Silver and silver-related assets were smashed across the board on Friday as the World Bank and IMF met in Washington, DC to discuss the worsening global crisis. Other commodities saw sharp declines as well. More silver was traded that day in any given hour than silver is available on the market for an entire year. It was an electronic sell-off. Physical prices now command a 10-20% premium to spot paper prices, the highest in years. Gold to silver ratio is now over 1:50, the highest in a very long time.
Predictably news comes out after the trading day (but we must assume the large insiders knew the whole time) that COMEX was raising margins by 15.6% on silver.
The problem is the COMEX does not have the silver to deliver, so forced liquidation is the strongest tool they have to bring prices down and take parties who would seek delivery out of the equation.
Silver is still up 46.31% on the year and has strong support in the $30.00 area. I think we need to see what the price action is when buyers step in and shorts cover. It could very well move up as fast as it did down (and higher) if we see ECB rate cuts, a Greek bail out, good earnings in the US, emergency Fed easing or other central bank policy movements as well as any geopolitical or event risk scenarios playing out.
Given that even though silver fell to $30.00, but physical silver commands a price of $33-35.00, there is evidence of a growing paper vs. physical price discovery bifurcation.
As far as my strategy goes, I don’t see any change in the situation for the dollar long term. The recent strength has been more of a liquidation panic in Europe and foreigners buying dollars because it’s the least bad currency for the moment. There’s even some rumor of weaker central banks liquidating gold and silver holdings to raise liquidity.
I saw the same pattern of behavior in 2008 and 2009, yet gold and silver are much, much higher now despite the occasional (and sometimes violent) correction.
Over the last 11 years silver and gold have outperformed all sectors of the S&P 500 by many multiples. There is no paper asset class quite as trusted during times of crisis, either.
http://finance.yahoo.com/q/ta?t=my&s=SLV&l=on&z=l&q=l&c=SPY (three year chart)
Now, given the potential for further easing by the Fed, ECB, BOJ, BOE, SNB and others, the need to monetize debt in the US to keep the government open (i.e. the necessity for QE3) — without debt monetization the government will go in to a crisis mode where their ability to spend will be limited as interest rates rise because treasuries are sold more than bought. But we’re not the only country that has to monetize debt. Keep in mind the US government has over $75 trillion in unfunded liabilities and there’s no ‘economic growth’ scenario that allows these debts to be funded from revenues.
QE3 from the Fed at this point seems like a foregone conclusion once we see a sovereign debt or large bank collapse. The ECB is also monetizing debt in the Euro zone for a few of the larger PIIGS, the BOE has QE’d in England and there’s a good chance the BOJ and SNB will continue to print money to artificially devalue their currency.
These actions will create a short to intermediate term burst in global money supply — and hot money seeking a high return. These types of inflationary pressures lead to booms for precious metals.
Greece’s default is all but inevitable, and that is going to rock the world and create the need for much, much more liquidity. This situation will spread throughout Europe and spread here and to Asia. Lower rates and more stimulus will follow.
Many shops sold out of their silver bars and coins on Friday because the appetite for physical silver was so strong at $30.00 (even though customers gladly paid the $5.00+ premium making purchases $35.00+ per ounce). In fact I still saw online stores selling silver for $45.00 to $50.00 per ounce.
I believe that the bifurcation in physical and paper prices is important to note because it indicates that there are two markets. A real market and a phony market. The phony market is being manipulated downward to an artificially depressed price.
This happened in 2008, too. But from that low price of $8.00 silver quickly rose to $48.00 in the course of three years, a 600% increase or averaged to 200% per year.
Gerald Celente, one of the best trend forecasters of our era is now buying physical silver. He made the announcement on Friday, so I believe that will mean something to the many that follow his advice and watch his investments closely.
Tonight silver is testing the 350 day moving average. Some continuation selling was to be expected after Friday’s drop, but we’re looking for some consolidation or even a short term reversal due to the very, very oversold condition, combined with the support of the 350 day moving average at 29.57 as well as the appetite that should be present in Asia during this season.
We’re also dealing with price move that is over a four standard deviation event — i.e. something that is extraordinarily rare and it’s punctured the bottom bollinger band, leaving a reversion to the moving average around $37.00-40.00 quite possible if technical buyers come in.
Volume is light as to be expected, but once Sydney and Hong Kong open we’ll get a better idea of what the Asian appetites for metals are after last week’s discount.
Personally, I am tempted to buy silver and silver-related assets given these discounts. Even if prices are weak short term, I know they will be much, much higher in the intermediate and longer term.