Silver’s Paper Driven Sell Off to Be Confronted by Continued Significant Physical Demand

 Gold stabilised in Asian and early European trading prior to a 1% fall, while silver’s sharp price fall continues and silver is now down 20% in USD terms in 5 days. The huge and unprecedented increase in margin in the paper silver market has forced some weak hands out of the silver market and allowed the concentrated shorts on Wall Street to press their advantage to the downside.


Gold to Silver Ratio – 1971 to Today Gold (orange), Silver (yellow) and Gold/ Silver Ratio (white)
Click on the image to view full size

Both gold and silver’s sell off are healthy and are due to them becoming overbought in the short term (particularly silver) and this is once again a paper profit taking and technical driven, speculative sell off as seen in the surge in frenzied dealing and large spike in trading volumes in silver futures in New York.

Gold’s resilience is further confirmation of massive buying of gold by creditor nation central banks which should reassure bullion owners and offer support to silver.


Silver in Nominal USD Terms – 1971 to May 2011 (Weekly)

Some nervous physical silver buyers and more speculative physical buyers have sold today and this week but those buying for diversification and financial insurance are strong hands and have not sold. Indeed, physical buying and buying the dip has continued yesterday and today.

A correction, possibly sharp, was expected after the 28% rise in prices in April alone and the sharp rise seen so far in 2011. Support may be seen at $35/oz but experience shows that paper driven sell offs in the futures markets in New York can surprise to the downside.


COMEX Silver Inventories – 1 Year (Daily)

Store of value, safe haven bullion buyers should hold their nerve and continue to accumulate and to maintain a core holding in gold and silver bullion. In the same way that the sharp falls from over $20/oz to below $10/oz in 2008 are now seen as a wonderful buying opportunity so this sell off will be seen as another buying opportunity.

Those who sell on this sell off and fail to reenter the market or maintain a core holding in gold and silver bullion will likely regret it in the coming months and years.


Cross Currency Rates

Inflation risk (and the possibility of stagflation and hyperinflation) today mean that cash can become trash very fast and thus international equities, international government bonds (high credit; very short duration) and gold remain prudent asset allocations.

The cash component of a portfolio should probably include some local currency and a combination of creditor nation fiat currencies and of course silver and gold.

Savers need to protect themselves from local currency risk and diversifying savings through ownership of bullion continues to be prudent.

Gold

Gold is trading at $1,501.40/oz, €1,012.54/oz and £910.27/oz.

Silver

Silver is trading at $37.72/oz, €25.45/oz and £22.87/oz.

Platinum Group Metals

Platinum is trading at $1,796/oz, palladium at $720/oz and rhodium at $2,250/oz.

Mark OByrne

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