7 May 2011

China Still Buying Silver

Gold and silver are tentatively higher after their 2% and 8% falls yesterday. In silver, speculators on the COMEX continue to liquidate en masse after margin was increased a massive 84% and various stop loss levels are hit, leading to further falls in the futures market.

Cross Currency Rates
Absolutely nothing has changed regarding the fundamentals driving the gold and silver markets and this will likely be another correction in gold and another sharp correction in silver.
Gold and silver’s rise is likely to continue until we return to a world of healthy economic growth, low inflation and positive real interest rates.
Gold in US Dollars - Bloomberg Adjusted for Inflation 1971 to 2011 (Monthly)
It is important to put the falls in gold and particularly silver in context and as ever focus on the long term. The long term inflation-adjusted charts put the gold correction and silver crash (above and below) in perspective and show both as being buying opportunities again. Although buyers should consider dollar cost averaging into position in order to mitigate any further price weakness.
With macroeconomic, monetary and geopolitical risks remaining high – including the threat of terrorism and war – safe haven demand from investors, pension funds and central banks is likely to continue.
The usual gold and silver bubble callers are out in force once again and it is interesting how there appears to be more coverage of gold and particularly silver now than there was with prices rising in 2010 and early 2011.
Silver in US Dollars - Bloomberg Adjusted for Inflation 1971 to 2011 (Monthly)
Indeed, mere rumours that Soros may have sold some of his gold and silver holdings led to massive media coverage.
The fact that John Paulson and a number of other increasingly respected hedge fund managers still own massive gold positions and are not selling did not receive as much coverage as the rumours of Soros selling some of his gold.
John Paulson told investors at a breakfast on Tuesday that he expects gold to hit $2,500/oz to $4,000/oz in the next three to five years.
Also, the massive gold accumulation by Mexico, Russia and Thailand was barely reported in the non-specialist financial press, nor was reported the news regarding Portugal being urged to sell its gold by senior German lawmakers.
Silver’s sell off has been vicious but value buyers continue to accumulate silver bullion. Jim Rogers, who arguably has a better track record than Soros in recent years, remains bullish on gold and silver and told CNBC, “if it goes down I hope I’m smart enough to buy more silver."
Other widely followed and respected investors with expertise on gold and silver such as Peter Grandich and Jim Sinclair are also relaxed about the falls and remain bullish on gold and silver due to the continuing strong fundamentals.
Also, there are reports this morning from the Wall Street Journal and Mitsui that there was decent buying of silver from China at these price levels overnight.
Gold is trading at $1,483.82/oz, €1,021.42/oz and £903.61/oz.
Silver is trading at $34.18/oz, €23.53/oz and £20.67/oz.
Platinum Group Metals
Platinum is trading at $1778/oz, palladium at $708/oz and rhodium at $2,250/oz.
(Wall Street Journal) Silver Is Down, but China Is Still Buying
Silver is sinking even further this morning, as investors follow George Soros and John Burbank in dumping the precious metal.
Silver on Tuesday suffered its worst one-day drubbing in three decades. In a troubling sign for silver bulls, silver futures are down to about $40.45 per troy ounce, down more than 12% over the first two days of this week. Gold is unchanged, highlighting the difficulties silver is having.
For months, professional and individual investors piled into silver to protect against weakening value for the greenback, and to guard against a pickup in inflation. Precious metals often serve as an alternative to paper currencies.
The U.S. dollar has fallen 9% so far this year compared with a basket of major currencies, through Tuesday, boosting the silver trade. Many smaller investors favor silver investments over gold, partly because silver is more affordable, earning it the sobriquet “the poor man’s gold.”
Silver fans have this possible arrow in their quiver: Signs that the Chinese are stilling buying, according to traders.
“If the Chinese weren’t significant buyers I’d be shorting right now,” said a hedge-fund manager with a major position in gold and silver.
And precious-metal believers still have John Paulson to lean on – he told investors at a breakfast on Tuesday that he expects gold to hit $2,500 to $4,000 in the next three to five years. Gold now trades at more than $1,530 an ounce.
Paul Touradji of hedge fund Touradji Capital Management LP also is holding on to his sizable gold and silver positions, according to someone close to the matter.
(Bloomberg) -- Silver Investors Dump Bets After Exchange Boosts Margins 84% (1)
The biggest slump for silver since 1983 may not be over as the Comex exchange in New York makes it 84 percent more expensive for speculators to trade the metal, triggering an exit by investors.
The minimum amount of cash that must be deposited when borrowing from brokers to open new positions will rise to $21,600 per contract after May 9, CME Group Ltd., Comex’s owner, said yesterday. That’s up from $11,745 two weeks ago. Open interest in futures has tumbled about 15 percent since the exchange began raising margin requirements on April 25.
Prices may drop an additional 14 percent to $34 an ounce by the end of next week from yesterday’s closing price, according to the average forecast in a Bloomberg News survey of six analysts. Silver has more than doubled in the past year as record-low U.S. borrowing costs and a slumping dollar prompted investors to buy precious metals as alternative assets.
“You’re talking about a very volatile market, a very significant run-up in a very short period of time,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio in San Francisco. “It went too high too fast, and exacerbating it on the downside is the increased margin requirements.”
As of April 29, the metal had soared 57 percent in 2011, the most among the 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index. In the past four sessions, silver plunged 25 percent, the most since February 1983. The slump trimmed this year’s advance to 17 percent, trailing gains by gasoline, coffee and gasoil.
‘Frothy Market’
“If you have to put up that much more margin, many people simply say ‘no, I won’t do it,’ so they liquidate,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia- based Gartman Letter. “It got a bit frothy, and frothy markets need to correct.”
CME raised margins after “unprecedented high levels of volatility,” Harriet Hunnable, the managing director of metals products, said in a telephone interview from the company’s headquarters in Chicago. Silver’s 10-day historical volatility jumped to 81.19 today, the highest since March 2009. The exchange has announced five margin increases in the past two weeks.
“When markets become highly volatile, and we can see the market anticipates further volatility, then it is highly likely that we will change the amount we require,” Hunnable said. “The exchange increases margins to manage the risk people face.”
Margins Increase
Before the increases, margins were about 5 percent of the value of a futures contract, which is for 5,000 ounces. After the plunge in prices, the cost after May 9 would be about 12 percent of a contract, using today’s settlement.
Silver “went up much too fast, and if it continues to go up, that’s disaster,” said Jim Rogers, the chairman of Singapore-based Rogers Holdings, who predicted the start of the global commodities rally in 1999. “I’m very happy it’s coming down nicely. I hope it comes down some more so I can buy some more. Markets are always correcting.”
The metal may reach $45 in the third quarter, said Ralph Preston, a principal at Heritage West Financial Inc., a San Diego company that specializes in futures trading. “At this point, I see some serious long liquidation and profit taking, but not an end to the historic 2011 rally.”
Rally Outlook
The rally won’t stop “until the Federal Reserve begins to aggressively hike interest rates, the Middle East simmers down, and the U.S. Commodity Futures Trading Commission concludes its multiyear investigation into supposed market manipulation,” Preston said.
Silver futures for July delivery fell $3.148, or 8 percent, to close at $36.24 on the Comex. Prices touched $49.845 on April 25, the highest since the Hunt Brothers cornered the market in 1980. Futures rallied as investor demand rose, pushing holdings by exchange-traded funds backed by the metal up 24 percent in the past 12 months. Shares outstanding of the iShares Silver Trust ETF, the biggest such fund, tumbled 4.7 percent on May 3, the largest slide since January 2008.
Traders who follow options markets may not be surprised by this week’s declines. The ratio of puts per call for the iShares Silver Trust rose higher than 0.9 in April, the highest since December 2008.
Record High
Silver reached a record $50.35 in January 1980 as the government investigated the Hunt Brothers’ attempt to corner the market. The brothers were forced to sell off their holdings, and the price collapsed to $10.90 in four months.
Prices may drop as low as $31 by the end of the week before rebounding, said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. On April 28, McGhee forecast $62 by the end of the year.
“Silver is a freight train,” McGhee said. “The market doesn’t change, doesn’t give up. It’s relentless, and you’re just going to get rolled over.”
(Bloomberg) -- Silver Set for Worst Weekly Drop Since 1975 Amid Commodity Rout
Silver futures fell, heading for the steepest weekly decline since at least 1975, as an increase in margin requirements and slump in commodities from copper to oil prompted investors to sell precious metals. Gold is set for the biggest drop since February 2009.
The Standard & Poor’s GSCI index of 24 commodities sank 6.5 percent yesterday on concern that slower global growth may crimp demand. Silver dropped 30 percent from a 30-year high of $49.845 set April 25 and exchange-traded product holdings of the metal yesterday slid the most in three years after Comex owner CME Group Ltd. announced an 84 percent increase in margin requirements.
“Given the liquidation of ETP holdings yesterday and the increase in margin requirements, further pressure could be in store in the coming sessions,” James Moore, an analyst at TheBullionDesk.com in London, said in a report to clients.
Silver for July delivery fell as much as $1.97, or 5.4 percent, to $34.27 an ounce and traded at $34.87 at 9:41 a.m. London time on the Comex in New York. It’s down 28 percent this week. A bear market is defined by some investors as a decline of 20 percent or more. Silver for immediate delivery was 0.6 percent lower at $34.89 in London.
The minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will rise to $21,600 a contract after May 9, CME Group said on May 4. That was up from $11,745 two weeks ago. Silver spot prices climbed to a record $49.79 on April 25.
“The higher cash-margin requirements simply cannot be met by all participants, and when a trader can’t make margin, the underlying security is often liquidated,” Lachlan Shaw, a commodity analyst at Commonwealth Bank of Australia, wrote in a note. “Further silver price falls are possible.”
Asset Holdings Tumble
Silver assets held in exchange-traded products tumbled 3.6 percent to 14,546.99 metric tons yesterday, the biggest decline since Jan. 2, 2008, while gold holdings fell 0.7 percent to 2,057.08 tons, the biggest drop in three months, according to data compiled by Bloomberg.
Gold for June delivery was little changed at $1,481.50 an ounce on the Comex. The metal, which reached a record $1,577.40 on May 2, is down 4.8 percent this week. Immediate-delivery bullion was 0.5 percent higher at $1,481.50 an ounce in London.
Bullion gained for six consecutive weeks as it advanced to a record on demand for a hedge against rising inflation and an alternative to a weakening dollar. The dollar headed for the first weekly gain since March after slumping to the lowest level since July 2008 against six major currencies. Gold may slow losses after Mexico, Russia and Thailand added the metal to their reserves in February and March, Marc Ground, an analyst at Standard Bank Plc, said yesterday.
Commodities Sell-Off
Eight of 18 traders, investors and analysts surveyed by Bloomberg, or 44 percent, said that gold will fall next week. Seven predicted higher prices and three were neutral.
“Should there be another sell-off in commodities, gold may be impacted,” said Ong Yi Ling, a Singapore-based analyst at Phillip Futures Pte Ltd. “However, its losses may be limited by its safe-haven properties.”
Palladium for immediate delivery was up 0.9 percent at $719.50 an ounce. Platinum gained 1.2 percent to $1,786.20 an ounce.
(Financial Times) -- Silver falls for fifth day
Silver prices plunged for the fifth consecutive day on Friday as the grey precious metal suffered its biggest correction since the billionaire Hunt brothers cornered the market in 1980.
The reversal of fortunes for silver – which until this week’s 25 per cent drop had been up 56 per cent since January – has led a wider sell-off in commodities markets, which were heading towards one of their worst one-day falls on record.
“The silver market has become even more unhinged as the week nears an end, with no sign yet that the nervous selling momentum is near petering out,” said Edel Tully, precious metals strategist at UBS.
“This has paved the way for a wider commodity slump,” she added.
On the spot market in London, silver fell by a further 1 per cent to $34.35 a troy ounce, unable to hold gains seen earlier in the session. The fresh losses came after falls of as much as 9 per cent on Thursday to a six-week low of $35.82 a troy ounce.
The volatility in silver has been exacerbated by a series of increases in margin – or the amount of cash that investors must set aside to trade each contract – by CME Group, which runs the silver futures exchange in New York.
CME has raised its margin requirements five times in the past 15 days. Investors must now set aside $14,000 per silver futures contract, worth about $180,000 at current prices. The rate will rise to $16,000 on Monday.
The increase in trading costs has forced some investors to sell their futures positions if they are unable to raise sufficient cash. The changes in margin rates are a function of the increases in volatility and price rises.
Investors have also been rushing to sell silver held through exchange-traded funds.
Holdings of silver through ETFs fell by 520 tonnes on Wednesday, the second largest daily drop on record, according to Suki Cooper, precious metals analyst at Barclays Capital in New York.
Investors had withdrawn 1,105 tonnes of silver from ETFs in seven days, Ms Cooper added, a decline of about 10 per cent.
The drop in silver comes after a spectacular rally in which the metal soared 175 per cent between August last year and last week, when it rose to within touching distance of the all-time nominal high of $50 an ounce, amid widespread enthusiasm among investors.
Sales of silver coins surged to record levels as retail investors, particularly in North America, bought the metal as an expression of dissatisfaction with the perceived profligacy of the Federal Reserve and the US government and the faltering US dollar.
The tumble in silver has led the price of other precious metals lower. However, gold has managed to remain relatively unscathed compared with its poorer cousin. Since hitting an all-time peak on Monday, the yellow metal is down 5.9 per cent at $1,483 an ounce.
Platinum and palladium, the other two main precious metals, have fallen 5.2 and 10.4 per cent respectively in the past four days.
GFMS, a leading precious metals consultancy, said in its annual survey of the two metals that palladium could rally to a fresh 10-year high of $975 a troy ounce, while platinum would hit a peak of $1,925 a troy ounce this year.
However, Philip Klapwijk, the consultancy’s executive chairman, warned that before the metals hit new highs, a “summer slump” across the precious metals was “quite likely”.
(Irish Independent) -- Gold prices slide after mega-rich Soros offloads his large holding
Gold prices retreated yesterday after mega-rich currency speculator George Soros sold the precious metal.
The multi-billionaire hedge fund manager sold his large holding in gold as the price spiked to $1,550 an ounce.
Mr Soros's liquidation could well mark the peak for gold since other hedge funds and traders who followed him into the gold trade could decide to sell, market traders said.
The Hungarian-American financier is understood to have first started to accumulate gold in 2008 when it was in the $850-$900 an ounce range.
This means he made a return of at least 60pc to 70pc over almost three years.
Soros Fund Management, a $28bn (€18.8bn) firm run by Keith Anderson, bought gold to protect against deflation.
It now believes there is less risk of a sustained drop in consumer prices because the Federal Reserve is still pumping money into the financial system, it was reported in the US.
A spokesman for the company declined to comment.
Gold for June delivery fell $28.90, or almost 2pc, to $1,511.50 an ounce.
It also emerged yesterday that Mexico massively ramped up its gold reserves in the first quarter of this year.
It bought more than $4bn of bullion as emerging economies move away from the ailing US dollar, which has dipped to two-and-a-half-year lows.
The third-biggest one-off purchase of gold by any country over the past decade took Mexico's reserves to 100.15 tonnes -- or 3.22 million ounces -- by the end of March from just 6.84 tonnes at the end of January, according to the International Monetary Fund and Mexico's central bank.
Gold has gained 11pc this year, driven by concern over eurozone debt and the unrest in the Arab world, as well as by the US dollar's 7.6pc decline against a basket of currencies.
Sergio Martin, chief economist for HSBC in Mexico, said the government probably saw gold as a highly liquid asset that would reduce exposure to the falling greenback.
"They're probably thinking that getting out of dollars and into gold makes sense because we know the dollar has some trend to depreciate in the near future at least," said Mr Martin.
"I don't think they're going to lose money with this."
Silver prices were down $3.48 to $39.10, almost wiping out April's gains and off 21pc from recent highs.
A volatile US dollar and news of an official €78bn bailout of Portugal were not enough to buoy gold and silver.
Both metals were trying to find support levels in early trading but momentum selling dragged them lower.
(Editor's note: The headline of this article and the article itself is misleading. Soros did not “offload(s) his large holding” rather there were unsubstantiated and unconfirmed rumours from unidentified sources that Soros’ fund had been selling some of their gold and silver ETF holdings. A more accurate account of the Soros gold rumour (including the actual Wall Street Journal article and Bloomberg follow up can be read here. It is unfortunate that the precious metal markets are so rarely covered in the non specialist financial press and when they are they are often covered in a simplistic and unbalanced manner.
(Irish Independent) -- China needs to think bigger than gold when it opens $3 trillion treasure chest
You know the feeling, you have $3 trillion (€2.02tn) in foreign currency burning a hole in your pocket and you are itching to spend. But on what? A mountain of gold, a sea of oil or a pile of paper?
So far China has chosen paper, especially in the form of US treasury bills.
But comments this week by China's central bank chief that the country's foreign exchange reserves exceed reasonable requirements, and local media reports that Beijing was considering setting up investment funds in energy and precious metals, again raise the question about what the country can do with its money.
The size of the issue is staggering -- in the first three months of the year China's reserves grew by $197bn to $3.05 trillion.
At first glance, investing in gold, which is at record highs, or oil, which has rallied for each of the past eight months, makes sense.
Gold has thousands of years of history as a store of value, but no nation has ever looked at oil as a way to diversify foreign exchange holdings, only as a strategic resource in case of war or disaster.
There is a very good reason for that -- unlike gold which can sit in a vault indefinitely, oil degrades once it has been pumped out of the ground and a tank of crude would be essentially worthless after 20 years.
Diverting even 10pc of the nation's mostly dollar-denominated treasure chest into commodities would cause huge ripples, and risk fuelling Beijing's current bugbear -- inflation.
"These are very big numbers, but how can China get into these markets without driving them to incredible levels? Any sniff that they are actually doing this would send prices through the roof," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.
One-tenth, or $300bn, could buy 200 million ounces of gold or 6,400 tonnes -- more than twice the amount mined globally every year. In terms of oil, they could buy 2.68 billion barrels, enough to power the world for a month.
Beijing might be more willing to risk disrupting the bullion market than one which would have a greater direct impact on the lives of ordinary Chinese people.
"Inflation is perceived as a real threat to social stability in China and anything that risks higher prices, especially of basic staples like food and energy, will not be tolerated," Mr Barratt said.
"Gold falls well outside the basic need criteria and the authorities would probably turn a blind eye to a super bubbly bullion market."
The most recent data from the World Gold Council showed that China held about 1,054 tonnes of gold -- less than 1.6pc of its foreign currency reserves.
The US, the world's top gold hoarder, has more than 8,100 tonnes of the metal, equivalent to 75pc of its foreign currency reserves.
The bullion market, like most other commodities, is highly sensitive to China's intentions. In February last year, a report on a Russian website, 'Rough & Polished', that China would buy nearly 200 tonnes of gold from the International Monetary Fund sent prices jumping, despite the most flimsy sourcing.
The report proved to be unfounded, but any official comment on how China might expand its gold holding would send gold bugs into paroxysms of ecstasy.
"Diversification of foreign reserves is certainly a worthy idea," said Lu Feng, professor of economics at the China Centre for Economic Research at Beijing University.
"However, the experience in the past few years shows that the endeavour could be very difficult; the scale of the foreign reserve is so humongous that the prices of anything that the state showed an interest in purchasing with the reserve would go up."
He said those price rises, even if the purchase was successful, meant the state might end up losing even more money than if it was to hold on to the currency.
China will need to think bigger than energy and precious metals if they want to succeed in diversifying.
In February, the country's top money manager warned of the risks of pushing too much money into commodities.
"Some have argued that we should buy oil, buy gold, buy iron ore, or even buy into companies and land. But it is much easier said than done," Yi Gang, head of the State Administration of Foreign Exchange, said.
China has already been an aggressive player chasing investment opportunities in resource firms.
Recently, Minmetals Resources, a unit of China's biggest metals trading company, bid unsuccessfully for Africa-focussed copper miner Equinox; while Chinalco bought 9pc of global miner Rio Tinto and has also been active in oil and coal.
"The question is whether to buy materials or invest in resources. If the government went to buy materials, it would hike the prices, which would be counter-productive," said Shi Heqing, an analyst at Antaike, a state-backed consultancy based in Beijing.
"The more sensible way is probably equity investment in resources companies, but not necessarily to seek a majority shareholding."
But with state champions and privately owned firms on the acquisition path and its existing sovereign wealth fund worth $300bn hungry for ways to secure supply and hedge against rising commodity prices, more investment vehicles risk competition against each other for the same assets.
"From the point of view of investment structure, should funds be set up to invest in energy and precious metals in the next 30 to 50 years? Absolutely," said Dong Tao, chief regional economist at Credit Suisse.
"With $3 trillion, China should invest in every possible asset. It can probably put $200bn to $300bn in each. Whatever they buy, it's better than buying US Treasuries.
(Bloomberg) -- Chavez to Take on ‘Mafia’ With Venezuelan Gold Investment
Venezuela will seek investment in the country’s gold industry to boost production of the metal as illegal miners account for almost half the country’s output.
Venezuela is producing “only” 11 metric tons of gold a year and alleged illegal miners extract another 10 to 11 tons a year, President Hugo Chavez said. The government will label the metal “strategic” and set geographical limits for its production in the country, he said.
“The gold mafia is taking it, and the state has to act,” Chavez said today on state television. “We have to look for investors to increase production with a new vision. We can’t just depend on one company.”
Venezuela is facing international arbitration over nationalized gold assets from two companies including Crystallex International Corp., a Canadian gold producer. The Toronto-based company’s stock plunged as much as 43 percent on Feb. 7 when it received a letter saying the Venezuelan government had terminated its Las Cristinas gold contract.
Vancouver-based Rusoro Mining Ltd. expects to quadruple its output of gold in Venezuela by 2013 after the government in August relaxed export limits to 50 percent from 30 percent.
Gold for immediate delivery extended declines today, falling 2.9 percent to $1,473.10 an ounce at 4:50 p.m. New York time.
(Bloomberg) -- ‘Elephants’ Contribute to Slump in Silver Prices, Gartman Says
Fund managers are getting more sell signals in silver as “elephants” contribute to the metal’s bear-market slump, said economist Dennis Gartman.
Silver futures slumped as much as 25 percent since touching a 30-year high of $49.845 an ounce on April 25 after Comex owner CME Group Ltd. raised margin requirements by 84 percent in less than two weeks. A bear market is defined by some investors as a decline of 20 percent or more. The Wall Street Journal this week reported billionaire investor George Soros’s fund sold precious metal holdings because of a reduced risk of deflation.
“There are elephants playing enormous games and we mice would do well to stay out of the way,” Gartman said today in his Suffolk, Virginia-based Gartman Letter. “Long only funds, oft times driven by rather simple models of moving averages and the like, are getting sell signal after sell signal after enormous sell signal.”
Silver for July delivery fell as much as 5.2 percent to $37.33 an ounce on Comex and traded at $37.92 by 7:22 a.m. in New York. The metal surged 57 percent this year through April. Spot prices rose to a record $49.79 on April 25 in London.
There was “a lot of disappointment in the market” after prices failed to remain above the $49.80 area, Afshin Nabavi, a senior vice president at MKS Finance SA, a bullion refiner in Geneva, said today. The metal’s plunge has taken prices below the 50-day moving average, a signal to some investors and traders that declines may continue.
After silver’s surge accelerated from mid-March through April, “the 50 percent to 62 percent retracement should have offered support between $39.60 and $41.50,” Gartman said, referring to levels singled out in so-called Fibonacci analysis. “Obviously ‘the box’ has not held.”
In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index. Fibonacci analysis is based on the theory that prices tend to drop or climb by certain percentages after reaching a high or low.

QE3 and Silver Entry Point

With QE2 scheduled to wind down in June and millions of American voters still unemployed, it was clear that the Fed was itching to keep the monetary spigot open. But how would that be possible with oil, food, and precious metals at or near historic highs and the dollar at multi-year lows? Clearly, something would have to happen to justify QE3.
Now we know what. On April 27 the Fed confirms that QE2 will end pretty soon, and one week later a slew of bad economic numbers just happen to hit the headlines. First-time jobless claims, productivity, consumer confidence all suddenly appear to contradict the idea that a sustainable recovery is underway. Stocks tank, oil falls, and gold and silver retrace their post-Bernanke press conference parabolic spikes. The economy is suddenly looking double-dipish.
This might be pure coincidence, of course, but the timing is definitely propitious for a government that 1) knows it has to inflate away the dollar if it’s to have any hope of maintaining its global military empire and cradle-to-grave welfare system, and 2) has an election coming up in which a roaring 2012 economy is crucial.
Now get ready for the spread of the 1931 meme, in which the current false spring is compared to the one that preceded the descent into the Great Depression. Talking heads will demand action, government officials will claim to be watching the situation closely, and economists will start debating the form of the next stimulus plan. Then — with plenty of time for the folks in power to claim credit during the election campaign — Washington will announce something that puts QE2 to shame. Shock and awe on a Krugmanesque scale will hit the markets. And the plan to inflate away the dollar will really get going.
No real surprises here, but a dilemma for investors. How much trauma will the financial markets have to suffer before it’s a “crisis” capable of justifying QE3? What level on the Dow are we talking about? And where will gold, silver and oil have to go to wash away those pesky inflationary expectations? Put another way, where is the entry point for the next — inevitable — parabolic move up? Is it $30 silver or does the plan require $20?
It’s safe to say that the entire sound money world has spent the past six months wishing we’d mortgaged the house and bought Silver Eagles. Now, just maybe, we’re getting one last chance.
So, two questions:
1) Where’s the bottom? Obviously that’s unknowable, so the only reasonable approach is to ease in, hope it goes lower and then buy more. Eventually silver will stop falling and by then you’ll own a bunch of it.
2) Bullion or mining stocks? A while back Paper Empire published a chart that validates what owners of silver mining shares had been feeling: the miners had underperformed bullion to an absolutely historic degree. The obvious response was to short bullion and go long the stocks on the assumption that no matter what silver did, the stocks would have to outperform bullion.
It’s probably too late for that now, and with both bullion and stocks falling hard it’s not clear how the relationship is evolving. But it will be a good idea to track it, for instance by setting up a spreadsheet that updates daily, as an indicator of which kind of silver to bet the farm on.

Silver Metal – TWICE as Rare As Gold

Silver’s recent performance has been spectacular. On 25 April it hit an all time high of $49.80 – at which point it had quadrupled in price in just two years. This has been exciting. But you have to expect a pullback after a monster rally like that - it’s just how the market works.
The price nearly doubled in three months and investors are taking easy profits. We’ve already seen one big pullback this year. The silver price fell 16% in January after rallying for three months. Once this was done, it was off to the races again.And now history is repeating itself. The price has just fallen 20%, and after some time to settle, I believe this will be the staging post for the next leg up.
So silver has pulled back quickly, but as the saying goes – ‘the best time to buy is when there is blood on the streets’.
So why am I still so bullish for silver after such a rapid doubling in price? Good question. The answer is because some precious metals are more precious than others.
Here’s the key point here -
Of course, you’d think that it would be the other way round. But you’d be wrong. By Sprott Asset Management’s calculations, there are just over one billion ounces of silver, compared to just over two billion ounces of gold.
Let’s just think about that for a second. If silver bullion is twice as rare as gold...then SHOULDN’T SILVER BE TWICE THE PRICE OF...GOLD....?

[1 Year Spot Silver Chart - SilverSeek.com]
Silver – quick pullback but still trending up strongly 

Throughout history, it has been the availability of the two metals that has defined their relative prices. Gold is roughly 15 times rarer than silver in nature, so for thousands of years one gold coin was worth about 15 silver coins. No need for central bankers for this one to work. Today we describe this relationship as the ‘gold-to-silver ratio’. It’s like asking ‘how many ounces of silver do I need to buy an ounce of gold?’ This ‘gold-to-silver ratio’ was around 15 for centuries. But last century it started rising as we started our doomed experiment with fiat money. As recently as two years ago it was still sitting at 80. So you needed as many as 80 ounces of silver to buy one ounce of gold. Gold-to-silver ratio – still falling like a stone as silver enters a bull market
This then started changing drastically last year. Now you need less than 40 ounces of silver to buy one ounce of gold. The ratio is heading back to where it belongs, driven by an epic shortage of silver bullion. We used to have far more silver in storage. But we have blindly painted ourselves into a corner by consuming nearly all of it. It was cheap for decades and we discovered hundreds of industrial applications for it; electronics, solar panels, ID tags, medical uses, wood preservatives. The list keeps getting longer. This short-sightedness has left us with just over 1 billion ounces of silver bullion. So if silver bullion’s now twice as rare as gold...then
why is silver not $3000 / oz? Probably because no one could get their heads around paying that much for silver! But the stark shortage of silver can only continue to send the silver price parabolic, leaving commentators completely speechless. I think silver could easily reach $500 ounce. Is that so unrealistic?
Not when you realise that the total global silver inventory is a fraction, of a fraction, of a percent of global financial assets - just 0.005%. Put another way, the world’s entire silver stash is worth just $47 billion – less than ANZ Bank’s market capitalisation. That’s small change on the global playing field, and it’s also a lot less than the $3,400 billion worth of the gold bullion in the world. So with so little silver available, it won’t take much demand to swamp the silver market and drive prices into the hundreds. You have to remember why investors are piling into silver – and will continue to do so. It is HARD MONEY, providing protection from the ravages of inflation, and brazen currency devaluation. The saying goes that ‘Gold is the currency of kings,
while silver is the currency of the common man’. Well the common man in China is getting very nervous about the steady rise in inflation, and silver is being purchased as rapidly as it can be imported. China has now rapidly swung from supplying 10% of the silver market to IMPORTING 10% of the world’s silver.
There isn’t even enough silver bullion in the world to supply one ounce per Chinese citizen! It doesn’t take much imagination to see where this is heading. The next biggest consumer of silver, India, already has inflation of 9%. Annual silver imports DOUBLED in 2010 hitting 97 million ounces, taking another 10% of annual production. The Bombay Bullion Association expects demand to keep rising fast. The US Mint, Royal Mint and Perth Mint keep setting record sales. The US Mint has even suspended sales of some of its lines. In my own experience, I’ve found that Australian bullion dealers are rationing sales. Everything is pointing very clearly in one direction.
Just don’t expect it to follow a straight line!
Diggers and Drillers 4 Commentators in the media will keep saying that each pullback on silver’s way up is the end - we’re hearing it right now.
Don’t forget that most of them know less about silver than your neighbour’s cat! And ask yourself how
many of them were calling silver to go up before the rally?

Why the silver price could hit $500 within two years 

The shortage of bullion will be the driving force of the rally this year, but in the next few years, the supply will be the important factor. In total one billion ounces of silver each year is produced. But investors don’t get their hands on much of it - Industry gobbles up almost two-thirds of it. This leaves just 340 million new ounces of silver each year coming into the market for investors. If you compare this to the 125 million new ounces of gold available each year to investors, it suggests that until production levels change, newly supplied
gold will be 2.7 times rarer than silver. Or in other words the gold-to-silver ratio in the medium-term should trend towards 2.7:1. So at a gold price of just $1350 for example, then silver should be trending  towards...$500.

Greece To Ditch The Euro?

The Parthenon in Greece.A group of European finance ministers was meeting on Friday to discuss the euro zone debt crisis, official sources told Reuters, as Greece denied a media report that it was considering whether to leave the bloc.

European official sources told Reuters that finance ministers from a handful of the largest euro zone countries were meeting privately in Luxembourg to talk about issues including the severe sovereign debt problems of Greece and Portugal.

German Finance Minister Wolfgang Schaeuble and his deputy Joerg Asmussen were at the meeting, a source in Germany's ruling coalition said. The meeting was not publicly revealed in advance, and the identities of the other officials attending were not known.

Germany's Spiegel Online reported the ministers would discuss the possibility of Greece withdrawing from the 17-member euro zone, as well as the idea of Athens restructuring its 327 billion euro ($444 billion) sovereign debt.

"The government has raised the possibility of leaving the euro zone and reintroducing its own currency," Spiegel said, without citing its sources.

Greece's Deputy Finance Minister Filippos Sachinidis denied the report, suggesting it played into the hands of currency traders. The euro fell nearly 1 per cent against the US dollar in response to the report, while the cost of insuring Greek debt against default was quoted at a record high.

"The report about Greece leaving the euro zone is untrue," Sachinidis told Reuters. "Such reports undermine Greece and the euro and serve market speculation games."

Jean-Claude Juncker, head of the group of euro zone finance ministers, also said the report was wrong. "I totally deny that there is a meeting, these reports are totally wrong," Juncker's spokesman, Guy Schuller, told Reuters by telephone.

A European official source told Reuters that the Luxembourg meeting was reviewing a range of issues such as the economic situations of Portugal and Greece as well as the future leadership of the European Central Bank.

He said there were no plans for a restructuring of Greece's debt. Last May, the country obtained a 110 billion euro bailout from the European Union and the International Monetary Fund, but it has been struggling to cut its budget deficit as fast as planned amid a deep recession.

Exit costs

Greece, which joined the euro zone in 2001, has been introducing tax rises and spending cuts for a year but it is still plagued by tax evasion, corruption and the economy's lack of competitiveness.

Financial markets have been speculating for months that Athens will eventually have to restructure its debt and with the political will for more austerity starting to flag, some Greek politicians have been suggesting a "soft" restructuring which might involve lengthening maturities on the country's bonds.

An exit from the euro zone could help the economy in the long term; Greece would be able to cut interest rates and having its own, weak currency would boost exports and tourism.

But there is no legal procedure for leaving the zone, and the risks and immediate costs of the process - Greece could face bank runs, and banks around the region could be damaged - mean the government is likely to fight hard to avoid that option.

Although taxpayers in rich euro zone states such as Germany are becoming increasingly reluctant to fund weak euro zone states, their governments prize the currency union as one of Europe's great political achievements. The EU is currently negotiating a bailout with Portugal, the third state it is rescuing after Greece and Ireland.

A German government official told Reuters that a Greek exit from the euro zone "is not planned and was not planned", while a spokesman for the Austrian finance ministry said a breakup of the bloc would be "absolutely unthinkable".

Spiegel quoted from what it said was an internal German finance ministry paper that Schaeuble was taking with him to Luxembourg, which warned that a Greek exit "would lead to a significant depreciation of the domestic currency versus the euro" and increase Greece's debt levels to 200 per cent of gross domestic product. Its debt is officially projected to climb to 153 per cent of GDP this year. 


If It Is Time To Sell Gold Then Why Are Central Banks Hoarding Gold Like Crazy?

Has the time to sell gold now arrived?  Before you start dumping all of your gold, you might want to check out what central banks all over the globe have been doing.  There is some serious hoarding of gold that is going on.  For most of the past two decades, central banks have been net sellers of gold, but now many of them are gobbling up gold as fast as they can.  So why would they be doing this if gold was not a good investment?  Yes, we did see gold, silver and oil all take a very serious tumble today.  That is what happens sometimes - global financial markets are so unstable at this point that even a piece of relatively minor news can set off a bit of a panic in one direction or another.  But the long-term trend for gold has been up, up, up and it look like the central banks around the world continue to expect the price of gold to soar over the long-term.
The central bank of Mexico gobbled up almost 100 tons of gold during February and March alone.
So how much is 100 tons of gold?
The following is how The Economic Policy Journal is describing the significance of this purchase....
The purchase is one of the largest by a central bank in recent history. The gold is worth $4.6 billion at current prices and is equivalent to about 3.5 per cent of annual mined output
But it isn't just Mexico that is buying up gold.  As an article on Bloomberg recently noted, countries such as Russia and Thailand have also been very busy hoarding gold this year....
Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand expanded assets by 9.3 tons to 108.9 tons in the same month
As faith in the U.S. dollar and other major global currencies falters, the big central banks around the globe are making sure that they have plenty of precious metals on hand.
According to Business Insider, the following are the top ten gold hoarding countries in the world....
#1 United States: 8134 tons of gold (although there are many that would dispute this figure for the United States)
#2 Germany: 3401 tons of gold
#3 Italy: 2452 tons of gold
#4 France: 2435 tons of gold
#5 China: 1054 tons of gold
#6 Switzerland: 1040 tons of gold
#7 Russia: 792 tons of gold
#8 Japan: 756 tons of gold
#9 Netherlands: 613 tons of gold
#10 India: 558 tons of gold
In particular, China has been rapidly moving up the list in recent years.
As I have written about previously, China now gobbles up 25 percent of all global gold production.
The following are ten facts about the gold fever that has erupted in China....
#1 According to the World Gold Council, China consumed 579.5 tons of goldduring 2010.  The United States only consumed 233.3 tons.
#2 China has been importing gold at a feverish pace.  In fact, China importedfive times as much gold in 2010 as it did during 2009.
#3 The Chinese appetite for gold only seems to be accelerating in 2011.  The Industrial and Commercial Bank of China sold approximately 15 tons of physical gold in 2010.  That was a huge amount.  But during the month of January alone, the bank sold approximately 7 tons of physical gold.  The growth in the demand for gold in 2011 is being called "explosive" by executives at the bank.
#4 Chinese demand for gold has now risen to approximately 25% of total global production.
#5 Investment demand for gold in China soared by a whopping 70 percentduring 2010.
#6 It is being projected that China’s gold investment demand will grow another 40 to 50 percent during 2011.
#7 Consumers in China and India now account for more than half of all global demand for gold jewelry and gold coins.
#8 Chinese households have purchased almost half as much gold since mid-2007 as all the investors in the West combined.
#9 On the Shanghai Gold Exchange, trading volume soared 43 percent during the first 10 months of 2010.
#10 China replaced South Africa as the number one gold producer in the world back in 2007.  China's gold mines produced an all-time record 340 tons of gold last year.
So don't be too hasty to dump all of your gold.
Just like with anything else in today's financial world, the price of gold is likely to continue to experience wild swings in price from one day to another.
But the long-term trend is clearly up.
In the end, the U.S. dollar and all other major global currencies are going to fail.
When that day arrives, you will be much better off holding gold and silver than holding a whole lot of worthless paper.

We Are Now Buyers of Physical Silver

Ben Davies called for a 3 to 5 day $15 decline in silver and that is exactly what happened. I wanted to catch up with the CEO of Hinde Capital to get his thoughts on where we are now in the silver market. When asked if silver is bottoming Davies replied, “As a firm we have covered all of our hedges on silver and we have started to accumulate physical silver. Let me add that this is the swiftest 30+% decline in this bull market. If you are a cash buyer of physical silver then you should now be accumulating silver. There is always a danger in catching a falling knife, but you have to remember that silver has intrinsic value.”

Davies continues:

“Nonetheless we are keeping an eye on the US dollar which could continue having a bounce post Trichet’s comments. There’s clearly an unwind of commodity positions in general with crude down almost 10%. The market in silver is extremely oversold and it would not surprise me to see a bounce overnight in Asian trading.

We have seen a 10 standard deviation move in silver on multiple periodicities that we track, the likes of which we haven’t yet experienced in this bull market. I want to reiterate that Hinde fundamentally believes that the silver market had reached a point of criticality at this last peak whereby the market was vulnerable to a swift and violent correction irrespective of any external trigger and that is what occurred.

In our opinion, such moves as we just experienced in the paper silver market have been exacerbated by system traders exiting the market. This last decline today was more a function of liquidation due to margin calls as a function of the whole commodity sector selling off.

This is the start of a great opportunity to accumulate silver. All of the key fundamental issues in the world have not gone away nor those specific to silver such as the fact that it is under-owned and short of supply in the medium-term. All of those conditions are still in place for silver. KWN readers should remember that on corrections beyond 20% in a secular bull market you are supposed to be buying.”

When asked about gold Davies stated, “The gold market has been dragged down with the precipitous fall in silver, but we believe gold will hold above $1,450. We believe between now and August we will find a floor and the next up leg in gold will begin. That next leg higher in gold should take us over $2,000.”

Davies is correct, in secular bull markets you are supposed to accumulate positions on significant corrections. Silver just experienced a tremendous decline, so you will start to see the big money accumulate on weakness.


6 May 2011

How Far Does Silver Fall?

With silver dropping roughly 19% in the last three days, a correction is clearly under way. Let’s take a quick look at how far it might drop.

I’ve updated the “corrections” chart, which shows all major pullbacks in silver since our bull market began in 2001. The data measure any clearly visible drop in price greater than 10%, regardless of time length. As you’ll see, some drops occurred over short periods of time, while others were prolonged.

It’s clear that silver has had some large and scary sell-offs. But the “silver” lining to that fact is the realization that our current volatility is perfectly normal.

The average of all corrections is 19%. Applied to our high of $48.70 on April 28, silver would fall to $39.44 if it matched an average drop. So as I write, our current pullback is about average – though it’s been quicker than most.

But corrections don’t happen in a vacuum. It’s generally true that the larger the rise, the bigger the subsequent pullback. Silver has registered an incredible 59% year-to-date gain – and measured from its January 28 low, it’s up an astonishing 82.5%. This is important to note because based on my research, this was the biggest surge in the silver price in the current bull market. Thus, it seems reasonable to expect that the metal might fall more than the average.

You’ll notice a couple corrections where silver fell by about a third; if we dropped 33.3%, we’d hit $32.48. As another reference point, a 25% fall would take us to $36.52. And if it matched the giant 53.9% sell-off, we’d get to $22.45, though I wouldn’t hold my breath for that.

The value in this, of course, is that it gives us some idea of where we might start buying again. I personally would love to see $32 silver, because that would represent a healthy sell-off and appear to have limited downside from there. Only if you believe inflation “loses” would you hesitate to buy at that level.

Regardless of when you start nibbling again, it’s important to remember that the fundamentals driving this market haven’t changed one iota. The two big “Ds” – debts and deficits – are among the largest in history and cannot be repaid in sound currency. The U.S. dollar and other fiat currencies are getting inflated into oblivion – the full ramifications of which have yet to play out. In my opinion, viewing silver as a monetary replacement in our current environment is very prudent.

So maybe the appropriate question to ask isn’t “How far does silver fall?”, but “When do I get to start buying again?”

Check out the brand-new issue of BIG GOLD, which is devoted to how to prepare for the correction in the precious metals industry. We’re employing a couple of strategies that can not only remove the sting of a sell-off, but also prepare you to profit from the next big run-up. And we list prices for every stock in our portfolio where we’re looking to buy again. It’s all risk-free for three months here …

Dollar Demise vs Gold Rise

Sadly, the great American public doesn’t understand what is happening…[and that it will be] on a greater scale than has ever occurred before in the history of mankind. It’s going to hit the current generation of Americans like a whirlwind. It will be historic in its intensity and destructiveness. [Here is an attempt to enlighten them.] Words: 939

So says Richard Russell (http://ww1.dowtheoryletters.com/dtlol.nsf) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Russell goes on to say:

The U.S. has been getting away with spending more than it takes in ever since World War II. It’s a process that isn’t sustainable, and if a process is unsustainable it will end. The U.S.’s habit of spending more than it’s paying for has finally hit a brick wall. The wall is the demise of the famous “Yankee dollar.” In order for the U.S. to live over its head, it must borrow. Half of the U.S.’s borrowing comes from foreign sources – and that’s a problem.

The U.S. Dollar Has No Fixed Value

The fiat US dollar has no fixed value. It’s worth must be measured against other currencies… Our foreign creditors, many of whom are loaded with dollars, keep a sharp eye on the comparative value of the dollar, and they’re now frightened and mulling over the credit-worthiness of the U.S.. The recent warning from the S&P rating agency[has] heightened our creditors worries about both the U.S. and the dollar. The disgraceful battle between Obama and the Democrats vs. Paul Ryan and the Republicans is further raising the fears of our creditors.

With commodity inflation now out in the open, Fed head Bernanke has a problem. His absurd defense is to refer to “core inflation” (without the cost of food and energy). Bernanke [claims] that there’s “no inflation,” and that should inflation develop that the Fed can end it any time they want.

What Bernanke and the Fed can not control is the tell-tale price of gold…[Unfortunately for them, however,] gold is traded internationally across the face of the planet and 24 hours a day. Gold is out of the hands of the Fed and Goldman Sachs, and it trades everywhere and where it wants.

Money and Gold – Then and Now

This year I’ve been telling my subscribers to think in terms of two concepts:
Avoiding losses (rather than thinking in terms of building fat profits)
PURCHASING POWER. Are you gaining or losing purchasing power?

For ten years I’ve advised my subscribers to climb aboard the great bull market in gold…Gold is the only true standard of value. The value of everything else must be measured in terms of gold…
It costs a lot more (in dollars) to buy a new Ford today than it did back in 1932 but how many ounces of gold does it cost to buy a new Ford today compared with the ounces required in 1932 to buy a new Ford? What has changed, gold or the dollar? Gold hasn’t changed, what has changed is the dollar, which has lost purchasing power.
At the peak of the housing market in March 2007 the median US home price was $262,600, which was equivalent to 340.6 ounces of gold. Today’s median income price is $186,100 or 109.2 ounces of gold. So in terms of real money, gold, the US median home price has lost 47% since 2007.
Applying the same measurements to the Dow, from the end of 2001 to the end of 2008 an investment in the Dow would have lost 81% of its purchasing power in terms of gold…

The U.S. public is rapidly being educated about money and gold. Ads are appearing almost daily in the newspapers and mass mailings are being sent out by advisories educating the public on the fact of the dying dollar and the Fed’s plan to solve the debt problem by diminishing the purchasing power of the dollar [and] telling readers how to buy gold. These ads are being confirmed by the rising price of gold. The public is finally “getting it”. As Lincoln put it, “You can’t fool all of the people all of the time.” Clueless as the American populace is, they are finally learning about gold, something that their great-grandparents took for granted.

Concluding Comments

The great and harsh lesson of history that now stares Americans in the face is that NO fiat currency in history has ever survived which underscores the growing panic to get out of dollars and out of all fiat currencies. Ironically, those who are rushing into dollars or dollar-denominated bonds and blue-chip stocks on the thesis that these are “safe havens” are [just] rushing out of dollars to get into other forms of dollars.

What’s happening now is on a greater scale than has ever occurred before in the history of mankind. It’s going to hit the current generation of Americans like a whirlwind. It will be historic in its intensity and destructiveness. The great gold rush of 1849 opened up the American West. This gold rush of the early 2000′s will open up the eyes of Americans to the danger of the Federal Reserve and fiat money…