The Silver Lining In The Dark Clouds Over Precious Metals

Includes: AGQ, PSLV, SLV
by: Moneyline

The dark clouds hovering over the precious metals group seem to be darkening with each passing week since Feb. 2013. Silver seems set for its biggest quarterly loss since 1980 while gold hit the lowest level in 34 months, heading for the worst quarterly slump in at least nine decades. Meanwhile Platinum prices tumbled to the lowest since October 2009. Gold prices slipped 1.7% to $1,180.50, the lowest since August 2010 and down 25% since April 2013, the biggest quarterly slide since at least 1920. Silver prices seem to have hit bottom and are seen trading up 1.9% after hitting $18.18 earlier. Gold has fallen 28% in 2013 as investors sold 583.2 metric tons of gold from ETPs, erasing more than $63 billion in the value of the funds. The 14-day relative-strength index (RSI) on technical charts for gold reached 21.9 on June 26, the lowest since April 16 and below the level of 30 that a rebound may be imminent. Gold prices had jumped from as low as $1,321.95 on April 16 to as high as $1,488.10 on May 3 after the RSI had slipped below 30 in April. Bullion tumbled into a bear market in April, setting off a physical buying frenzy of coins and jewelry around the world at sharply lower prices not seen since long. A lack of accelerating inflation and concern about the strength of the global economy has also been hurting silver, platinum and palladium, which are used more as industrial metals.

Silver Market Investors lose confidence:

A lot of people who bought silver even when down at 25 dollars or 30 dollars an ounce, are probably feeling discouraged. Silver bullion is yet headed for its worst quarter since the Hunt brothers tried to corner the market. Silver plummeted 58% in the first three months of 1980. The collapse came after William Herbert Hunt and brothers, Nelson Bunker and Lamar, bought more than 195 million ounces in the 1970s. In 1988, a federal court found that the three had attempted to illegally corner the market. The gold to silver ratio climbed to 66.4701 this week, the highest since August 2010. The iShares Silver Trust, on Monday, posted a 192-tonne, or nearly 2%, decline to 9,882 tones, its biggest daily drop since June last year. The latest silver ETF redemptions suggest some longer-term investors might have lost confidence and are worried it could mark the beginning of prolonged liquidation similar to those seen in gold investment funds.

The Silver Lining:

There is no doubt that silver trading is extremely volatile and wild price swings do discourage short term traders. Short term investment or trading intraday in silver is surely not for the faint hearted. But now let's look at the other side of silver. In 2012, the U.S. Mint sold 33 million ounces of silver for the entire year. This year, the U.S. Mint is on pace to sell 50 million ounces of silver for the entire year. So far this year they have sold 24.2 Million ounces of silver and the biggest year of sales was only 40 million ounces for 2011.

Silver as an industrial metal has over 10,000 commercial applications. Apart from electrical uses such as switches, multi-layer ceramic capacitors, conductive adhesives, solar cells, heated automobile wind shields, DVD's and electronic gadgets, silver also has many medicinal applications. The amount of silver consumed annually and bought for investment exceeds currently exceeds total annual mining output and has for years. That gap has been filled by sellers willing to sell from existing inventories and as prices rise. Both industrial and investment demand for silver is growing in excess of the annual increase in mining production growth. The available inventory is low and will get even tighter over time. These two factors will lead to a continued tighter supply-demand situation going forward, leading to higher prices - much higher than previously ever seen.

I would like to draw your attention to some important aspects and views regarding silver Investment and the price of silver. The following is an excerpt from a recent article that caught my attention...

16% of domestic silver production was destroyed with the Kennecott Mine collapse in April. The US produces about 40 million ounces a year total in domestic mine production. 5 million of that came from the Kennecott Mine in Utah and that is now buried under 165 million tons of rock. So since the US Mint must only use domestic mine production for the Eagle program, we will use every ounce we produce just for these coins. Forget about the thousands of uses for industrial silver, and now there is a huge gash in the American Silver productive capacity.

These lower paper prices are not going to bring on more production… The true cost of mining silver is much higher when you use real cash costs. Miners are not going to produce, only to sell at a loss. They will simply not produce, hold for higher prices or go out of business. Which once again might be part of the plan. If you are logical, this may be part of the plan, to buy these assets on the cheap before the collapse of the dollar.

We have been here before… I sat through the grueling 2008 silver collapse. I listened to all the silver naysayer's bash silver then. They are once again fluffing their feathers. They said that silver was done and that you should sell. The biggest money historically, has not been chasing trends, but seeing where the world is going to go and buy right and sit tight.

Silver is way below its nominal record price of $50 in 1980. It is even further below the government inflation adjusted level of $135. And if you use REAL inflation adjusted numbers, like Shadowstats, the REAL 1980 inflation adjusted price of silver would have to be $450! Silver is a precious and depleting resource and when you look at the price of housing, cars, education, food, energy, taxes, insurance back in the 1980?s, it is insane to think that silver is so cheap on any level especially, when the uses of silver have skyrocketed since the 1980's. It is now used in technology on a massive scale and is even now said to cure cancer. Heck, they did not even have Silver Eagle sales back then, or the Silver Bullet Silver Shield for that matter.

This time it is going to be much larger! None of the problems from the 2008 Banking Crisis have been solved. In fact it is orders of magnitudes worse. What started out as an institutional problem, is now a sovereign nation problem. This collapse will not be a puny multi - billion Dollar Corporation like AIG disintegrating, it will be the Trillion dollar economies of the nations of the world and the Quadrillion dollar derivative monster markets cracking apart. There is no financial, political or social safety net left. We destroyed all of that in 2008 and are on a debt based junkie delusion.

The collapse of currencies will affect every counter-party debt based asset in the world - Your cash, stocks, bonds, Real Estate, pensions, insurance, all of it. The collapse of financial contracts will lead to the collapse of all political and social contracts. The Anger Phase of humanity is coming and only real assets with no counter party risk will be worth anything. Most commodities have storage or degradation issues leaving only precious metals as a real store of wealth.

The historical stockpiles of silver are destroyed. We know implicitly that gold has been treasured and kept secure. While silver has been used and abused as a cheap, industrial metal like tin. Since the price of silver has been under attack since the Crime of 1873, silver has been used in such small quantities that it has been destroyed. The US government in 1950 had 5 billion ounces of silver in its strategic stockpile, now it has ZERO. So if gold and silver come out of the ground at a 1:9 ratio and gold has been treasured and silver stockpiles destroyed, logic would dictate that the end of this silver bull market will find the gold to silver ratio BELOW 1:9 and I think it will come close to a 1:1. Either way, we are a long way away from those levels which makes silver so exciting right now.

It is the destruction of huge stockpiles like this that explains the decade long supply deficit to the growing demand of silver. Do not forget that we are only 7 years away from the United States Geological Survey's prediction that if we continue to consume silver at these rates, silver would be the first metal to become extinct. When I challenged the USGS on that statement, they said that only a massive revaluation of silver to bring on more production and wiser use of silver would stop the extinction. I don't think we will ever run out of silver, but I do believe that the free market will crush this paper manipulation and that anyone holding physical silver on that day will then have a lottery ticket in real value.

Another interesting article from Zerohedge that I read today, mentioned some of the sentiments on silver (and not gold) that I concur and share. Mentioned therein is a view that silver may soon follow gold on the upside, though eventually outperform gold - whereas I am of the view that, surely silver may soon rebound to exceptional highs and outperform gold by far but, as a leader and not the follower. I could be wrong - Well, Time will tell....

Presenting below an excerpt from the same for reasons on silver.

Are Silver and Gold finding a Bottom?

Gold and Silver appear to be in the process of finding a bottom; however, the price action could continue to be choppy in the coming weeks. Ultimately Citi's FX Technicals group, expects both precious metals to move much higher in the long term with the potential for Silver to be the outperformer, as was the case from 2008 to 2011. The most important thing to note is that whether we are seeing a pattern more like 2008 or the 1970s, we do not see this as just the beginning of a bear market in Gold; rather, this should simply be another correction in the upward trend. This would be similar to what we saw in both of those time periods (a deep correction setting up for the next move higher which would take Gold higher by multiples). We still remain of the bias that Gold will find a bottom soon and that in doing so it will form the base for a new leg higher which can take Gold to our target of $3,400 - $3,500 by 2016. Before we get there, though, we may need to see more stresses to riskier asset markets. As we have previously seen, moves higher in Gold are accelerated by either:

Global stresses - Europe and China come to mind as potential catalysts, with the possibility of another Euro crisis becoming more real as highlighted in Chart of the Week. The potential for tapering by the Fed has shown just how sensitive asset markets are and how easily panic selling can take place.

Increasing balance sheets of Central Banks / debt levels of governments - "taper talk" is still just talk and even when/should it begin, there is no plan to actually reduce the size of the Fed's balance sheet; meanwhile, other major Central Banks are still in the process of accommodating or increasing their balance sheets. On the debt side, there is no indication that any major economy is actually reducing the size of outstanding debt any time soon. This might actually suggest that when Gold begins to rally again, the price change in other currencies may be greater than that in USD (a topic we will likely revisit in the future). These dynamics continue to suggest to us that the long term trend of higher Gold prices is very much intact.

Silver should also follow suit as it attempts to find a bottom. Once it recovers, it may actually be the outperformer of the two…

As with Gold, we think the correction in Silver should end up being similar in magnitude to that seen in 2008. The 60% correction would suggest Silver bottoming around $19.75, though it has already overshot that level. However, as with Gold, our bias is that Silver is in the process of bottoming before a more aggressive move higher, such as that seen after the correction in 2008. That suggests a move in Silver to over $100 by 2016. The Gold/Silver ratio shows that in the correction of 2008, Silver severely underperformed Gold (correcting 60% versus 34%). Then as both moved higher, Silver outperformed, rallying 488% versus 181% for Gold.

This correction again has seen Gold do better (less badly?) and the ratio is approaching resistance around 67, the 76.4% retracement of the 2009-2011 move lower. If Gold and Silver are bottoming, as we expect, than it would not be surprising for the ratio to begin to turn around the resistance area as well. This would mean Silver could once again be the outperformer over the next few years.

Do you need any more reasons to own silver?

Disclosure: I am long SLV, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.