Capacity Utilization Update And Why It's Good For Gold And Silver

Includes: PHYS, PSLV
by: Katchum

As a follow up on my previous post on the Capacity Utilization Rate, I am publishing this update. Capacity Utilization in March was 78.6% for the total industry, which is 0.1% lower than the previous month (Chart 1). I expected a bigger decline, and was surprised that it fell so little. There is a good chance that it will go up in the future as industrial production in March 2012 was unchanged. This is positive for gold going forward.

Click on graphics below to enlarge:

Chart 1: Capacity Utilization Rate

The good news is that capacity utilization for mining and utilities went up to 87.5% and 73.1% respectively. For the mining industry, this is good news. The utilities even went up 1% point (previously 72.2%).

Also, something interesting happened in the gold market (Chart 2) after the IMF raised its growth forecasts. World economic growth will be 3.5% this year. At first, the gold price plunged on optimism, but reality is that this will be very inflationary. That's why the gold price went back up.

Chart 2: Gold vigilante

Of course this economic news is very good for silver. The silver price was less affected by this news from the IMF (Chart 3).

Chart 3: Silver price is steady

Meanwhile, the gold and silver premium rates are at multi year lows for the Sprott Physical Gold and Silver trust (PHYS), (PSLV) (Chart 4, 5). PSLV's premium is 4.94% and PHYS's premium is 2.28%.

It would be a good idea to buy in these gold and silver trusts now, as premiums are poised to go up in time.

Chart 4: PSLV Premium (%) (blue) VS Price (USD) (orange)

Chart 5: PHYS Premium (%) (blue) VS Price (orange)

Disclosure: I am long PHYS, PSLV.

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