From the Bullion Desk:
>>>>Since there is not much to talk about today, I thought it might be fun to discuss the mysteries of the silver market at present. Please be aware that I will be just be asking questions. If I had the answers to these issues, I would (well, perhaps I wouldn't...) be writing about them. The financial press keeps alluding the "unknowns" in this market, and I thought it would be illuminating to portray just a few of them.
SILVER LEASE RATES
Earlier this morning in London, the midpoint of the 30-day lease rate for silver was about 25%, an extremely high historical rate, not seen for about 4-5 years. This means that an investor could lease out his silver and receive almost 10 cents per month in interest or a lease payment. This would indicate that the physical market is EXTREMELY tight and silver needed to be borrowed, and badly. A very bullish sign. Now, lets look at the one-year rate which was about 3.5% per annum, or about 18.8 cents per annum or 1.6 cents per month. So....if you borrow silver for one month, your cost is almost 10 cents while if you borrow for a year, your cost is only 1.6 cents per month. Wouldn't it make eminent sense to borrow silver for a year (borrow long), and lease it out for a month (lend short)? If lease rates held for just one more month, you would recover ALL of your committed expenses for a year lease, while still having 10 months to profit from leasing your silver short term? Please understand that all components of this trade can be hedged; please take my word for it as I do not want to get into the specifics of the transaction. (Well, for the right price I would tell).
So, pray tell....why have short-term rates for silver leases gone ballistic while long-term rates have been relatively unaffected? Why haven't major players in the market seen the obvious? Just what is going on here? It makes no logical sense.
NEW YORK VS. LONDON SILVER PRICES
For over a month now, silver prices in London have been 5 to 9 cents over the price of silver in New York. One would naturally expect to see silver leave New York warehouses to seek the higher price in London. And, yet...that has not occurred. In fact, silver inventories in New York have increased during this period of time. Again, please take my word for it, this trade can be totally hedged and arbitrage profits are virtually assured, and yet, it has not happened. Why?
OPEN INTEREST ON THE COMEX
In virtually every rally in silver prices on the exchange over the past 20 years, we have seen open interest (the number of silver contracts outstanding) expand as prices surged higher. In this current rally, we have not seen this at all. In fact, most of the buying has been demonstrated to be the covering of short positions by the large speculative funds, and not fresh buying. How does this play in the prospects for the market?
WHY HASN'T THE PRICE DONE BETTER?
This perhaps is a matter of judgment and the results of 25+ years of trading and watching the market. Personally, after such a long period of time of very high lease rates, I (my own personal observation only) would have thought silver would be at much higher prices than we currently see. The past two to three days, where we have seen short-term lease rates of over 20% on a annualized basis, silver prices have done very little. In fact, today they declined. I would have thought that silver prices would have done much much better under such conditions. Another mystery, I suppose.
I hope the above will provide some food for thought. I know that I am confused, but then again, my wife always accuses me of that. And worse. Much worse.
There was a very interesting article in the Miningweb.com where Paul Van Eeden discusses the gold/dollar relationship of the past 20 years. While it is certainly understood by readers of this commentary that gold, being priced in USD, is injured as the USD increases in value, it is noteworthy to quote the exact statistics over the past 10 years, "Even though the gold price in USD has declined by over 30% since January 1990, the average gold price in the world has increased by over 20% during the same time. This not only reinforces the concept that talking about the gold price is currency specific but more importantly, it shows that the average gold price in the world is stable and in fact steadily increasing". Well, to be fair, much of the increase is due to the utter collapse of some currencies of the world during the last 10 years, the Malaysian Ringgit, the Mexican Peso, the Russian Ruble, etc. But, it attempts to demonstrate that gold can still be considered a valuable portfolio diversification and "insurance" against currency catastrophes in some nations, but, truth be told....investors in those nations would have been better served buying USD and not gold. The stream of income would have been better and the net return much better. Yes, gold served them well, but USD would have served them better if they were looking at a collapse in the value of their currency. And, I think it a journalistic error not to recognize it as such.
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