India Has a Voracious Silver Appetite 28 comments
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Lately, there have been some strange happenings in the silver market. From Act 4, scene 1, lines 40-41 of Shakespeare’s Macbeth, “By the pricking of my thumbs, / Something wicked this way comes”.
My article on Gold In Backwardation objectively explains what happens in the markets when monetary commodities enter backwardation. Backwardation is a situation where the fiat currency price of a commodity is pregnant with a premium the buyer is willing to pay for immediate delivery. The price of a commodity for future deliver is lower than the spot price. This is contrasted with contango where the spot price is lower than the futures price. Backwardation seldom arises in the monetary commodity gold or the quasi-monetary commodity silver.
Contango is supposed to exist because of silver’s inherently negative interest rate. The future price of silver is generally the spot price plus the future value based on the currency’s interest rate and a premium for counter-party risk. For example, if the interest rate is 12% APY and silver is $100/ounce then silver’s futures price for delivery in one month would be $101+CPR=$100+(.12/12*100)+CPR. As counter-party risk or the perception thereof increases, like an exchange’s potential failure to deliver, there is greater demand for present delivery of silver.
Without getting into yield curves, the lowering of interest rates by central banks is leading to some interesting developments in the monetary arena. The question becomes: If I earn no interest on my dollars, euros, yen, rupees, etc. and lose purchasing power from inflation then I have a negative real rate of return. If I have a negative real rate of return then why should I own national currencies instead of silver?
SILVER IN BACKWARDATION
While the gold lease rate and silver lease rate have calmed down slightly, from 8 Dec 2008 to 23 Dec 2008 the SIFO (Silver Forward Mid Rate) were negative for 1 and 2 month and from 9 Dec 2008 to 12 Dec 2008 the 3 month. From 21 Jan 2009 until the present, 3 Feb 2009, the rate has turned negative for all months; 1, 2, 3, 6 and 12 months. This is a highly unusual event.
LBMA Silver Foward Mid Rates
What if silver trades in backwardation for an extended period? Well, I already answered this question earlier. It means individuals are unwilling to take the risk of holding national currency illusions or the risk of an exchange’s failure to deliver. Potentially the national currency illusions could be pulled into the event horizon leading to the fiat currency graveyard. Watching the gold and silver prices in euros and pounds is getting exciting.
THE LOVE HATE RELATIONSHIP BETWEEN SILVER AND GOLD
Gold and silver are both monetary commodities. If you think the gold bugs are kooks then you should meet the silver bugs. During the 1896 election both advocates proudly wore their respective pins to display their political preference. While gold and silver perform a similar function they are always in competition with each other. At all times and in all circumstances gold and silver remain money. They are both immortal monetary instruments. Therefore, the only risk they are subject to is exchange-rate risk.
GOLD TO SILVER EXCHANGE-RATE
The gold to silver ratio is getting interesting. Silver appears to be extremely cheap in terms of gold. The ratio tends to lower as the bull market progresses. Should the ratio lower to the 200dma then gold would be about $900/ounce and silver would be about $14/ounce. If the ratio went even lower towards 50 then that would put silver around $18/ounce. Keep in mind that silver lies dormant most of the time and almost all of its gains are made in a very short period which is extremely difficult to predict.
INTERESTING NEWS IN THE SILVER MARKET
Silver is an odd monetary instrument because it is also consumed. Much of the silver in the world is in landfills after being used in cell phones, CDs, etc. Supposedly the SLV ETF hit a new inventory high of almost 7,500 tons but as mentioned earlier there are Problems With the GLD and SLV ETFs.
Indians in India, being fairly smart, have a voracious appetite for both physical gold and silver. They are a lot smarter than most Westerners who clutch their paper instruments with such blind misplaced faith. The Indians are satisfied only if they get the cold, hard physical bullion in their warm hand. Indians consume/import an estimate 3,000 tons of physical silver per year. Each year the central bank, the Reserve Bank of India (RBI), issues a circular wherein they give a license to banks to import physical gold and physical silver.
According to the India Times, for 2009 the RBI has renewed the license to import physical gold but not physical silver. Therefore, it appears most Indians will have to either purchase their physical silver overseas with a reputable source like GoldMoney, turn to the black market via smuggling or face shortages.
As I have quite a few extremely wealthy Indian readers I hope they are able to purchase all the silver they want. For those who have the ability to purchase silver you may want to reflect on value of that economic freedom. Given that an ounce costs about the same as a nice dinner and because the physical silver market appears very stressed why not pick up one or two ….. or a few thousand ounces?
Disclosures: Long physical gold and silver.
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This article has 28 comments:
I say Yippee for the (gold-backed) Rupee !
I totally disagree with your "Historical" facts. The projections are ludicrous.
Inflation adjusted gold should be $455 after 95 years?/????
Ha, Ha, ha, ha...forever.
37 per ounce for SLV...
To da MOON!
They also have another tangible asset to show wealth that costs money to keep: cows. I don't see much of an international market in that as a commodity though. Maybe the holding cost is too high.
For that matter, when the Backwardation disappears in both Gold and Silver, how long will it take before you issue a Sell signal on both.
Should China consider replacing the USD as a currency peg, and, rather, chose to use its historical commodity, then the market would once again go through the roof.
Pure speculation at this point, but I like the idea that silver at least has other non-monetary uses.
In 1873, the US went into into a defacto Gold Standard with Gold fixed at $20.67. It stayed that way until the Great Depression when it was changed by Fiat to $35.00. It stayed that way until 1971 when the US officially left the Gold Standard.
THIS is history. Wikipedia it.
Next, CPI? Which CPI do you refer to? The real CPI or the altered CPI, excluding food and energy?
I do not know what silver was worth but we are talking gold here. So that Double Eagle(wikipedia, Double Eagle) was worth $20, or about 1 oz. of gold not 0.048 of an oz..( around a 20 to 1 ratio)
Now apply whatever you wish, but if I multiplied your finally tally on gold by 20, I get $9,100.
Last year, It was bandied about that the Dollar had lost 97% of its value since inception. But, I do not try to pass this around as if it actual history.
A US double eagle (USDE) was worth $20 in 1913.
Mass: 33.431 g Composition: 90% Gold, 10% Copper
Therefore a USDE contains 30.0879 g Au
1 troy ounce = 31.1034768 grams
30.0879 / 31.1034768 yields 0.96734 troy ounces in a USDE
If in 1913, 0.96734 Troy Au = $20, then in 1913 1 Troy Au = $20.675
(and $1 worth of Au in grams was .96734 / 20 = 0.048367)
Using the governments own figures data.bls.gov/cgi-bin/c...
The 1913 gold price of $20.68 was equivalent to $443.73 at the end of 2008.
A US silver dollar (USSD)was worth $1 in 1913.
Mass: 26.73 g Composition: 90% Silver, 10% Copper
Therefore a USSD contains 24.057 g Ag
1 troy ounce = 31.1034768 grams
24.057 / 31.1034768 yields 0.7734 troy ounces in a USSD
If in 1913, 0.7734 Troy Ag = $1, then in 1913 1 Troy Ag = $1.293
Again using the governments own figures data.bls.gov/cgi-bin/c...
The 1913 silver price of $1.293 was equivalent to $27.74 at the end of 2008
Based on CPI analysis alone
Silver is undervalued
Gold is over valued
I stand by my analysis
However I would not short gold here,
I'd wait until it goes over $1080.
Silver is a no brainer buy and hold.
Especially during the gold influenced dip that I expect.
I meant
(and $1 worth of Au in troy ounces was .96734 / 20 = 0.048367)
What other still used finite commodity from the nineteenth century, with increasing usages, which is going into relative shortage, can be obtained for less than half of the actual cost of hundreds of years ago?
Silver is truly a unique investment. ;)
B of S in Math, Minor physics. 12 years Actuarial Science.
But I like to use what is put before me, not as an self explanatory afterthought.
I am only talking about Gold so skip your chatter about silver. Your latest comment, has already modified your first comment.
No Where in your first comment did you state that you were using USDE, I used the Double Eagle as a reference point and as far as I was concerned, you were using a $1 dollar certificate.
That's Paper currency not USDE (which you just added) and gave an unnecessary , but vigorous, defense for. This defense did not include alterations to the calulation of CPI. It has been changed, did you know that?
Thats why I included the reference to an estimated 97% devaluation of the USD since issuance in my response.
Your use of "CPI" indicated that you did not have any real idea what the True Inflationary figures are. You are relying on Government Issued Pablum for Public Consumption.
Shadowstats.com is referenced quite often when people speak about Inflation at SA. You can either believe anything the Government feeds you or you can use a modicum of common sense. IMO
Two reasons I hesitate to use the USD against gold. First the amount of dollars circulating in the world is unknown. As a US currency, not only are there untold printed "Greenbacks" but US Gov. issued gold and silver coins as well for well over a hundred years.
No one really knows how many are still in existence just like no one really knows how much of the paper currency was actually shredded.
Secondly, Gold has only been allowed to float freely since 1971. That's just 38 years. The CPI calculation has been changed a couple of times between 1971 and the present, each time the real inflation figures have been suppressed further.
Last year I saw some figures that estimated $2,300 per oz. for gold as an inflation adjusted figure.
To my knowledge, no one has tried to ignore the existence of the USD prior to 1913. Or tried to apply a figure whose calculation has been adjusted a number of times, as if it had stayed constant.
Will it be here today to accomodate a current situation and vanish when Contango resumes for both Gold and Silver?
The attempt to rationalize Backwardation in your analysis is commendable and useful to me because I would have viewed it as a one way street otherwise.
(Deflationary times ahead, Look out below, type of thing)
Contango/Backwardation will not change the direction of inflation. Common sense tells you That Gold Will continue to rise. IT isn't a matter of IF, but How long it will take.
I try to view How Long it will take.
"heartbone Feb 05 03:03 AM
paultaut, why would you disagree with history? A US silver dollar. A US double eagle."
I was the first to use the double eagle in this discussion. And ss far as your credentials are concerned. Try to put them to better use.
Again why do you disagree with history?
Or can you accept FACTS?
I used a very straightforward comparison.
Accept the truth of it and smile.
economictimes.indiatim...
MUMBAI: Bullion traders are a worried lot. This comes on the back of the Reserve Bank of India (RBI) not renewing the licence of banks to import
silver. At the end of each year, the central bank issues a circular, wherein they give a licence to banks to import gold and silver simultaneously.
This year has been a little different. While the licence to import gold was renewed as a part of the normal process, silver, however, has run into a bit of a problem with its licence yet to be renewed. No reason has been cited by the RBI so far for the licence for silver not being renewed. {more at lnk}
You introduced gold into this Silver Article.
Yes or No?
Did you include anywhere in that comment that you were referring to a silver crown or gold eagle? yes or no
My comment was specifically on the gold aspect and the usage of $1 from 1913 to get to $455, since I knew full well that the USD was linked to Gold 40 years earlier.
$1 from the date specified was being equated to .048 gold. and Gov. issued CPI data was being applied to arrive at gold at a present value of $455. Your figures,
Yes or No?
I do not doubt that your meticulously applied numbers conclude with $455 Gold from that date Using a USDE. But you did not use the USDE, you used $1.
I supplied additional data showing that the 1 USD was pegged to Gold at $20.67 some 40 years earlier than what you used. I gave you a source to use other than Gov. issued CPI data.
Why don't you quote yourself from your first comment?
Apparently, you made a mistake in your first comment but instead of admitting it, you decided to go on the attack.
Use figures and facts, but do not continue with your abusive attitude.
"You are a very arrogant SOB are you not?" and "A BS in Math, yeah right, only if the B is for bull."
You introduced gold into this Silver Article." - paultaut
No.
"My article on Gold In Backwardation objectively explains what happens in the markets when monetary commodities enter backwardation." - Trace Mayer
Are you are a master of obfuscation?
My point can not be any clearer.
Even one with a mathematics degree should be able to comprehend it.
Go back and read where my subsequent posts only strengthened my original.
The original article contained an excellent point highlighting that missing import license renewal. What is up with that?
Your quote "You are a very arrogant SOB are you not?
This IS a silver thread."
Now, if you had been talking about 1 USDE from the beginning, it would have read something to the effect of : In 1913, $1 USDE was .90 oz gold by applying CPI data from that date gives gold a present value of $455.
Then you compared this totally useless number to to make the contention that the Present day Gold value was overvalued but you would not short it until it went above $1080.
It is a Totally Useless number because Gold, as pegged to a single USD was done so in 1873, not in 1913.
To use 1913 to derive a Present Value of Gold in USD is Flawed from the very start. The date that you say
Sorry about the "ha,ha,ah" but I recognized this immediately.
I am really sorry that you chose to ignore my help in getting better inflationary figures. I pointed out shadowstats.com, you responded that you Used Gov. data because everyone uses Gov. data: "Uhhh dude, that would be true of any of us."
I don't, many SA commentators don't. You used the 1913-Present CPI data simply because that's when a record of those stats started.
What you represented as the True Value of Gold in USD Presently does NOT include Inflation prior to 1913.
My Obfuscation?
For your INFO, Wikipedia, "Shadow Government Statistics"
I will repeat the essence.
1913 is commonly used because that year is when the banksters took control and started the inflation of the US currency.
There was no systemic inflation prior to that point in time.
The rest of your comments trying to justify your original poor response to my totally true statements are,
to borrow your phrase,
"ludicrous".
paultaut, perhaps you should more time correcting yourself and leave my valid comments be.
That's why Gold's present inflated value = $455.
I really pity your inability to grasp the idea that Inflation existed prior to 1913. IMHO
• “silver is an odd monetary instrument because it is also consumed”. I agree with this, and for this reason find silver much more difficult to analyze than gold. I also do not think of silver as a ‘monetary metal’ to the degree most commentators seem to;
• “Indians in India, being fairly smart, have a voracious appetite for both physical gold and silver. They are a lot smarter than most Westerners who clutch their paper instruments with such blind misplaced faith. Indians consume/import an estimate 3,000 tons of physical silver per year”. I am not sure why Ms Mayer qualified the word ‘smart’ with the word ‘fairly’. My experience suggests I would not have done that.