Explaining Silver’s Volatility
The silver market is still reeling from its fall from $50 to $34 over a very short time. The move was driven by at least one investor selling around 1,000 tonnes of silver over a two week period. Yes, silver had climbed dramatically from around $25 and quickly. The charts had supported a rise to $29, but when it rose higher it climbed outside the technical range into new territory. All the time thereafter it was vulnerable to a selloff back to support around that level. Many felt it could easily fall to $20 before recovering, but it bounced off $32 and has been consolidating above $34 since then. The selling then stopped and buying started, but the consolidation at this levels indicates that the market has to get used to these prices for a while before they establish a ‘floor’ that permits cautious buyers to re-enter the market again.
- Investors have to ask themselves, should silver be considered as financial security the same as gold is?
- Will it ever be a monetary metal in the eyes of central banks, as well as in the minds of global investors?
- Some may feel that the biggest question mark hangs over its volatility in the future. To this end it seems relevant to ask if the silver market can be manipulated both up and down as the large U.S. banks have done in the recent past?
- Or can the silver market be cornered as the Hunt brothers from Texas once tried to do?
Should silver be considered as financial security the same as gold is?
To answer that question we have to understand that the current silver and gold investing world is divided in two.
First, in the developed world investments are not looked at as financial security, but sources of profits. Investors themselves make their own financial security through the profits they make over the years [or hope to do]. This implies that investments are held for eventual selling unless they continue to grow and make capital gains and income, for the foreseeable future. Investors must constantly monitor their investments to ensure they do make profits or be sold. The reins remain firmly in the investor’s hands.
Second the emerging world, where wealth is new to most and the memories of recent poverty and the uncertainty of retaining wealth sit close to their investor heart. Bank deposits in China were the usual investment avenue, until food and energy inflation brought back uncertainty, poor performance and doubt that their savings were safe. Gold has always been considered an important place to hold ones wealth, as it protects against uncertainty and the attrition of wealth by inflation. New investors have watched the performance of gold over the last decade, through boom times and uncertain times and seen gold and silver outperform other investments persistently and soundly in a confidence-decaying world. This confirmed to them that gold and silver are financially secure investments. With burgeoning middle classes for the next decade and more, investors in gold and silver are likely to expand too and so perpetuate the belief that gold and silver should be considered as financial security and as real money.
Will silver ever be a monetary metal in the eyes of central banks, as well as in the minds of global investors?
The very presence of gold in the foreign exchange reserves of nations is definition enough that gold is a monetary metal. It has been, it is and it will be as we see the number of central banks across the world buying more of it and no longer selling it. But silver is not in global central bank vaults, nor has it been more than a valuable means of exchange in the past’s dark distant history.
We don’t think it will come back as a monetary metal [and as part of central bank reserves] until the entire present monetary system sits in disrepute. It is too much of an industrial, consumable metal to provide the features that a monetary metal should have. At a price beyond well above the level that is now and were it not used in industry, it could make a comeback.This is unlikely. After all the definition of a monetary metal lies in the hands of central banks, not in the hands of investors.
Is that the final word on the matter? No! If investors treat silver as money, a poor man’s gold, as it were, then it rises to the status of real money in those investor’s eyes. It won’t matter what central banks then think. In the developed world, silver is nowhere near that status, except in the hands of a select few. In the emerging world matters are different.
Emerging world investors are finding that gold is getting out of their reach in price. They have no option but to turn to a cheaper alternative. Silver in the recent, as well as the distant past, has always been a precious metal that is real money and represents, to them, financial security. Again its performance over the last few years confirms that investors were right. If you look at the silver price from when it stood at $6 and ounce, investors have not been disappointed in Asia. A pull back from $50 to $34 was not totally unexpected after all it rose too high, too fast. But the nature of investors in the emerging world, in particular those in India, is such that when they see such a ‘spike’ in prices, they may sell, hoping for a good fall and the establishment of a new ‘floor’ price, when they buy back in and continue to hold. It is rarely their intention to exit the precious metal markets. Proof of such an attitude lies in the recent import figures of silver to China. Demand for silver bullion in there saw silver imports in April at 339.4 metric tonnes. This compares to 302.09 metric tonnes in April 2010 or an increase of over 12% from the same month last year.It compares with silver imports of just 132.5 and 127.3 metric tonnes in April 2009 and April 2008 respectively. This shows that the record Chinese demand for silver bullion seen in 2010 is continuing in 2011 and higher silver prices are not deterring Chinese buyers. China imported 3475.4 tonnes of silver bullion in 2010 up a massive fourfold from 2009 when imports were just 876.8 tonnes. Importantly, China was a net exporter of silver bullion up until 2007. We expect the numbers to India to reflect the same trend.
So a silver price now consolidating in the lower to mid $30, if it persists for a while, will re-attract emerging world buyers in greater volume still.
Can the silver market can be manipulated, both up and down, as the large U.S. banks have done in the recent past?
In short, yes, it can. With silver at a low price relative to the volume of investment funds out there [such as in the top five U.S. banks] it does not take a very large amount to push prices up and down. Regulators themselves have pointed out that there has been manipulation of the silver price in the past. But regulations and the media have certainly chased a measure of that out of the U.S. market [but the world is a big place].
However, we have to qualify that statement, by saying that the number of silver investors out there with 1,000 tonnes of physical silver to sell are few and far between! Once they have sold, their silver has gone.They have to hope that the silver price will drop back and allow them to buy back in at lower prices or remain out of the market. Many have hoped that the silver price would fall back to $20 but the fall halted at $32 and in came emerging market and other buyers. This makes really effective price manipulation very hard. With the trend of silver up, anybody shorting the market, will usually get hurt. The best a manipulator can do today is to go with the price waves that we see in all markets, but avoid fighting the trend.
Over time, and with prices trending up, there will be a day when such manipulation will be very difficult to achieve on a continuous basis. But silver will continue to be very volatile and much more so than gold, for a long time still. Until we see considerably more liquidity in the silver physical market price swings could remain frightening. Once liquidity rises much more than seen now, a seller or buyer of a large amount can do so, while producing only small swings in the price. Then silver’s price will become as stable as that of gold. But the pattern of silver price movements that has been established by silver, all the way up, has been to move up with gold and to fall with gold, albeit in a more exaggerated manner. This has been the case for some years now. There is no reason to think that this pattern will stop.
Can the silver market be cornered as the Hunt brothers from Texas once tried to do?
There are two ways to corner a market and both require a dominance of demand. The Hunt brothers tried the first way and succeeded in driving up the price to $50 and ounce. They were then pressured by the silver regulating bodies and forced into a position when they had to sell. Trouble was that, as the only buyer at anywhere near those prices there were nobody out there to take the silver off them. Then as they sold, the silver price dropped back to the level they had begun buying at. Hence developed world investors need liquid markets so they can sell at higher prices without hurting the price too much but when they sell too much, too quickly, the price falls [as we saw silver drop from $50 to $32 recently].
The second type of cornering the market is again to dominate supply without any intention of selling any at all. Likewise, to be a perpetual seller of a huge silver stockpile would hold the price down for as long as you have stock. In the silver market, for the last few years before the price started to rise, India, China and Russia were sellers of their huge silver stockpiles left over from the days when silver was used as a ‘means of exchange’ [change in your pocket]. This has held prices down since the Hunt brother days. Now look across to the gold market and we saw a similar situation right through to 2009 until the central banks of Europe stopped selling their gold. Even as the sales were slowing, eventually ceased the gold price rose from its [manipulated] low price of $275 [when Britain sold half of its reserves] to around $1,200 an ounce. Now central banks are either holders or buyers of gold, but unlikely to be sellers again.
Nations that produce gold are now buying up their own local production and reducing the supply to the market, which could be seen as a sort of manipulation, but not for profit, but for the protection of national reserves. They have no intention of selling. If this extended to all nations that produced gold, then you would have a true cornering of the gold market. If the central banks of silver producing nations decided that silver should be a reserve asset in their reserves then they would have to take off newly produced silver for a very long time to make a significant contribution to their reserves.
As to an individual or single institution cornering the market such as the Hunt brothers tried to do, we believe that it would be nigh-on-impossible. Should the silver producing nation’s central banks decide to act ‘in concert’ and corner the silver market that would be possible, but extremely unlikely! With so many important industrial applications, such an attempt would produce huge anger across the globe. Consequently, we do not believe that a cornering of the market would be successful in this day and age.
Why should the silver price continue to rise with gold and how high will it go if it does?
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
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