(Julian D. W. Phillips) The silver market is still reeling from its fall from $50 to $34 over a very short time. The move was driven by at least one investor selling around 1,000 tonnes of silver over a two week period. Silver had climbed quickly from around $25. The charts supported a rise to $29, but as silver went higher, it climbed out of technical range into new territory. All the time thereafter it was vulnerable to a selloff back to support around that level.
Many felt it could easily fall to $20 before recovering, but it bounced off $32 and has been consolidating above $34 since then. The selling then stopped and buying started, but the consolidation at this levels indicates that the market has to get used to these prices for a while before they establish a ‘floor’ that permits cautious buyers to re-enter the market again.
Investors must ask themselves…
Ø Should silver be considered as financial security, like gold?
Ø Will it ever reach that status of being a monetary metal, in the eyes of central banks and global investors?
Ø Some may feel that the biggest question mark hangs over its volatility in the future. Can the silver market be manipulated, as the large US banks have done in the recent past?
Ø Can the silver market be cornered, as the Hunt brothers from Texas once tried to do?
Financial Security the silver and gold investing world is divided in two…
In the developed world, investments are not looked at as financial security, but rather as sources of profits. Investors make their own financial security through the profits they make over the years. This implies that investments are held for eventual selling unless they continue to grow and make capital gains and income for the future. Investors must constantly monitor their investments to ensure they make profits. The reins remain firmly in the investor’s hands.
In the emerging world, wealth is new to most and the investor is constantly reminded of the recent poverty and the uncertainty of retaining wealth. Bank deposits in China were the usual investment avenue. That was until food and energy inflation brought back uncertainty and poor performance and doubt in the safety of their savings.
Gold has always been considered an important place to hold ones wealth, as it protects against uncertainty and the attrition of wealth by inflation. New investors have watched the performance of gold over the last decade, through boom times and uncertain times. They have seen gold and silver persistently outperform other investments in a confidence-decaying world. With burgeoning middle classes for the next decade and more, investors in gold and silver are likely to expand and perpetuate the belief that gold and silver should be considered financial security and real money.
Silver as Monetary Metal for central banks global investors?
The presence of gold in the foreign nation’s exchange reserves is proof enough that gold is a monetary metal. We see the number of central banks across the world buying more of it and no longer selling it. But there is no silver in the central bank vaults. It hasn’t even been a valuable means of exchange in the dark past.
It most likely will not come back as a monetary metal or as part of central bank reserves until the entire present monetary system sits in disrepute. It is too much of an industrial, consumable metal to provide the features that a monetary metal should have. At a price beyond well above the current level, it could make a comeback, but this is unlikely. The status of ‘monetary metal’ can only be given by central banks, and not investors.
If investors treat silver as money –a poor man’s gold, as it were— then it rises to the status of real money in those investor’s eyes. The central banks wouldn’t be an issue. In the developed world silver is nowhere near that status, except in the hands of a select few. In the emerging world matters are different.
Emerging world investors are finding that gold is getting out of their price range. They have no option but to turn to a cheaper alternative. In the past, Ag has always been a metal that is real money and represents financial security. Its performance over the last few years is confirmation enough.
Asian Investors haven’t been disappointed, considering the silver price once stood at $6/oz. A pull back from $50 to $34 was not totally unexpected. It went too high, too fast.
But the nature of investors in the emerging world (i.e. India) is such that when they see a ‘spike’ in prices, they sell and hope for a good fall and the establishment of a new ‘floor’ price. Then they buy back and continue to hold. It is rarely their intention to exit the precious metal markets. Proof of such an attitude can be found in recent Chinese import of silver.
April demand for silver bullion was 339.4 metric tonnes. This compares to 302.09 metric tonnes in April 2010 or an increase of over 12% from the same month last year. It compares with silver imports of just 132.5 and 127.3 metric tonnes in April 2009 and April 2008, respectively. The record demand for silver bullion seen in 2010 is continuing in 2011 and higher prices are not deterring Chinese buyers. China imported 3475.4 tonnes of silver bullion in 2010, a massive fourfold increase from 2009 when imports were just 876.8 tonnes.
China was a net exporter of silver bullion up until 2007. We expect the numbers to India to reflect the same trend.
Consolidating in the lower to mid $30, silver will re-attract emerging world buyers in greater volume.
In short, yes, it can. With silver at a low price relative to the volume of investment funds out there [such as in the top five U.S. banks] it does not take a very large amount to push prices up and down. Regulators themselves have pointed out that there has been manipulation of the silver price in the past. But regulations and the media have certainly chased a measure of that out of the U.S. market [but the world is a big place].
However, we have to qualify that statement, by saying that the number of silver investors out there with 1,000 tonnes of physical silver to sell are few and far between! Once they have sold, their silver has gone. They have to hope that the silver price will drop back and allow them to buy back in at lower prices or remain out of the market. Many have hoped that the silver price would fall back to $20 but the fall halted at $32 and in came emerging market and other buyers. This makes really effective price manipulation very hard. With the trend of silver up, anybody shorting the market, will usually get hurt. The best a manipulator can do today is to go with the price waves that we see in all markets, but avoid fighting the trend.
Over time, and with prices trending up, there will be a day when such manipulation will be very difficult to achieve on a continuous basis. But silver will continue to be very volatile and much more so than gold, for a long time still. Until we see considerably more liquidity in the silver physical market price swings could remain frightening. Once liquidity rises much more than seen now, a seller or buyer of a large amount can do so, while producing only small swings in the price. Then silver’s price will become as stable as that of gold. But the pattern of silver price movements that has been established by silver, all the way up, has been to move up with gold and to fall with gold, albeit in a more exaggerated manner. This has been the case for some years now. There is no reason to think that this pattern will stop.
Cornering the Market
the Hunt Brothers…
They succeeded in driving the price up to $50/oz. They were then pressured by the silver regulating bodies and forced into a position when they had to sell. As the only buyer at anywhere near those prices there was nobody else to buy the silver from them. As they began to sell, the price dropped back to the level it had been when they started.
Hence developed world investors need liquid markets so they can sell at higher prices without hurting the price too much. When they sell too much too quickly, the price falls (i.e. recent drop from $50 to $32).
Similar to the Hunt Brothers is another type of cornering: dominate supply without any intention of selling any at all. To be a perpetual seller of a huge stockpile would hold the price down, as long as you have stock. India, China and Russia were sellers of their huge silver stockpiles left over from the days when silver was used as a ‘means of exchange’ (i.e. pocket change). This has held prices down since the Hunt brother days.
We saw a similar situation in gold when up until 2009 the central banks of Europe stopped gold sales. As sales were slowing down, the gold price rose from its low, manipulated price of $275 (Britain sold half of its reserves) to around $1,200/oz. Central banks now either hold or buy gold, unlikely to sell again…
With no intention of selling, Gold-producing nations are buying up local production and reducing supply to the market –not for profit, but for the protection of national reserves. If this extended to all gold-producing nations then you would have a true cornering of the gold market. If the central banks of silver nations decided that silver should be a reserve asset, then they would have to take off newly produced silver for a very long time to make a significant contribution to their reserves.
For an individual or even a single institution, cornering would be nigh-on-impossible. It would be possible (although extremely unlikely) if the central banks of silver producing nations decided to act in concert and corner the silver market. With so many important industrial applications, such an attempt would produce global anger. Cornering the market in this day and age would not be successful.