Gold News

Silver Showing Strength

The "contango" in Silver Bullion futures contracts remains tight, suggesting heavy demand...


THE INTERNET
is humming with numerous commentators wondering who "the big buyers for silver are", writes Gene Arensberg in his Got Gold Report from Houston, Texas.

The second-most popular precious metal defied seasonality in July and early August by consolidating sideways, catching a bid when it "should" have sagged in late August, and then popping right into the teeth of futures contract and options expiry.

This week it challenged its previous turning high at $19.80 an ounce – and all signals say there has been uncommon strength in Silver Bullion futures this summer.

Is the strength in silver tied to the news that the big banks like J.P.Morgan and Goldman Sachs are in the process of winding down their own proprietary trading desks? Acting early to comply with the so-called "Volker Rule" on prop trading, might this explain silver's strength? Possibly...a little. But perhaps that is merely a "market suggestion" instead of an actual market trigger.

Sometimes the market sees well ahead though. And here at Got Gold we see signals there is also strength in physical Silver Bars demand, especially the large commercial-sized 1000-ounce bars, even as ordinary investors for the small-sized products such as coins were doing more selling than buying this summer, forcing premiums down to their lowest levels in many months in the process.

Premiums are the amount charged and paid by bullion dealers above the current cash or spot price of the metal quoted. That decline in smaller silver-product premiums jars with the strong outperformance of silver over Gold Prices in recent weeks, and the correspondingly large drop in the Gold/Silver Ratio – a more bullish than bearish sign for both metals. Notice also, however, the contraction in the high-low trading ranges for both precious metals, too – a sign of slowing momentum or growing resistance.
 
As silver challenges its 30-month resistance at $20 an ounce, we call attention to the very tight contango which still shows in the Comex futures strip. [Ed. note: Contango means the premium typically paid for gold or silver further out in the future, so as to cover the seller's ongoing storage costs and lost interest-on-cash until then.] As just one example, even though silver has advanced about 26% over the past 12 months the spread between the December 2010 and December 2011 silver contracts is a miniscule $0.145 or 0.7% per ounce! We and other veteran traders believe such a tight contango indicates there is currently not an overabundance of silver bar stock.

Indeed, a tight contango or backwardation in precious metals [i.e. a reversal of the usual pricing, so near-dated contracts cost more, rather than less] is a direct indication that there is heavy demand relative to existing physical supplies. Best we not forget that going forward.

One other indicator that is cause for optimism in Silver Prices going forward is our old friend, the Gold/Silver Ratio. Behold the remarkable plunge in the GSR over the past two weeks...down from above 68 ounces of silver to one of gold...sinking below 63 ounces last week.

In a word, wow...!

When silver outperforms Gold Prices (and so the GSR falls) it is usually a more bullish than bearish signal. That is not just for the precious metals, but also for other markets as well. Because a falling GSR equates to a willingness by investors to take on risk.

Would it be all that surprising to see the gold/silver ratio falling back into the 50s before this year is out? That's assuming the "prophets of doom" remain more in the shadows and fringes of our collective focus just ahead. And with gold at $1250 the ounce, a GSR of just 55 would mean a silver price of $22.72. At a GSR of 50, it would mean a Silver Price of $25.00.

We cannot predict when, but we would not be at all surprised if by the time this current precious metals bull market is done, we see the GSR well below the lowest readings of the last two decades or more. Perhaps even as low as the low 20s is a realistic ultimate target in our own opinion.

That is why we have included silver as a significant portion of our own real assets to hold for the long haul, and why we intend to add to that silver stash opportunistically as we move into Stage Two of the Great Gold Bull. Obviously, we continue to believe that silver is strongly undervalued relative to gold. But we remain long-term bullish for both, and we have seen nothing in the recent data to discourage that bias. We remain grateful that we hold, in addition to our short-term trade positions, a reasonable portion of our assets in actual bullion. We think everyone should.

Buy Silver at live "spot prices" online today at Bullion Vault...

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web. Gene's more in-depth market reports, insights and trading ideas are available at GotGoldReport.

See the full archive of Gene Arensberg.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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