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Popular Silver Demand Surging in U.S.

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April 21, 2008 – Comments (1) | RELATED TICKERS: SLV , SLW , CEF

This story provides further support of the information presented in my article published March 24 entitled "Don't Miss the Silver Lining".  For further context, please also see my blog post on the subject here.

Popular Silver Demand Surging in U.S.

By Gene Arensberg
21 Apr 2008 at 08:11 AM GMT-04:00

ATLANTA (ResourceInvestor.com) -- Popular demand for silver is on the rise strongly in the U.S. How can we tell? An interesting divergence has been developing where the paper silver market in New York is not really reflecting popular demand for the white metal on the street.

Why would the paper silver market not reflect the popular silver demand? Well, the COMEX paper silver market is related to, but different from the popular physical silver market. The paper silver market deals almost exclusively with very large, average 1,000-ounce so-called “good delivery bars” and each futures contract covers the delivery of five such bars at a date in the future.


The popular silver bullion market, which is every coin and bullion shop everywhere, covers a whole host of other products for silver investors large and small, including small one-ounce rounds (such as U.S. silver eagles and Canadian silver maples), one, ten and 100-ounce silver bars, and investment bags of 90% silver U.S. coins in $500 and $1,000 face value lots.

A bona fide scarcity of silver inventory for just about all popular small-sized fabricated silver products is evident because even dealers are willing to pay higher than normal premiums in order to get the metal when silver is trading near current cash market prices.

When dealers are paying higher premiums they are only doing so because they have immediate need for it, because they have customers willing to pay even more, if they can get it. When customers are willing to pay much higher than normal premiums, it means that current inventories of silver are insufficient to meet the demand at the prevailing spot price, which is largely influenced by the paper silver markets.

Tight supplies in the popular silver markets and positive money flow into silver exchange traded funds suggest that demand for the second most popular precious metal in strongly on the rise in the U.S. For more about that, please see the Silver ETF Section below.

Big Money Exodus Underway?

Both gold and silver took a late-week knock as the Big Markets regained a little optimism, or rather, lost a little of its fear this week. That led to more calls by stock-friendly-metals-averse market watchers that Big Money is “rotating” out gold and silver and back into the stock equities markets. Let’s call that the Big Money Exodus Theory, or BMET.

Maybe we do see BMET to some degree at times, but more likely this most recent scare, this most recent brush with death of the global financial sector has reinforced the notion for portfolio and fund managers that a part of their investment diversification ought to include some percentage of their ammunition in precious metals.

However the piles of cash that have accumulated on the sidelines are eventually deployed going forward, the game has changed. Whereas before gold and silver were regarded by Big Money Managers (BMMs) as unworthy of serious interest, regarded as the purview of doomsday kooks and fanatical gold bugs, today a growing percentage of the BMM fraternity are more aware of and are more willing to embrace hard assets. And no wonder, haven’t they been good performers over the last six years?

So far the signals this report follows do not support the thesis that a meaningful exodus of capital is underway for the two most popular precious metals. For example, if BMMs are really pulling their cash out of gold and silver the traders who stand to benefit most from such an exodus of wealth from metals aren’t positioning like THEY think that exodus will continue. Not yet anyway. Read more about that in the COT Changes section below. The upshot is that COMEX commercial traders, the big, well funded and presumably well informed bullion banks and hedgers, have not increased their net short positioning in the paper gold and silver markets in New York in any big way lately. To the contrary, actually.

For another example, there has been no meaningful negative money flow (more wealth exiting than entering) from the world’s gold and silver exchange traded funds which would support BMET. Please read more about that in the Gold ETF and Silver ETF sections below.

For yet one more example, if the BMMs are really jerking their funds from precious metals, shouldn’t they also be reducing exposure to mining stocks? Well, if they are then who is buying in a big enough way to keep key mining share indexes from just plowing through their popular moving averages? Please see additional commentary about that in graphs linked in the Gold Indexes section below.

Bottom Line

The bottom line for this report is that so far the indicators this report tracks do not confirm the BMET. Despite the relatively bullish refusal to break popular technical moving averages by the biggest of the Big Markets, this report suspects that a giant global bearish flywheel has only just begun turning. The flywheel of a monster global engine of unchecked growth of fiat money supply in a world which has seemingly forgotten that the normal cycles of growth and recession will assert themselves sooner or later no matter what governments do to try to stop them.

A world where central bankers are content to debase their own mediums of exchange to keep the “good times” rolling. A time of “The Great Reflation” to devalue the currency and to mask previous unrestrained, reckless and immoral government overspending. A time where central bankers are content to flood markets with unlimited liquidity so that normal cycles are postponed just a little longer.

What that means for all of us is the virtual guarantee of much higher inflation in the near future, much higher interest rates after that and higher inflation is bullish for precious metals.

The current pullback of gold and silver may or may not continue very short-term, but each tick lower means a slightly better opportunity for entry or reentry for long-term investment and with demand for metals on the rise, with oceans of new fiat paper currencies now chasing relatively finite hard assets, it’s a great time to be a precious metals bargain hunter in this report’s opinion. Especially for silver metal provided one can obtain it at reasonable premiums and safely store it.

All Clear?

The Big Markets acted as if an “all clear” sounded late this week when Citi announced its (significantly sorry) numbers and those with heavy short positions in the financial sector decided it was time to cash in. IBM and Google also “surprised” the market with relatively good news and, along with the strong short covering, hopeful equity traders and investors stuck their toes back in enough to push major equity indices above key lower resistance for the first time since December.

Indeed, the DOW inched above the very important 12,778 level Friday, the level at which that index of really big dogs becomes less than 10% off its high set in October of last year. The DOW now sets its sights on the popular 50-day moving average as a realistic near-term target in the 13,120s.

Are we really out of trouble in the Big Markets? That’s anyone’s guess very near-term, but despite all the dire financial news over the past quarter, didn’t it seem strange that the biggest of the Big Markets, the DOW, couldn’t even manage to challenge its popular 200-day moving average? Now, that index is either putting in a marvelous short-covering-fueled bull trap, or else conditions were just not as bad as the press and the pundits made it out to be in this U.S. national election year.

On to some of the indicators.

COT Changes. In the Tuesday 4/15 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) rose 10,540 contracts or 5.42% from 194,572 to 205,112 contracts net short Tuesday to Tuesday as gold added $13.32 or 1.46% from $915.22 to $928.54.

Since Tuesday gold walked up to as high as the low $950s Thursday (up to $952.76 for the weekly intra-day high Thursday) before harsh selling pressure, apparently concentrated in London, appeared Friday morning driving gold to as low as $905.85 (the weekly intra-day low). Then spirited late-day bargain hunting in New York surfaced from multiple dealers, taking the yellow metal back up to a paper-market last Friday cash market trade of $917.15. For the calendar week gold posted a net $8.43 loss on the cash market.

As of Tuesday’s COT reporting cutoff, COMEX gold open interest rose 15,487 to 422,699 contracts open, each covering the future delivery of 100 ounces of gold metal.

Long-term June 2009 and beyond COMEX forwards added a small 734 contracts to show 48,128 lots open, or a very low 11.39% of total open contracts. We still find no telltale big jump higher in long-term forwards in other words.

If gold and silver were about to see significant wealth pulled out of them to put to work elsewhere, which would mean much lower prices short-term, shouldn’t the large, well funded and presumably well informed COMEX commercial traders be much more willing to increase their net short positioning? Yes, one would think they should, but are they jumping all over the short side?

Well, take a look at the graph below to answer that question.

Gold versus the commercial net short positions as of the Tuesday COT cutoff:

Source for data CFTC for COT, cash market for gold.

If the COMEX commercials think that gold is heading much lower then why weren’t they really piling on the short side? That doesn’t mean that gold won’t go much lower, it just means that the commercials are not positioning like they think it will.

Okay, so the LCNS didn’t spike up but was that because of quirks in the open interest data, or something else that masks a more intense net short position?

The chart below compares the COMEX commercial net short position with the total open interest. As of Tuesday, 4/15, the LCNS was still quite high relatively speaking, but the trend over the past eight weeks has the short positioning of the largest gold futures traders, the bullion banks and hedgers, taking less a part of the total New York paper gold pie, not more.

Historically speaking, the COMEX commercials are well positioned for a gold pullback continuation with their net short positioning at 48.52% of all open gold contracts, but they are 18.8% less exposed to the short side nominally than they were on February 19 when gold was at $927.92 and their 252,740-contract net short positions represented 51.6% of the then 489,789-contract COMEX ballgame.

Source for data CFTC for COT, cash market for gold.

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], remained unchanged at 641.82 tonnes. As of Friday’s figures that’s equal to $18.7 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, added 1.79 to 115.85 tonnes of gold held (as of Friday). Barclay’s iShares COMEX Gold Trust [AMEX:IAU] gold holdings were flat at 64.04 tonnes of gold held for its investors.

For the week ending Friday, 4/18, all of the gold ETFs sponsored by the World Gold Council showed a collective increase of 1.11 tonnes to their gold holdings to 805.58 tonnes worth $23.6 billion.

As mentioned in the last Got Gold Report two weeks ago, the absence of negative money flow (more wealth leaving gold ETFs than entering), which would certainly surface by a reduction of metal holdings in the gold ETFs, doesn’t mean that there couldn’t be a major exodus of capital out of gold ETFs tomorrow, next week or next month. It just means that so far we aren’t seeing it. It also means that significant numbers of investors are buying the dips so far.

Just about anything is possible very short-term, but isn’t it kind of hard to believe that gold will fall very far off a price cliff when Big Money is apprently choosing to hold the stuff and is also apprently intent on buying it when it dips?

Source for data streetTRACKS Gold Trust.

Silver ETF: Metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, showed a smallish increase of 30.8 to 5,776.51 tonnes of silver metal held for its investors over the past week.

On a calendar week basis, silver actually booked a net $0.09 gain on the cash market with a Friday last trade of $17.869. The white metal actually outperformed gold in that respect, although it was more volatile, as usual.

Remember this comment in the last Got Gold Report? “Isn’t it fascinating that as silver reached its most recent apex above $21 and then sold down to as low as the $16.60s that we have yet to see ANY negative money flow from the largest silver ETF? Friends, we’re seeing the opposite.”

We still have yet to see any negative money flow from SLV.

Source for data Barclay’s iShares Silver Trust. As of Thursday, 4/17.

Brother, Can You Spare Some Silver?

The silver shortage was discussed in more detail in the last report for those who may have missed it. It won’t come as a shock to readers when we report that the ongoing shortage of physical silver in the U.S. has not improved. If anything, small-size silver (just about anything less than an average 1,000-ounce good delivery bar) is even harder to locate in quantity than it was two weeks ago at any reasonable premium. There is silver out there to answer demand, but you’ll have to pay more than usual if you want to buy it.

A check of electronic dealer networks shows there does seem to be small sized silver available, but only if the buyer is willing to pay a high premium. Even dealers are offering significant premiums to buy metal. For example, as of Saturday, April 19, with silver at $17.86, a large electronic network for bullion dealers showed consistently high bids by dealers willing to pay premiums of as much as $1.85 over spot for problem-free U.S. silver eagles in quantity. If dealers are willing to pay such high premiums, their silver buying customers have to pay even more. Even 100-ounce name brand bars are fetching premiums of around $0.50 over spot dealer to dealer, but there were apparently no offers for those same bars in quantity at any reasonable premium and few offers at any price.

One large local bullion dealer reported this week that he has customers that would like to sell some of their physical gold holdings to convert them to silver, but the frustratingly high premiums which occur when silver trades down to where they want to make that conversion end up preventing them from doing so economically. Situations like that are yet another reason that we are not seeing negative money flow from the silver ETF. The growing demand for silver is finding a home where it can, not necessarily where it would like to.

Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.

A trade comment in the 2-year graph is repeated here in its entirety: “As of April 17, Silver probably has something like $3.00 potential “go-to-Hades” downside (16.8%) in order to test its 40-wma and its December turning low of $13.70, but it has something like $32 of potential upside (280%) just to test its former NOMINAL 1980 high near $50. That alone is an RRR (Risk/Reward Ratio) of 1:17. If we use an inflation-adjusted real high, then silver has more like $107 of upside just to match the 1980 purchasing power peak and the RRR is – are you ready? – 1:36. (And who says that 1980’s peak is all there is?) Buy silver on any significant to strong dips. If you can find it at reasonable premiums, can get your hands on it and safely store it. Otherwise, buy the silver ETF (SLV). Silver scrap, 90% U.S. silver coins in bags, 80% silver foreign coins in bags and (un-weighted) sterling curios, serving pieces and flatware are also interesting.”

Silver COT: As silver added $0.16 or 0.90% COT reporting Tuesday to Tuesday (from $17.70 to $17.86 on the cash market) the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by a miniscule 565 (0.98%) to 58,192 contracts of net short exposure, as the total open interest on the COMEX rose 3,501 (2.4%) to 149,199 COMEX 5,000-ounce contracts.

Since February 19, when silver was then at $17.25, silver metal has actually increased a little ($0.61 net as of Tuesday to $17.86), but the collective commercial net short positioning of the COMEX commercial traders (LCNS) has declined by 17,598 contracts or 23.2%.

If the largest of the largest silver futures traders are really expecting much lower silver prices, then why aren’t they getting more into position for it? Since February 19 as silver actually increased a little in price, the COMEX commercial traders are less net short by about 88 million ounces of paper silver contracts. Does that sound like they think silver is heading for the basement?

http://www.resourceinvestor.com/pebble.asp?relid=42084

1 Comments – Post Your Own

#1) On April 21, 2008 at 3:52 PM, XMFSinchiruna (27.46) wrote:

Charts discussed in the above article:

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