Is Silver Positioning for Further Weakness?

By Michelle Smith — Exclusive to Silver Investing News

Lower margin requirements for COMEX silver contracts went into effect this week, but the decrease hasn’t been the spark that the market needs. Silver appears in need of something much more solid and encouraging to improve market sentiment. And, there are some suggestions that the market may even be positioning for further weakness.

Last week, North American markets showed their disappointment in the weaker than expected Chinese GDP figure, which came in at 8.1 percent. There are some suggestions that this data could be positive for silver as the market may begin to expect easing measures from China. If these expectations are prevalent, they did not help the market on Friday. Disappointment not only weighed on silver prices, but also snapped a two-day TSX rally.

Focus on Spain

Though it was not as much of a concern in North America, on Friday, weak silver prices on the other side of the globe were connected to reports of record borrowing by Spanish banks. As concerns grow about the debt situation in that nation, Spain’s auctions are expected to be a focal point for the global silver market.

Tuesday’s T-bill auction was considered positively received. Though rates rose, they were not considered to be at dangerous levels; demand was good, but this wasn’t seen as the most important indicator. The market wanted to see what would come out of Thursday’s bond auction.

The bond auction was considered satisfactory, but the nation was not able to contain rising rates.

In the midst of these auctions, the market reacted negatively to news that Spain had a large increase in its number of non-performing loans. Given the nation’s unemployment rate, this is an issue that may worsen.

Overall concern about Spain’s condition continues to plague the market, especially against the backdrop of macroeconomic uncertainty.

Market positioning for weakness?

Earlier in the week, the Indian silver market received a boost that was largely attributed to physical demand in connection with inventories being stocked for the wedding season. There are also suggestions that some demand is a result of Akshaya Tritiya festivities next week, which some are hoping will provide further support.

However, silver for May and July delivery on the Multi Commodity Exchange of India slid Thursday. Analysts continue to report that the weakness seen in India is largely the result of the market taking cues from international trends, which includes being concerned about Europe’s economic situation. This could be bad news as some believe the broader market is preparing for an extended period of weakness.

The silver market has not been showing significant interest in the supply story lately. The concern has been mostly macroeconomic, and thus demand. But, it may be time to broaden the scope and take note of accounts of rising production.

Reuters said silver stocks in CME-approved depositories are at their highest levels in at least ten years, the period for which it has been compiling data. Some believe that the stock building could suggest weak demand amid rising supply.

David Jollie, analyst for Mitsui Precious Metals, said generally if COMEX stocks are building, it means that demand is low and premiums are not particularly high anywhere.

Last week’s Commitment of Traders report also sent negative messages to a number of analysts. Net speculative length fell 320.5 tonnes, with 210.4 tonnes unwound from the longs. The total short positions rose above the 2011 average, which Standard Bank says indicates a market positioned for weakness.

There were times this week when silver saw gains, but given positions in equities and energy, it was noted that silver should have performed much better.

To ignite a significant move, the silver market appears to need a much stronger spark than anything we’ve seen lately. Without it, improvement may not be forthcoming in the near term. Though neither the bears or the bulls are gaining much ground, Kitco analyst Jim Wycoff says the bears still have the technical advantage.

The close

Silver on the spot market in New York closed up 0.09 at $31.72, and May silver on the COMEX closed up 0.24 at $31.73. Silver mining equities were a mixed lot.

Company news

Silver Dragon Resources (OTCBB:SDRG) announced that a lawsuit against the company and other defendants has been withdrawn.

At a hearing on March 16, 2012, the company said it was demonstrated that the act of transferring equity by the company was legal and that there was no evidence of malicious conspiracy. The defendants reserved the right to seek damages against the plaintiffs for libel, slander, and infringements of reputation.

The plaintiffs later filed an application to withdraw the lawsuit and the court approved it. The hearing scheduled for April 18, 2012 was canceled.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.