Physical Demand And Silver-To-Gold Ratio Signal Strong Rally In Silver Prices

Includes: AGQ, PSLV, SLV
by: Moneyline

Silver prices have slumped to deeper lows in June 2013 after having been smashed big time earlier in April. Technical indicators suggest an extremely oversold condition and that a rise seems imminent. On a weekly basis, RSI (relative strength indicator) is at the lowest in 40 years of data and nearly that low on a daily basis. This timing indicator suggests that silver is extremely oversold on both a daily and weekly basis. Gold is similarly oversold. Technically, a rally in gold and silver prices is absolutely unavoidable. Then why have bullion seen a steep and steady decline in prices? Having said about Gold and Silver being in technically oversold conditions, market manipulation yet, will of course play its own part in defining price direction, even though for a small volatile period now.

Take a look at a recent statement by GATA: Market-rigging central banks laugh at technical analysis and 'fundamentals'

GATA said: "Technical analysis of a manipulated market like gold has been tedious nonsense for years, but these days, with virtually infinite paper dropped on the gold futures market at illiquid times to drive the price down even as the physical market remains strong, technical analysis has become insulting. The only analysis worth anything anymore is the identification of the source of all the paper. The suspects are obvious - Western central banks."

As of Friday, June 28, 2013, the Commitment of Traders (COT) data by the CFTC indicates that net long difference was the lowest since the beginning of January 2001 and probably also for several decades. This indicates that the large bullion banks (JPM, etc.) are in net longs and also in a position to profit from a sharp rally in the Gold and Silver prices - especially Silver. Also that, JPMorgan has announced an overweight buy call in commodities proves my point and should help see money flows from institutional investors. India's gold demand has always had a huge influence on gold prices. Due to the recent extreme steps undertaken by the Indian govt. to curb demand, gold imports by India have dipped since the mid of May 2013. But Indians seem to have simply shifted their focus from Gold to Silver and Silver imports by India have seen sudden spurts since April 2013. Just imagine what can happen when the world's largest gold buyer is compelled to quit gold investments and thereby completely focusing now on Silver!

For how long can Gold and Silver prices remain weak in the face of massive global physical demand?

Most mints around the globe have uniformly reported unusually high demand and of being swamped with orders, especially for silver bullion coins. Premiums in regional markets have been pushed to exceptional levels. There is a lack of recycling at these price points and large bars have been imported to meet shortages. This is particularly true for those refineries supplying to the Eastern markets. Whether it's individuals who are bargain hunting, or central banks looking to diversify away from the U.S. dollar, the ounces are getting gobbled up at an alarming rate. Massive Gold ETF outflows have been blamed by the mainstream media for the price onslaught in Gold. But have you noticed where these very outflows have ended up? There has been a plethora of central bank buying in the last few months. More and more central banks have been building their gold reserves while the rest of the gold outflows have ended up in many eastern markets where individual buyers have been flocking in droves to the physical gold markets. Even according to the World Gold Council, it is quite likely that gold previously held in the ETFs will find its way to Asian consumers taking a long-term view on gold. Regardless of what's happening in the west and in the paper bullion markets, Asian buyers are making huge moves on bargain gold and silver prices. Indeed, it seems more and more folks want to have their hands on physical gold and silver. This is an unprecedented wave of long-term, physical gold and silver demand from central banks and individuals alike. Tying all the pieces together, even in the face of a market sell-off, there's a lot of demand hanging around for physical gold and silver. So till when do you expect that gold and silver prices will be able to hold at multi-year lows in such circumstances, additionally with mining output getting reduced largely due to price and production related feasibility issues?

The Gold to Silver Ratio favors a rally in Silver prices:

Moreover, the multi year low Gold to Silver ratio of 1:66 today provides a very devilishly lucrative opportunity. The ratio is currently retesting the area from which it broke down when it started the spectacular rally in 2010. If this area between 67 and 70 holds, then the ratio is likely to fall significantly. This ratio falls significantly mostly when gold and silver prices rally, with silver prices naturally outpacing gold. Having analyzed all the above points, Silver prices seem likely to start a massive multi-month rally going forward. Equities have had their run and it is highly unlikely that this may again continue with all the negative data coming out of the U.S. recently, the most important being the downward revised GDP number. Today's Employment data out off the U.S. may seal the market direction for quite some time to come.

Silver Prices Rally when Market Players are frightened:

Finally, and as explained above, the silver and gold markets are deeply oversold and sentiment in both markets is at a multi-year low. This is one of the biggest indicators, though not technical, that a sharp and long price rally may be around the corner. Most traders have burnt their fingers at buying on dips in gold and silver prices earlier this year. By now, almost all traders are convinced of a massive and continuing bearishness in the Silver and Gold market. These traders will now provide the much needed selling at all rises and it's no big guess as to who the buyer(s) may now be. The fright of accruing more losses by being on the buy side will make traders prefer to be sellers. Eventually, at a certain point, after again accumulating losses (now in Sell mode) traders will hit the panic button on short covering. This panic will lead to more sharp rises in Silver prices. Avoid being on the wrong side now. The biggest obstacle to a rise in gold and silver prices has been equity markets, sucking up most of the available monies in global markets. However, it appears that this obstacle is now out of the way, with the stock markets likely having peaked. Also, that the US Dollar has steadily been rising most currencies for a long time now. Why has the dollar been rising and why is it doomed? A fall in the dollar will prove holding bullion much profitable now as it will inversely impact the gold and silver prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: I am long Silver and will add more on price declines.