By Rakesh Neelakandan
July silver contract on Comex dropped as much as 5% to touch $40.465 per ounce, subsequent to losing 7.6% Tuesday and 5.2 % on Monday.
CME Group—the owners of the Comex—announced this week that minimum amount of cash to be deposited for borrowing silver for trading would climb to $16,200 per contract at the close of business from Tuesday. Prior to that, the margin was at $14,513, according to a Bloomberg report.
A year before margins stood at $4,250 !
Back in 1980, silver prices dropped 78% subsequent to a rally that had taken silver to $50.35 an ounce.
We are yet to know if silver is in the same bubble though content to the tune of many a Gigabytes is available in this regard. Theories galore; facts hide and truth evades.
But let us dig a bit deeper and return to the basics; the fundamentals:
There are five reasons why silver prices would go up despite this correction. And they form the fundamentals:
1. Robust industrial demand
2. Bullion coin demand
3. Global inflation
4. ETF fund flows
5. Weak dollar
Robust industrial demand
Over the next five years, silver demand is slated to rise to 666 million ounces which would form 60% of total fabrication demand. The figure is a 36% increase over 2010’s demand of 487 million ounces; according to GFMS Ltd. The demand from the industry forms lion’s share of silver fabrication demand.
The recession of 2008 made a significant dent in silver consumption on the part of the industry, but demand surged and resurgence occurred in 2010.This demand trend is expected to continue.
Silver use is surging in electronic and thermal equipments. Stronger industrial demand from US and Asian countries like India and China through 2015 would keep silver prices up.
Given its unique characteristics silver cannot be substituted and hence its price inelastic.
Silver coin demand
American Silver Eagle coins are in short supply as investors ply to secure their cash by buying the coveted coin. The American Precious Metals Exchange has warned of potential delays running into Mid-May in Silver Eagles delivery. (APMEX is offering $3 premium over spot for any Silver Eagle coins in any quantity.)
Recently, director of Canada’s Royal Mint reportedly told that sourcing of silver was becoming “very difficult” with prices of the commodity climbing.
Silver prices and Canadian Maple Leaf and the Silver Eagle should go a lot higher so that people would find it attractive to sell.
Global inflation
Inflation is surging around the globe and people are eager for a hedge which they found in silver bullion. Global inflation made silver to touch an all time high in the international market recently ($49.820 on Comex).
ETF fund flows into silver
Silver assets being held by the ETFs dropped 1.1% to 15,169.80 metric tons on Tuesday in the event of correction in markets.
But, with the above said fundamentals being strong, it is highly unlikely that ETF fund flows into silver would dwindle.
Weak Dollar
Weak dollar gives buyers the necessary appetite for silver as well and the commodity surged almost 4% on the US futures market to a 31-year high of USD 47.90 recently. With the US debt at historic high levels, and QE2 in progress, the chances are that dollar will continue to remain weak unless the interest rates are hiked in US. But, this is a remote possibility.
Back in the past,.silver, touted the poor man's gold, was reportedly depressed artificially for a while by certain quarters. But strict norms, later effected changed the horoscope of the commodity. Fundamentals, rather than speculation began to drive silver.
May be the rally is silver’s cathartic exercise!
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