Gold, silver breakout watch: Got Gold Report
2/2/2009 1:53:27 PM | Gene Arensberg
stockhouse.com
Silver could be the investment opportunity of this generation
Atlanta -- This is actually an “off” week for the Got Gold Report. Normally off weeks are spent catching up on the various companies this report follows and recharging the batteries, but since both gold and silver are at pretty important technical levels below is a quick update on some of the indicators. This supplemental report is also a way to get the updated charts to the readership. See the chart links at the bottom for those.
First, though, just a few comments about the very small silver market; small relative to gold, that is. A few fundamental drivers concerning silver that haven’t been mentioned lately but need to be remembered as a foundation for its investors. These are merely a few of the many bullet points. We’ve discussed them at length in previous reports, but it helps to consider them in the context of all the economic fear that has been worrying the markets lately.
Now that all the fair weather jump-on-the-bandwagon-late gold and silver investors have been run out of town by the worst gold/silver correction sheriff ever; now that the markets have turned formerly rank and cocky bulls into meek, fearful, quick-on-the-sell-trigger sausage meat, perhaps it’s time for gold and silver to give everyone a taste of what they are capable of. Perhaps but, as always, never, ever consider trading either futures or ETFs on a short-term basis without either “insurance” (options to offset unexpected adverse movement) or carefully selected and constantly managed trailing stops.
Fear can change one’s focus. Fear can cause “fundamental amnesia.” Fear can make one forget all about why they chose one investment or another. It shouldn’t, but it can. The comments mentioned below are a few of the points to remember the next time silver hits the skids and fear rises to the fore.
Silver is cheap, cheap
Gold has already made new all time highs in U.S. dollars (last March), but silver never really came close. That’s particularly odd given that the world really doesn’t possess all that much above ground silver to spread among all its inhabitants.
Indeed, when silver cut its all time nominal high in U.S. dollars near $50 in 1980, the best estimates are there was close to double the amount of silver available then, some 29 years ago last week, compared to now. Some very popular silver analysts suggest that there is an even larger difference; they say that there is even less than half the silver metal available now, but 100% more silver in 1980, or rather, 50% less metal now seems like a safe assumption given sovereign dishoarding and a continued production-to-consumption deficit since then. Let’s go with half the silver today available than in 1980. If wrong, it’s on the high side, not the other way around.
In 1980, the world population was about 4.43 billion souls, more or less. World population in 2008 was estimated at 6.7 billion, up 2.27 billion or about 51.24% higher than then.
According to Dollardaze.org, in 1980 there was on the order of the equivalent of $6 trillion of global money supply in all currencies in all forms. By late 2008 global fiat money supply had ballooned to $60 trillion U.S. dollars worth of all global money supply. That’s an increase of $54 trillion or about 900%.
In 1980, there was no such thing as a silver ETF. Virtually all the action was contained in the OTC markets, the futures markets and in physical metal through a wide array of private dealers. For ordinary investors and large institutional investors alike it was not as easy to trade silver in 1980 as it is today.
Let’s sum up just this much so far. Today versus 1980 we have globally 51% more humans using 900% more “dollars” to chase 50% less silver in a world where any one of those individuals can use a cell phone or a mouse click to buy silver via an ETF in seconds. Oh, one can still buy futures, or physical silver from your local dealer too, but the point is there are many more options to gain exposure to the silver market available today. So when silver does catch on it can do so like never before.
Silver, scarce now and getting scarcer
Despite this, silver “only” managed to achieve about 40% of its $50 all time nominal 1980 high last March, while its more popular cousin, gold, eclipsed its 1980 peak of $850 by 21.6% to $1,034 as the Lehman news was surfacing. That fact alone tells us something interesting. It tells us this bull market for gold and silver is still young. At least I think so.
Sure, the 1980 peak for silver was a mania event driven by an attempted speculative corner by the Hunt brothers and the Arabs, but both gold and silver were involved long before the peak and silver maintained a price of $16 for over a year on either side of that blow-off top.
Not incidentally, $16 in 1980 dollars is the equivalent of $42 in 2008 dollars. Silver would have to advance 230% from its Friday $12.66 cash market close just to equal silver’s lower range in 1980 in real terms. Silver would have to rise to $131 to equal its real 1980 silver mania purchasing power peak.
Just because silver hasn’t yet caught on with the masses yet doesn’t mean it never will. If the extremely high premiums for the real deal silver metal on the street and metal additions to silver ETFs are any guide, it’s already growing in popularity strongly. Let’s stop right here and hit one pretty important, but largely overlooked point about the silver price.
The action on the COMEX, division of NYMEX in New York largely “sets” the spot price of silver. In a perfect and orderly market there would be a kind of balance between buyers and sellers. However, in July of last year something went very wrong with the COMEX market for silver. Some of the largest of the largest of traders literally went belly up. The market was artificially disrupted. We’ll leave the government intervention into the markets for gold, silver and oil in July for another time, but that set off a cascade effect that smashed the commodities markets and eliminated some of those really big, overly leveraged traders for good.
That set up a rare condition of near total advantage for one side of the market. The short side, or the side that profits when prices fall. Other traders were forced by the panic action to dump long positions in a selling frenzy to raise precious cash. The market was in pure panic by October. That allowed short sellers, dominated by just two very large bullion banks, to mercilessly press their advantage through overly large net short positions in silver futures into a vacuum of little speculative buying pressure. So, the figurative perfect storm arrived for silver in July and the eye of that speculator-deadly hurricane crossed the New York coastline in November.
With the demise of so much of the trading action on the futures markets, prices were driven down to absurdly low levels. This report firmly believes that without the very unusual circumstance of so much upheaval in the composition of the balance of traders, there is no way that silver would have been forced down to an $8 handle in October and November.
I think it is terribly interesting that throughout the crisis the real physical silver market consistently showed very, very high premiums (as high as 50% for some silver products). Premiums are the amount paid or charged by dealers over the spot or cash price of the metal.
As prices on spot futures markets plunged, they did so with a commodity that was extremely scarce for the general public. Although I am not certain, the July to October plunge of 50% for silver may be the first time a commodity spot price has been cut in half in the midst of a physical shortage of that commodity. If it has ever happened before it is extremely rare. Price collapses for commodities in shortage are and will always be unsustainable for any length of time. Anomalies will occur from time to time (we just lived through one), but the laws of supply-demand-liquidity will ultimately prevail over time, every single time.
Silver, opportunity of this generation
During a financial sector crisis and panic, then, we can conclude that bizarre and unbelievable mispricing of commodities can occur even when the commodity is in very real shortage. Such conditions are the once-in-a-generation opportunities real, battle hardened, ice-water-in-veins veteran contrarians live for. Such conditions are tests of one’s resolve and understanding of the markets we have chosen to invest in. And, if we get it right, if we don’t forget the fundamental drivers that brought us here in the first place, such conditions are the stuff that allow significant improvement in one’s standard of living through opportunistic speculation.
Now, with the current economic crisis forcing the scaling back or outright closure of so many of the world’s mines for things like copper, zinc, nickel, lead, etc., and since silver is largely a byproduct of mining for those base metals, the production profile for silver is almost certainly going to plunge in at least the first two full quarters of 2009 even if things turn around right away. The strangely low prices will ultimately result in even greater shortages of the metal just ahead.
Short term, anything can happen, but just as with gold, the fundamental drivers for silver are truly compelling. As gold regains its rightful position in the world’s collective mind as the ultimate store of value; as gold continues to reflect a growing mistrust of paper currencies and a new found fondness for hard assets; silver will tag along as “the other monetary metal” certainly should. Except there really isn’t enough silver to go around at current artificially depressed futures-dominated pricing. Not nearly enough. That’s one reason so much silver has been leaving COMEX warehouses of late. At some point there’s a chance that the general public will catch on to the indisputable fact that there’s a growing shortage of the metal, so silver could turn into the proverbial moon shot once again. As it did in 1980. Maybe not right away, but chances are it’s a lot sooner now than it would have been had the U.S. government not tried to “fix” things so much back in July and sent so many dominoes tumbling.
Long-term buying and investor accumulation of physical silver today makes much more sense than it ever has in this report’s opinion. If the world avoids falling into a financial abyss, no other commodity is as underpriced relative to gold; no commodity that can be instantly purchased and resold by anyone, anytime, is as well positioned for spectacular gains as the tiny silver market is right now in February, 2009.
That expected rise in popularity and in the dollar value of the metals ought to be very good for the miners and explorers that took it squarely on the chin late last year too. Silver investors need to keep such things firmly in mind going forward. We’ll have much more on this topic in future reports and Brien Lundin will be bringing us some timely opportunities in the sector to take advantage of the ongoing recovery as we move forward in Gold Newsletter.
Gold ETFs
SPDR Gold Shares, [GLD], the largest gold ETF, reported adding another 11.02 tonnes to show 843.59 tonnes of gold bars held for its investors by a custodian in London. As of the Friday close the metal held by the trust was worth $24.9 billion.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.
Barclay’s iShares COMEX Gold Trust [IAU] gold holdings also added 0.61 tonnes to 68.13 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added a large 9.85 tonnes over the past week, to show 129.92 tonnes of gold held.
All of the gold ETFs sponsored by the World Gold Council showed a collective addition of 21.36 tonnes to their gold holdings to 1,013.86 tonnes worth $29.9 billion.
We continue to see more buying pressure than selling pressure in global gold ETFs. Demand for physical gold on the Street remains robust. A slight increase in scrap has surfaced this week to answer the higher prices.
SLV metal holdings
Silver turned in a higher low in the $11.60s and a higher high again this week (the high was Friday just above the $12.66 close) before a Friday last trade of $12.66. For the week, metal holdings for Barclay’s iShares Silver Trust [SLV], the U.S. silver ETF, added a huge 309.88 tonnes of new silver, to show yet another new record 7,453.15 tonnes of silver metal held for its investors by custodians in London.
Source for data Barclay’s iShares Silver Trust.
Apparently we are not the only ones who believe that silver is cheap. During the month of January, buying pressure so overwhelmed selling pressure for SLV that the authorized market participants (AMPs) increased the float by 21.6 million shares and added 21.2 million ounces (660.16 metric tonnes) of new silver to their allocated metal holdings in London. Not counting the first two months after SLV’s inception in May, 2006, that’s the largest one-month addition of silver metal for the trust.
By the way, 660.16 tonnes of silver is about 21,200 average 1,000 ounce London Good Delivery Bars (LGDBs). Read that sentence again and let it sink in just how much silver was just added to SLV. Got silver? Got SLV?
Got Gold Report Charts
1-year daily gold
2-year weekly gold
1-year daily silver
2-year weekly silver
3-year weekly HUI
2-year weekly Gold:HUI ratio
2-year weekly U.S. dollar index
That’s it for this excerpt of the full Got Gold Report. GoldNewsletter.com subscribers enjoy access to all the Got Gold Report technical analysis and commentary as well as Brien Lundin’s timely advice, analysis and specific resource company recommendations.
Until next time, as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, net long SPDR Gold Shares and holds various long positions in mining and exploration companies.
ABOUT THE AUTHOR
Gene Arensberg
A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web.
Gene’s more in-depth market reports, insights and trading ideas are a new feature for subscribers of the very popular Gold Newsletter (GNL). GNL is edited and published by Jefferson, Louisiana based Jefferson Direct, Brien Lundin, President. Brien hosts the acclaimed New Orleans Investment Conference each year which has brought investors together with some of the best and most sought after financial experts and investment authorities in the world for over three decades. For more information visit GoldNewsletter.com or New Orleans Investment Conferences. |
