The State Of Silver Bullion and Other Anomalous Events

Silver Bullion

From a technical perspective, the price of silver is obviously breaking down. The market has been 'trading heavy' for a while. Furthermore, the entire commodities complex is trading in a downward trending channel, except for oil. The U.S. Dollar is also stronger because of the Euro aftermath.

Nevertheless, lots of silver longs are still holding their positions since open interest has remained high despite the move down from the 32 region. Open interest will usually fall on big declines like this, but many longs have hung on and some believe the big shorts want to force a real washout before covering a large portion of their positions.

The silver market could still go down to 25 or lower before all the bulls are gone. This would match what happened in 2008 when silver traded down from near the 20 level to bottom at 8.40.

Hedge funds are playing this move from the short side. As a group, theyare net short silver contracts for the first time in seven years.

Regardless of the reality of a shaky financial system and little change in the fundamental picture for silver, the global economyremains largely stuck in a slow growth, non-inflationary mode. Silver tends to perform better in a decidedly inflationary environment.

Conflicting Reports

The Silver Institute recently reported surging industrial demand for silver that could take such demand to a record high annual level of almost 500 million ounces in 2013.  In addition, the organization said that sales of American Eagle Silver Bullion Coins in the first two months of 2013 were 43 percent higher than that seen during the same period of 2012.

In contrast, Standard Bank said in its Precious Metals Definer report that it expected silver prices to struggle for the rest of 2013. This subdued forecast was largely due to a significant silver inventory build-up in China that could only realistically be taken up by a substantial increase in Chinese demand for the precious metal. 

Standard Bank also pointed out that China became a net importer of silver for the first time in 2010, after having traditionally exported the metal.

The More Things Change, the More Precious Metals Stay the Same

The problem is that the prices of gold and silver are not going up much, nor are they going down much.As a trading vehicle, precious metal prices seem relatively stable and the physical metals provide no significant return on investment.The physical metals remain locked in safes or hidden away in private stashes doing nothing and refusing to multiply.

Yet what do change are the values of those OTHER commodities, i.e. fiat currencies like the U.S. Dollar and the Euro, as well as the level of desire among investors for unencumbered assets.

Also, fiat currencies trade against each other in pairs, and hence their exchange rates reflect value only relative to one another. Still, since fiat currency purchases less food and fuel than it did a year ago, it remains a devaluing asset. 

From MF Global to Cyprus, the Case Improves for Precious Metals

As MF Global and GM bondholders might attest, expedience tends to win out over the rule of law, morals and common decency in a financial crisis, unless of course you are in the ‘club’.

Now, with the Cyprus bank debacle and capital controls appearing increasingly likely, less confidence in the financial system will probably soon follow. As time goes on, the un-mined supply of unencumbered assets like gold and silver iscontinually dwindling, whilethe existing above ground supply is falling into ever stronger hands.

Furthermore, debt based fiat currency in circulation is increasing by billions per month — soon to be trillions — and this increasingly debased medium of exchange is not an unencumbered asset.

In this economic environment, the smart people will be trading encumbered assets for unencumbered ones, especially a commonly accepted asset and hard currency like silver or gold that is increasing in rarity on a daily basis. As soon as the price of silver becomes irrelevant for its eager buyers, that will the moment the real financial crisis hits.


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What Other Visitors Have Said

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Inflation versus Deflation 
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