Tuesday Kitcommentary – By The Light of the Silvery Swoon

by Jon Nadler, Kitco Metals Inc. on May 3, 2011 · 0 comments

Bullion BarsThe focus in the marketplace remains almost entirely concentrated on silver and the silver bubble’s developing story.

The CME hiked the margin requirements for silver speculation for the third time in a week, and the higher amounts necessary for gambling in the white metal will become effective as of the close of business tonight.

Yesterday, the price of silver fell by more than 8% (and by 13% earlier, ahead of Monday trading) and the price slide extended by an additional 2% during the overnight trading hours in Asia.

A number of small players were likely driven out of the market by the successive CME margin hikes, albeit not every analyst regards the participatory requirement changes as having necessarily been the catalyst for the $7, virtually insta-plunge in the value of the white metal, since it touched fresh records but failed to close above the psychological round figure.

According to CFTC-sourced data, the net-long positions in both gold and silver experienced contract shrinkage in the latest reporting period. On the other hand, the recent dip in prices may be helpful in boosting gold sales in India ahead of the May 6 Akshaya Tritiya festival — one of the most auspicious times to buy small pieces of gold and silver.

This morning’s price action started off to the downside in New York. Spot gold traded at $1,544.10 on the bid-side and showed a loss of $1.50 after having traded down to near $1,535.00 during the early hours. Current support in gold is believed to be found near $1,531.00 the ounce. Silver fell 32 cents to start the session off at $43.61 per ounce. Support in the white metal is thought to emerge around the $42.15 area and then not until the roughly $39.50 value zone.

Platinum and palladium opened flat-to-down this morning but turned slightly higher within the first half-hour of trading action. The initial quotes came in at $1,859.00 for the former and at $769.00 for the latter. Rhodium dropped $70 to the $2,130.00 per troy ounce level. While the recent patterns in the noble metals space may be indicative of the fact that speculators are beginning to discard major concerns about the metals in the wake of the Japanese quake in March, the latest in CFTC positioning data does give some reasons for concern.

Standard Bank SA metals analysts feel that platinum’s net speculative length (as a percentage of open interest) is "particularly high" at a level of 65.5% (as last year’s average was nearer to 59%) and that it may signal "a market vulnerable to a sudden change in sentiment). The same type of findings does not apply to the palladium market at this juncture; its net length is at 52.5% as against an average last year of the same (59%) as platinum’s.

PGM niche market players will be on alert for the release of US car sales figures for April and will parse them for significant trend changes, if any do emerge. Some Japanese automakers will not be able to resume full output until November, at best. US and European car manufacturers might see a market share bump in their US sales while the situation persists. High gasoline prices may also have played into whatever the final April US sales figures will turn out to be.

The most recent findings by statistics and analytical firm CPM Group New York note that almost all of the resolution of the high May contract open interest in silver, going into April, has been through traders and speculators rolling their positions forward. Very little of the positions have been held into the May delivery period, which began Friday 29 April, and basically no metal has been delivered into Comex depositories to meet the delivery requirements."

Market developments such as these, and others, have prompted CPM to warn small retail investors that:

"this suggests that silver prices have been in a bubble-like spike over the past few weeks, and are extremely vulnerable to a sharp decline. Gold also could fall back sharply. How far could silver decline? Silver could fall $12 or more, to around $37 or lower, very quickly. Such a sharp retracement seems more likely than not at this point. No asset in history has risen so sharply so rapidly and retained most of its price appreciation. Silver has no immunity to the laws of the markets."

More importantly, CPM’s latest Market Alert also noted that:

"there was no group of silver conspirators trying to ‘bankrupt’ the silver market; it was just business as usual on the Comex. Open interest across all Comex futures con-tracts surged from around 700 million ounces to 743.2 million ounces on the 14th April, reflecting the wave of shorter term investors pouring into silver, following the price higher and driving it higher with their own actions. These trends do not suggest a massive rush into silver by long-term investors, and they show no evidence that the silver conspiracy crowd has had any success in mounting an assault on Comex inventories."

At the end of the day, one of the corroborating pieces of evidenceto such a conclusion having been drawn by CPM’s analysts is the fact that during this wild and headline-making period of silver’s price explosion, investors also have not been "particularly voracious buyers" of in the ETF space. In fact, silver held via ETFs rose from 601.6 million ounces on 1 April to 612.7 million ounces on the 25th April, but fell sharply thereafter to 604.4 million ounces by the 29th of April, showing a loss of some 258 tonnes.

The chief silver ETF, the iShares Silver Trust, showed a gain in balances from 358.1 million ounces on the 1st of April to 366.2 million ounces on the 25th April. As silver prices rose sharply last week, the SLV holdings actually dropped back to 354.3 million ounces as of the 29th of April. As of the beginning of the week, and counting Monday’s eight tonnes of silver outflow, the SLV has lost 376 tonnes of the metal from balances. Those patterns are not exactly indicative of a "moon shot" for the white metal at this juncture.

And now, back to a quick review of the fundamentals-related picture in silver. Yes, such metrics do matter in gold and silver and other commodities, irrespective of the latest declarations from mining firm CEO’s that they no longer do. The estimates and findings that follow are courtesy of London-based GFMS, the only other specialty firm that tracks the important components of supply and demand in metals, aside from the aforementioned CPM Group.

GFMS data released quite recently indicates that silver mine production will witness another increase in the current year-driven in large part by output hikes in Mexico- and that it could tally a total of 790 million ounces (24,571 tonnes). Unlike in gold, net producer hedging will add considerable tonnage to the supply side in the white metal, as mines could contribute some 40 million ounces (1,245 tonnes) via that process to the market. As well, scrap silver supply is estimated to experience a gain, as high prices continue to draw existing supplies of silver out of current owners’ hands. The total supply of silver in the marketplace could rise by approximately 30 million ounces (933 tonnes) in 2011.

On the demand side, the firm feels that growth in the industrial demand for silver might slow dramatically during the current year "owing to slower global GDP growth and normalization of stock levels. The areas of photography and silverware demand are likely to contract further, while there is hope that jewellery demand might witness a better level of offtake. Government silver sales, after having experienced a sizeable decline in 2007-2009 spiked sharply higher last year, and Russia was identified as the major seller of the white metal (with some 40-45 million ounces coming to market).

Nevertheless, the silver market, as GMFS sees it "will remain in [a] substantial surplus this year." Investment will remain the single category that must continue to absorb such overhangs (with us since about 2006, at least) if the silver market is not going to "clear" at a significantly lower value equation. That kind of overdependence on investment demand is not exactly an auspicious paradigm for silver.

GMFS also believes that silver’s historically high level of price volatility will continue to be manifest in 2011 and that a wide trading range is still in store for the white metal. We have, thus far, already had a $23+ range within which silver has raced around this year and its Q1 average volatility has already exceeded 39 percent. Factor in April, and those numbers would see a dramatic alteration.

Two items of interest as we go to publication. First, US factory orders rose 3% in April. More evidence that the recovery is real and that there is solid capital spending going on in the country. Exports fared quite well, but the gain was defined by robust demand for machinery and computers. The figure exceeded economists’ forecasts. Perhaps a bit more ammo for the Fed to consider hiking rates, despite last week’s lukewarm posturing on the topic by Mr. Bernanke.

Speaking of which, here is the latest "hawkish" pronouncement from a Fed President, Kansas City Fed President Thomas Hoenig, who, speaking to reporters at a banking conference in Washington, urged the Federal Reserve to increase interest rates from a historically low range of 0% to 0.25%.

Said Mr. Hoenig: "We need to slowly reverse that to calm inflation fears. I can’t go anywhere without being asked about inflation. Inflation is being talked about everywhere. I am not concerned about the 1.8% growth rate for the first quarter, saying that special factors limited growth and forecast growth at a modest 2.5% to 3% pace over the course of the year." — reports Marketwatch.

Mr. Hoenig is due to retire from the Fed in October and isn’t a voting member of the Federal Open Market Committee.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler

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