The Conversation (0)
Silver ETFs have widened the playing field for many previously locked-out investors. On the flip side, this investment innovation may pose real danger: quick and dirty liquidation of silver holdings leading to a flood of physical silver onto an already oversupplied market experiencing declining levels of demand.
By Melissa Pistilli—Exclusive to Silver Investing News
A strengthening dollar may have put a lid on gold’s gains and placed downward pressure on silver, too. Further weakness in the euro in light of ongoing financial woes in the EU is stoking sentiment over the possible demise of the currency, which would prompt a stampede of cash into the greenback.
“Trading in gold and silver futures could also be a bit more volatile Tuesday, as Comex gold and silver futures options expire on Tuesday,” cautioned Kitco’s Jim Wyckoff this morning.
Monday, iShares Silver (NYSE:SLV) saw inflows of 27 tonnes compared to SPDR Gold Trust’s (NYSE:GLD) LOSS of 4.2 tonnes. Overall this past month, iShares Silver has outperformed SPDR Gold Shares—gaining more than 17 percent compared to SPDR’s less than 2 percent.
However, as the International Business Times’ Scott Rubin points out, silver is dramatically underperforming gold Tuesday. As of 3:00 PM EST, the price of gold according to Kitco Metals was up .75 percent to $1377.60 an ounce compared to silver prices, which were down 1.22 percent to $27.55 an ounce. This underperformance is also evident in the major ETFs. The SPDR Gold Trust is up 0.65 percent to trade at $134.36 compared to iShares Silver, which is down 1.03 percent to trade at $26.89.
“Expect significant resistance around $27 in the SLV as it has stalled out just above here a couple of times in the last two weeks,” warns Rubin.
Exchange-traded funds have gained a lot of notice in the past year; especially from analysts that point to booming interest in the financial products as the main driver of investment demand in silver, and in essence, the dominant factor determining silver price direction.
ETFs have changed the playing field in the investment market. Whether that change is for the good or for the worse is up for debate. There is a growing, and well-founded, concern that silver ETFs, which accounted for approximately 4,700 tonnes of silver consumption in 2009, may be pushing prices toward levels unsupported by basic supply and demand fundamentals. An even greater concern is the real danger these investment vehicles pose: quick and dirty liquidation of silver holdings leading to a flood of physical silver onto an already oversupplied market that has been experiencing declining levels of demand for quite sometime.
Silver Bugs rejoiced over the white metal’s breach of the $29 level nearly two weeks ago; salivated over the recent GFMS call for $30 an ounce in early 2011; and are now hot and bothered by fervent calls for $50 silver. This week’s cold shower comes to us from the precious metals market’s very own Dr. Doom, Jon Nadler, whose dose of reality, while based on facts, is always a bitter pill for some to swallow.
Mr. Nadler pins “the most recent (2007-2009) sharp rise in silver” on “hedge & momentum fund speculation and a falling U.S. dollar.” He further adds that should these fund holders “have a change of heart and commence selling,” there is no telling “how significant the accelerative effect on falling silver prices . . . might become.”
While you may not like Nadler’s conclusion—silver prices at higher levels are not supported by basic fundamentals and are in danger of serious cuts should the focus on safe-haven precious metals shift to other commodities—to ignore it means pretending the silver market is not inherently volatile and a risky play.
He’s not the only market expert foreseeing serious corrections in precious metals prices, yet his cautioning statements are often decried as heresy.
Barclays Capital recently opined that future silver price direction could be tied to the ability of investment demand to continue consuming the over supply created by the ramp up in global silver mine production, hardly a radical statement if one looks at the numbers presented by GFMS in their most recent report.
A look at the CFTC’s latest weekly COT report shows futures and options speculators in gold and silver markets are already looking for the door on long-term positions after last week’s price declines.
“The trimming of long positions represented the fifth such weekly decline in the gold market’s COT report and the seventh consecutive one in silver,” notes Kitco’s Debbie Carlson. Commerzbank, reports Carlson, said early this week “that since making a record net-long position in the disaggregated report at the end of September, speculators have cut these positions by more than half.”
For now, precious metals prices are expected to continue moving skyward, but not necessarily into the stratosphere.
On top of GFMS’ recent call for $30 silver in 2011, Societe Generale SA notes that silver has climbed 64 percent so far this year and forecasts the white metal to climb another 19 percent in within the next 12 months; essentially, another five dollars.
Keep an eye on:
Interest rates in China. Higher rates would mean higher purchasing cost, depressing silver demand from the Asian nation, which recently became a significant importer of the sometimes precious sometimes industrial metal.
The fate of the euro. A dead euro could lead to the rebirth of the dollar.
Positive Global Industrial Reports. Silver prices need a healthy resurgence in industrial demand to help shoulder the burden of oversupply.