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Metals Market Provides Timely Fire-Sale

By: Dr. Jeffrey Lewis

-- Posted 26 May, 2011 | | Discuss This Article - Comments:

Now three weeks after the massive silver movement toward $50 per ounce, and a near reversal of opinion among the financial media, silver is now stable in the $34 per ounce area.  While the panic, confusion, and frankly, fraudulent popping of the silver price may have shaken the weak hands, the market is providing opportunities for those who are willing to wait out the institutional investors.


Silver is, and will probably always be, a very cyclical metal.  The two nations that crave it the most, China and India, add so much to the demand pool that they are, in many ways, the (ultimate) driver of the price.


Economic Institutions Driving Silver


Subtract the printing presses of the Federal Reserve and the debt machine of the US Treasury, and silver is normally a very silent commodity.


Silver buyers, especially those in India, drive up the price during the summer months, before silver prices cool, or stay flat, for much of the winter and spring.  This has much to do with the fact that silver mining companies do not seek to perfectly align their mining and asset sales with the demands of the market; most companies tend to produce the same amount each and every quarter to fulfill Wall Streetís demands for perfect quarterly earnings.


Meanwhile, demand for silver isnít so perfect.  Forecasting demand for Indian celebrations that spur jewelry crafting sprees can be difficult, and in a small market like silver, the volatility keeps most institutional investors away from hedging their silver bets for no-risk profits.  This year, the elements are aligning perfectly for silver as an asset class.


Silverís Next Move


Net buyers of silver are making full use of the recent dip, realizing that the fundamentals are unchanged, and that they can purchase 30% more silver now than they could at the top. 


Indian buyers, who come into the market to buy with both hands in July and August, will also enjoy the recent sell off.  Investors may enjoy it even more.


The market action leading silver up was made up of bullish interest in financialized silver available in exchange-traded funds, hedged mining stocks, and (especially) short-covering of futures positions.  These trades, which were levered through a number of vehicles, werenít intended to be held indefinitely.  The same is true of the traders who went short ahead of the CME Groupís ill-timed increase in silver margin requirements.


Luckily, these traders have either eaten their losses or accepted their profits.  Positions still open above the current silver price should be short positions, which werenít clobbered by excessive margin increases. 


The Indian Market


The fundamentals are now in place for another summer rally spurned by Indian silver demand.  Quickly approaching summer demand should work perfectly to erase the shorts still in the market, who will have to cover by purchasing silver at market.


Long term shorts could easily be wiped out if the calendar year proves to be as much as an influence as it has been in the past.  Short-covering could ultimately be the straw that breaks the 1980sí high.


Dr. Jeffrey Lewis

-- Posted 26 May, 2011 | | Discuss This Article - Comments:

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