

Silver traded to historic highs Monday the 25th of April , taking out the $49.45 an ounce that held for more than 30 years when the infamous Hunt brothers tried to corner the market. After closely reaching $50 where do we go from here. There’s are a technical warning sign in the Relative Strength Indicator (RSI), a gauge of magnitude of advancing days versus declines on down days. The RSI, has reached 89 last week, a level not seen since 2006. A pullback or “blow off top” as more of a short term correction is near, however the ultimate run is not over!

Taking out the old high was psychological. Silver is “not trading on any kind of intrinsic or fundamental value. It’s no surprise that the rally petered out “temporarily”. Regardless, investment demand for physical silver continues with strong demand coming from India and other parts of the emerging world. Momentum continues to side with the buyers.

On the contrarian view of Silver (NYSE:SLV) below I see a rather normalized trending currency, reflecting moderate fiat (dollar) debasement, within a technical framework remarkably similar to late 1980 early 1981. And low and behold, silver has very much been acting within the technical part as it did in 1980. In 1980, it was the Hunt Brothers cornering the silver market. Today, it’s more or less the sentiment of irrationality that is expressed on places like Zero Hedge and through maverick traders like Eric Sprott. One approach is a position in (NYSE:ZSL) (See below link of Silver High Since 1980) as an option trade on the silver market, without the serious risk of time decay you are exposed to with conventional options.

On the inflation side of the trade, I only see a minor pull back with the first major support below the market, to around the $45 an ounce, and $50 is the first major resistance. $125-$150 is the price in real or inflation adjusted terms that I’m targeting in the long run. Buy on any dips. I think this is the perfect opportunity to buy in a pullback price. Ben Bernanke is set to have the Fed’s first impromptu speech of the current fiscal policies to calm the bond and Treasury markets.

Eric Sprott

Canadian asset management firm Sprott Asset Management is lifting restrictions on its popular silver closed-end fund designed to give investors exposure to physical silver, a move that has at least one market observer concerned the fund’s price could be depressed as a result. As silver prices have soared in a parabolic fashion in recent months with New York Mercantile Exchange-traded silver for May delivery nearly touching $50 an ounce earlier in today’s session, Sprott Physical Silver Trust (NYSE:PSLV) has traded at a premium to its net asset value. On Friday, that premium rose to 22%, according to Barron’s.

Last week, Sprott announced in an SEC filing that it was lifting restrictions on 26% of the fund’s total units that manager Eric Sprott and affiliates had held off the market. Those units are worth $10 each, Barron’s reported, and a Wall Street Journal column notes they can be sold at anytime, which could lead to some selling pressure in the Sprott Physical Silver Trust. While the fund currently trades at levels that are more than double $10, making the now unrestricted units all the more attractive for Sprott and its affiliates that hold those units, there are no guarantees those units will actually be sold in the near-term. Consider that Sprott himself recently called silver the “investment of the decade” and said the white metal could eventually trade to $100 an ounce. If that happens, the Sprott Physical Silver Trust would soar in value, in turn leading to an even better exit point for units purchased at just $10.

At the end of 2010, Sprott held stakes in silver miners such as First Majestic Silver (NYSE:AG), Silver Wheaton (NYSE:SLW), MAG Silver (AMEX:MVG) and gold miners Yamana Gold (NYSE:AUY) and Brigus Gold (AMEX:BRD).

Silver has stolen the spotlight among investors in recent days after surging nearly $50/oz.  Lost in all the commotion, however, are the wildly disparate rumors accompanying silver’s rally.  It’s hard to believe that it has been only a week since a widely circulated story concerning a large hedge fund which supposedly made a “gargantuan” bet against silver.  This story, which smacked of being planted by speculative interests, was circulated by some otherwise reputable financial publications.

As we’ve talked about in past commentaries, whenever extremely bearish news stories are circulated in the financial press it carries a contrarian implication in most cases.  In an established bull market like the one for silver, it’s dangerous to sell short based on a rumor since the major trend is up and a large buildup in short interest can create explosive rallies when everyone decides to short the market at the same time.  This is what apparently happened last week and temporarily today.

Here’s a quote from the story that appeared in the financial press last week:

“A gargantuan bet against silver values was placed into position [April 11] with the initiation of a one million-share-large put on the iShares Silver Trust (SLV) – at the $25 level by July. The bet constituted the largest single options trade on US exchanges and came as silver was touching the 31-year high watermark near $42 per ounce.   The (as yet) unidentified buyer of said puts is in effect counting on a 37% decline in silver prices by that timeframe and is perhaps reinforcing the UBS-originated opinion issued [April 11], that ‘it takes a brave investor to buy silver right now.’”

Assuming the above statement contains the truth, the fact that several financial news wires picked up on this and circulated it with a scary headline definitely helped generate a bearish bias in the silver market among inexperienced retail traders.  It also undoubtedly resulted in many of the bears losing their shirts. One writer for the popular Seeking Alpha web site called for a 20% correction in the silver price.  He based this forecast on the fact that the silver price was dramatically over-extended from the 200-day moving average.  The lesson here again is that’s extremely dangerous to short an established uptrend based on scanty technical evidence.  Unless there is an extremely compelling (and hopefully non-publicized) reason for doing so, the best policy is to refrain from selling short in a bull market.

Please note the increased volume spike ZLV and SLV of all time highs. This leads to suggest one yes, shorts had to cover on both ends which forced higher prices, but secondly the bears build an increased bear presence to temporarily trip the rally.

Click on links below to see prior discussions and calls on Silver. (NYSE:SLV)

Silver Hits New High Since 80′s

Short Squeeze in Silver & Gold Coming Feb. 2007

Triffin Dilemma

New Silver Margin Requirement

Food Inflation Wal-Mart

Gold and Silver: History and Stocks

Silver – Long Term Investment

October 8, 2008 on Silver and Gold

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China’s Economy To Overtake US By 2016

Monday, April 25th, 2011

The IMF -International Monetary Fund has set a date for the moment when America’s world dominance will end and the U.S. economy will be overtaken by that of China. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now. I would be the next President elected to be marked down in history to be the last to preside over the world’s largest economy. Some analysts the last few years had projected China to overtake US by 2025, but according to the IMF it’s much sooner than later.

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and is rising. Just 10 years ago, the U.S. economy was three times the size of China’s.

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back. And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different. The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

China has a state-guided form of capitalism, and we have a much freer former of capitalism. These are two systems in collision. What we have seen, is a massive shift in capability/production from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages. China has essentially followed the Japanese model of export-oriented growth, producing first and foremost for the domestic American market.

If past history is any indicator of whats to come from the US world military presence, then we’re in for a repeat in history. Spain and Britain once where dominant forces with a large Navy presence. US  is currently dominating military presence by stationing troops around the world. We’re currently spending 20-30% of our GDP in military expenditures while our economy continues to shrink.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. The interest rate on the 10-year Treasury bond is supposedly the “risk-free rate” on money. And so it has been for more than a century. No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutsche mark. If it’s just the Greek drachma in drag … not so much. Silver today just hit an all time high of $50 while hit $1516. What happens when China announces it will dump US Treasuries

The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.

It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.

China has militantly kept their banks out of the global derivatives disaster that is just beginning to unfold, which gave them enough liquidity to implement almost immediately a massive domestic stimulation program that has – so far, at least – allowed them to maintain a respectable growth rate .. [for the moment].

The problem for China is if the US market to which they are still so structurally connected doesn’t pick up before the steam generated by their well-conceived and quickly-instituted domestic pick-up program runs out of gas. The lesson of Japan for China is not the dangers of letting the finance sector dominate the economy and society – that’s what the US should have, but still doesn’t seem to have, learned. The lesson of Japan for China is that an export-oriented economy is as dependent on the health of its main markets as a crackhead is on its dealer. Creating domestic demand big enough to sustain China’s massive industrial infrastructure is no easy task. It’s not by any means impossible, especially with such an intelligent leadership. But it will require a real willingness to consider not just a radical re-structuring of the Chinese economy, but the political changes that may come with it.

Facts from MarketWatch

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Silver (NYSE:SLV) Climbs Up Higher $46

Thursday, April 21st, 2011

Are you trying to call a top in silver and trying to short SLV?

You’re not alone – I’ve been picking up on a lot of chatter in blogs and emails about traders and analysts trying to call the “top” in Silver “any day now. See the Weekly chart below from September of 2009. 1 chart is the (NYSE:SLV) SLV ETF vs. (NYSE:ZSL) Ultrashort Silver ETF.

Before getting too deep into the chart, keep in mind ProShares announced a 10 to 1 Reverse Split for ZSL on April 14th, 2010. The long-term fate of leveraged inverse ETFs almost always means a trajectory headed to $0 per share … which is why they will have to CONTINUE reverse-splitting most leveraged inverse ETFs every few years (particularly if there are strong rallies in the underlying market) … but that too is another story.

I’m really showing this chart for comparison purposes, and as a reminder that double or triple leveraged inverse ETFs are for very short-term (perhaps only intraday) trading purposes – you should not invest long-term in leveraged inverse ETFs.

The main point of this chart is the literal surge in volume in 2011 – which one would assume is a rush of risky/aggressive traders seeking to profit from a potential top in silver.

The surge in volume from March to present either indicates that more people are now aware of the ZSL fund… or that more people are finding shares just too irresistable to snatch up a position that will rally a large percentage gain (but NOT large share price gain – certainly NOT back to $140 per share or even $100 per share) in the event Silver does top soon.

Now going back to the main point – our weekly pullback phase in January (when it looked like Silver had topped on the daily chart) led to a ZSL move from $40 to $50 per ounce (a 25% gain) but now price is 70% lower ($50 to $15) and still declining.

To make a long story short, any type of trend reversal strategy is inherently more risky than playing for trend following strategies – given the foundation of technical analysis is built on the notion of trend continuity.

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US Outlook Rated Negative By S&P

Monday, April 18th, 2011

U.S. government bond prices fell after S&P’s announcement, while US stock market extended losses down DJI 215 points  and the dollar pared gains against the euro. Standard & Poor’s on Monday downgraded the outlook for the United States to negative, saying it believes there’s a risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis, and with a budget deficit projected at more than $1 trillion, is set to grow further. The S&P said the move signals there’s at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years.

Gold prices, meanwhile, hit a new record above $1,496 an ounce. Gold is likely to rally further on renewed safe-haven demand as concerns about European sovereign debt escalate. Market speculation has intensified that Greece won’t meet its debt payment obligations despite help from the European Union and the International Monetary Fund. These worries are redoubled by talk that additional aid won’t be provided, sending investors scampering for a safe harbor from rising uncertainty. 

Meanwhile, market speculation about other financially weak Euro-zone states continues to fan these worries, with many naming Spain as the next likely bail-out candidate. Gold prices hit a record overnight as inflation concerns continued to spur buyers in Asia. Gold had set fresh records Friday after China’s stronger-than-expected inflation data brought those concerns to center stage. The yellow metal is considered a store of value and an alternative currency, with investors often buying gold as a hedge against rising inflation.

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Gold, Silver & Oil Make New Highs Again

Friday, April 8th, 2011

Silver (NYSE:SLV) climbed to its most expensive level versus gold since 1983 as rising inflation spurred by commodity shortages, economic recovery and turmoil in the Middle East bolstered demand.  An ounce of gold bought 37.15 ounces of silver, compared with an average of 62 in the past 10 years. Silver for immediate delivery has more than doubled in the past year while gold gained 27 percent, cutting the ratio from a high of 70 in June. Silver has yet to hit a record which means the ratio will decline further” to levels unseen since 1980, when the billionaire Hunt brothers hoarded the metal. Investor and industrial demand is strong as the economic recovery is under way and inflation becomes a worry.

The jobless rate in the U.S. unexpectedly fell to a two- year low in March.  A United Nations index of world food prices jumped to a record in February, contributing to riots across northern Africa and the Middle East that toppled leaders in Egypt and Tunisia. Corn prices traded near a 33-month high today, while crude oil in New York hovered near the highest level since September 2008.

Silver Outperforms

Silver will rise to $60 an ounce in the next three years, while gold will climb to $2,000 an ounce. American Precious Metals Exchange, one of the largest U.S. gold and silver dealers, said yesterday its sales may double this year. Sales of items including 1-ounce gold coins and 10- ounce silver bars are “on pace” to reach as high as 15 million units for the year, Chief Executive Officer Michael Haynes said. The dealer shipped 7.5 million items last year.

Industrial applications such as electrical switches and batteries accounted for 50.3 percent of silver demand in 2008, compared with 40 percent five years earlier and 51 percent in 2007, according to The Silver Institute.

Gold

Gold (NYSE:GLD) prices were hitting a new record Friday and silver prices touched $40 an ounce as the precious metal bulls came out in full force. Gold for June delivery was adding $12.40 to $1,471.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price hit another high of $1,474.50 an ounce. The spot gold price was jumping more than $12.

As silver looks to $50, gold is looking to $1,500, which seemed like a far-fetched dream for a few weeks as the metal could not conquer the $1,450 level. Now it has and many experts think the $1,500 level will be reached in days or, at the most, weeks. Safe-haven demand is leading the charge Friday as investors are ready to protect themselves during a possible government shutdown. Japan’s 7.1-magnitude earthquake Thursday also left investors with the notion that anything can happen, so gold and silver become appealing to hold over the weekend. Portugal’s formal request for a bailout as well as the European Central Bank’s tacit statement that Thursday’s rate hike was not the first of many have highlighted gold and silver as an attractive alternative to paper currencies.

OIL

Oil (NYSE:OIL) hit a 32-month high near $125 on Friday after attacks on Libyan oil fields raised the prospect of long-term supply cuts, with commodities in general rising on optimism global economic recovery will fuel demand.

US Crude Oil prices also popped pasted $111 a barrel Friday with $120 the next price target for many experts. Gold and silver have been moving in tandem with oil prices as higher energy costs lead to higher inflation which leads to more demand for gold and silver. Brent was up $1.82 to $124.49, after earlier climbing more than $2 to just below $125. U.S. crude climbed $1.29 to $111.59, down from slightly an intra-day peak of $111.90 last reached in September 2008.

Gaddafi has caused damage to the Sirte basin which has about two thirds of their oil, there’s dollar weakness and some very large fund action piling into the market in oil and base metals. Analysts call for $150 Oil Target. It took Kuwait two years to restore oil production to pre-war levels of about 1.6 million bpd, similar to Libya’s pre-conflict production, after the 1991 Gulf War, according to International Energy Agency data.

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Silver Hits New High Since 80′s

Tuesday, April 5th, 2011

Silver (NYSE:SLV) gained 1.2 percent to last trade at about $38.34 an ounce, after hitting a session high of $38.99, the highest since the Hunt Brothers cornered the market in the early 1980s, when prices briefly hit a record of just below $50 an ounce. Silver has outperformed gold in recent months, rising 22 percent in the first quarter compared with gold’s 0.7 percent. The gold:silver ratio, which shows how many silver ounces are needed to buy an ounce of gold, fell to a 28-year low at 37.3.

On Monday, Bernanke said an increase in U.S. inflation has been driven primarily by rising commodity prices globally, and was unlikely to persist. His comments contrasted with those of other U.S. central bank officials, some of whom called for tighter monetary policy.

Rising oil and grain prices boosted gold’s inflation hedge appeal. Brent crude rose to a 2-1/2-year highs on geopolitical risks to supply from the Middle East, while corn futures hit a record high as worries over tight supplies persisted.

Investors have a round of central bank meetings and economic data to digest this week, and likewise, trading will be heavily influenced by forward looking commentary regarding interest rates, inflation, and growth. To kick the week off, the Reserve Bank of Australia announced their interest rate decision last night, and this looks to be followed up by the FOMC Minutes during the day today, and lastly back-to-back interest rate decisions from the Bank of England and the European Central Bank early Thursday morning. Gross domestic product data is also slated to come out of the Eurozone and England on Wednesday, while Canadian unemployment is the last major event for the week on Friday.

As investors wait for central bank decision to hit the wire, equities and consumers around the world will likely continue to feel the pressure of rising oil, especially as WTI crude futures pushed past $108 a barrel on Monday. Likewise, precious metals are gaining momentum on continuing fears of rising inflation and general economic uncertainty.

SLV opened above $37 a share for the first time on Monday, and the fund will likely continue higher in the coming weeks given the longer-term strength of its uptrend and supporting fundamental factors. The next likely level of resistance is the $40 mark, while support comes in at the 20 day moving average, right above $35 a share. Any brief correction may be used as an entry point, while a close below its 20 day moving average should be treated as an alert, since the fund may then quickly fall to its 50 day moving average or even lower.

Technically speaking, SLV remains in a strong uptrend, and from a long-term perspective investors can use dips/corrections as great opportunities to establish long positions. When taking into account fundamental factors, the case for SLV remains bullish. This precious metal not only mimics the safe haven traits of gold, in serving as a hedge against inflation, market volatility, and geopolitical tensions,  its demand is actually primarily driven by industry. In fact, GFMS forecasts that industrial silver demand will rise by one-third in the coming years, up from 15,000 tonnes in 2010 to over 20,000 tonnes in 2015. Economic momentum in emerging markets is also picking up, and likewise the price of silver is increasing thanks to rising incomes and growing demand.

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Utah Now Accepts Gold As Legal Tender

Tuesday, March 29th, 2011

There is a new law in the state of Utah. The State of Utah has a new measure on the books that eliminates state taxes on the exchange of gold and silver coins and directs the legislature to study an “alternative form of legal tender”. The law, signed by Gov. Gary Herbert last week, also recognizes gold and silver coins issued by the federal government as legal tender in the state. The Tea Party has a powerful presence in Utah and is the leading voice against Fed Chairman Ben Bernanke’s loose monetary policy. Wow, how things changes. It’s a slap in the face of the US Government that designates the US Dollar as the only legal tender. Utah does not have faith in the dollar. Quite frankly, neither do many economists around the world that feel the Fed has been deliberatively devaluing the dollar to creep up inflation here and abroad.

People have been using the gold and silver coins as investments, but not as legal tender. The big legal change in Utah is that the state tax code now treats gold and silver coins thats issued by the U.S. Mint as a currency rather than an asset. That means no capital gains or other state taxes will be levied when the coins are exchanged, but here’s the caveat– Federal taxes of course still apply. As a currency for Utah, the gold and silver coins are still only worth their face value in the eyes of the state. Does that make sense? To put in luminance terms…If your gold coin is a $50 coin and gold is currently trading at $1400 an ounce, that means according to state code, your $50 Gold coin is worth face value – that’s right 50 bucks. There’s no benefit to the consumer if the precious metal hits $2400. Your coin is still has a face value of $50. This is in part, a smart move by the state because they’re the ones benefiting of the price increase, not the consumer. Of course, the state is anticipating desperate people, when times are rough to meet ends meet, they’ll trade the precious coins in exchange for food. Expect other states to follow. The new law is, of course, a shot at the Federal Reserve. Utah isn’t alone. Apparently a few other states are considering similar bills.

The only benefit to the consumer is it eliminates taxes on the exchange of the coins. So, essentially it would be on the same playing field as paper currency. Here’s another investment idea, start a bank that steps in and creates accounts backed by gold and silver coins. There’s another opportunity. Take life by the horns!!!

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Oil & Silver Hit New Highs

Friday, March 4th, 2011

Middle East & North Africa oil producing countries are creating inflated oil prices. Crude-oil futures settled at their highest level in 2 1/2 years Friday, spurred by reports of violence near Libya’s oil facilities. Light, sweet crude for April delivery settled up $2.51, or 2.5%, at $104.42 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 26, 2008. Brent crude on the ICE futures exchange settled up $1.18, or 1%, to $115.97 a barrel.

More violence in Libya, the member of the Organization of Petroleum Exporting Countries that has been consumed by armed revolt in recent weeks, again lifted crude prices Friday. At least four people were killed in clashes near an oil compound at the seaside town of Raslanuf. Meanwhile, conflicting reports emerged about the status of the port city of Brega, an important oil refining town that has been the site of heavy fighting between forces loyal to Moammar Gadhafi and rebel groups. Libyan government sources say that “fighting is still occurring” there, but an official earlier said the town had fallen to rebels. Libya has gone “from an oil-producing country experiencing unrest to actual oil production being under martial attack. Nymex crude prices have gained more than 23% since the popular revolt began in Libya Feb. 15. The International Energy Agency has said as much as 1 million barrels of oil per day have been removed from the market due to the crisis, and oil market participants are fearful that the violence could spread to other oil-producing nations.

Analysts say the market is likely bracing for a long-term disruption to oil supplies from Libya. On Friday, traders were purchasing additional positions ahead of the weekend, further boosting prices, on fears that further supply disruptions could be on the way. However, most developed countries remain well supplied with oil, and prices could easily reverse course if the IEA approves the release of strategic oil reserves. On Friday, half a dozen U.S. Senate Democrats joined a growing group of lawmakers asking the president to release portions of the U.S. Strategic Petroleum Reserve, citing worries about high gasoline prices. The U.S. has about 727 million barrels of oil in strategic stockpiles.

Signs of an improving economy in the U.S., the world’s biggest crude consumer, often lift crude prices as traders become optimistic about increasing demand for oil and fuels.

Gold rose above $1,430 an ounce on Friday, while silver surged 3 percent to 31-year highs, as soaring oil prices fueled by widening clashes in Libya prompted investors to pile into safe havens.  Bullion hit a record high of $1,440.10 an ounce on Wednesday, notching its fifth consecutive weekly gain on fears that Libya’s escalating unrest could spread across the Arab world.

Spot gold hit a high of $1,431.85 an ounce and was up 0.8 percent at $1,427.31. Gold fixed at $1,427 in London. U.S. gold futures for April delivery settled up $12.20 at $1,428.60, with volume down nearly 50 percent from the previous session and 30 percent below its 30-day average.

The positive correlation between gold and oil has been strong of late, but its prospects appear questionable going forward. Turnover has been weaker than usual during gold’s rally, prompting some analysts to question whether the precious metal has much upside potential without the aid of soaring oil prices and geopolitical tensions. Net long positions in U.S. gold futures contracts held by speculators rose nearly 10 percent last week as bullion prices rallied 2.5 percent, data from the U.S. Commodity Futures Trading Commission (CFTC) showed on Friday. Spot silver gained 3.3 percent to $35.31 an ounce, having earlier hit a high of $35.46, its loftiest price since 1980. Silver has risen on record coin buying in a tight physical market and strong demand for industrial metals as the economy recovers.

Silver eagles hit a record 6.4 million ounces in the first month of 2011, U.S. Mint data showed. February sales rose year-on-year but was lower than January’s level. The gold-silver ratio, which shows how many ounces of silver it takes to buy one ounce of gold, fell to a 13-year low, the weakest since 1998 when billionaire Warren Buffett bought 130 million ounces of silver. Holdings in the world’s largest silver ETF, the iShares Silver Trust, rose to 10,794.89 tonnes by March 3, the largest since early January.

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Correction Started: Risk Is Off

Tuesday, February 22nd, 2011

Twenty four hours ago we were talking about currencies and Gold/Silver at the brink of reaching new highs but today, most of the majors are trading lower against the U.S. dollar as risk aversion seeps through the financial markets. Increasing turmoil in Libya, another earthquake in New Zealand and Moody’s decision to downgrade the outlook for Japan’s sovereign debt rating from stable to negative was too much for investors to handle. Even stronger than expected U.S. consumer confidence failed to ease concerns about the global economic outlook. Geopolitical risks are very serious but in the case of the conflict in Libya, the consequence is higher oil prices which can have global repercussions. Many countries still have an immature recovery and higher oil prices will only make life more difficult. Both the U.S. dollar and the Swiss Franc have benefitted significantly from a flight to quality but the stability of the euro and the nominal sell-off in the British pound shows that investors realize that slower growth is not the only and most immediate consequence of higher oil prices. ECB officials are growing more nervous about second round inflationary effects and even though the Bank of England has been silent, we suspect that they are feeling equally frustrated.

How Does an Oil Crisis Impact the U.S. dollar?

With oil prices on the rise, many investors are talking about the possibility of $100 oil. Traditionally oil prices rise when the dollar falls or vice versa but this has not been the case in recent days. Oil prices are rising in lockstep with the dollar because the conflict in Libya poses a risk to oil supplies and at the same time global stability, encouraging investors to seek safety in the U.S. dollar. However as the oil shock of 1972, 1979 and 1990 showed us, the dollar eventually weakens. In the 1970s, the dollar initially weakened because the Federal Reserve was forced to raise interest rates in the face of rising inflationary pressures. The focus on inflation was initially dollar bullish but once the rate hikes started to have a serious impact on US growth, the dollar turned lower. The scenario was slightly different in 1990 because the Fed started to cut interest rates before the spike in oil and continued to reduce rates throughout 1990 and into 1991 and as a result the dollar continued to weaken. Although the U.S. dollar is rising right now, the abundance of spare capacity and the muted level of inflation mean that the Federal Reserve is not under any pressure to raise interest rates in response to higher oil prices. In contrast, there is a good chance that other central banks will respond to the rise in inflation by tightening monetary policy or at least threatening to do so. This dynamic should be positive for those currencies and negative for the U.S. dollar once the tensions in the Middle East ease.

Meanwhile consumer confidence climbed to a 3 year high in the month of February according to the Conference Board’s latest survey. The index jumped to 70.4 from 64.8, beating the market’s expectation. Rising equity prices and a brighter outlook for the labor market has made consumers feel a bit better about the outlook for the U.S. economy. The expectations component of the report surged to 95.1 from 87.3 previously while the present situations component rose from 31.1 to 33.4. Fewer people felt that jobs were hard to get, though the labor differential is still heavily skewed towards the difficulty of finding jobs than the ability to attain them. This report is consistent with the University of Michigan survey released earlier this month and shows continued improvement in the U.S. economy. The S&P Case Shiller index also reported smaller decline in house prices while the Richmond Fed index rebounded in the month of February. Existing home sales are due for release tomorrow and a small pullback is expected after sales of previously owned homes rose by a whopping 12 percent in the month of December. Double-Dip in Housing in the Mix. I think so.

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Is A Short Squeeze In Gold And Silver Imminent

Monday, February 7th, 2011

LCH.Clearnet, a leading independent clearing house, is considering a plan to accept gold bullion as collateral against margined positions. London is the world’s largest market for over-the-counter gold trading. This follows an announcement by J.P. Morgan that it will become “ … the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counter-parties.  And according to spokesman Chris Grams, the CME accepts allocated gold at the JP Morgan vault in London as collateral against any asset class position an investor might have at the CME.

Why is this move important? Market watchers say it adds credibility to the argument that gold is an alternative asset, a type of alternative currency. Banks are always looking at their scarce resources including, cash and gold. Leveraging an increasingly valuable gold inventory would be a natural next step, and likely welcome extension of that process.

There will be a substantive benefit for all firms active with gold bullion and/or LME registered warrants. It is the direction of the overall market to use warehouse receipts and/or bullion for margin purposes. And, as the London Metals Exchange (LME) gets closer to launching its over-the counter (OTC) contracts for gold traded in London, it will be important for the gold community to lever it’s existing stores for margin purposes. And perhaps in the process, ease the transition to a more transparent, over-the-counter gold market.

European sovereign debt yields are flat. UK gilts have seen some selling again today with the yield rising to 3.86%. In just 5 weeks the yield on the UK 10 year has risen nearly 50 basis points from 3.393% to 3.86%. Most commodities are higher today and NYMEX crude oil is up 0.2% to $89.21 and Brent up 0.7% to $100.56 a barrel.

JP Morgan announced today that from now on they will accept physical gold bullion as collateral. This is a sign of gold’s further remonetisation in the global financial and monetary system. It may signal that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. They will not accept ETF trust gold as collateral. In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds.  Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral. JP Morgans’s move shows how gold bullion’s fungibility and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system.

Interestingly, the CME is storing their collateral gold at JP Morgan Chase Bank in London. The exchange said it hoped to add additional depositories in the future but there has been no announcement of developments in this regard. Silver prices remain in backwardation, showing that buyers are willing to pay a premium for silver delivered sooner rather than later. Both gold and particularly silver are vulnerable to a short squeeze that propels prices beyond their recent record nominal highs. In the gold market that are some 80,000 short contracts which is more than 30% than the average short position in 2010. The concentrated shorts who the CFTC has been investigating will be nervous and given the strong fundamentals in the bullion market may be forced to buy back their positions in order to protect themselves from significant losses.

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