Silver's Paper-Driven Sell-Off to Be Confronted by Continued Physical Demand

[iOWNme]

Silver's Paper-Driven Sell-Off to Be Confronted by Continued Physical Demand

http://seekingalpha.com/article/268351-silver-s-paper-driven-sell-off-to-be-confronted-by-continued-physical-demand?source=from_friend




Gold stabilized 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 five 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.

http://static.seekingalpha.com/uploads/2011/5/6/saupload_goldcore_bloomberg_chart1_05_05_11_small_ thumb1.png

Both gold and silver’s sell-off are healthy and are due to their becoming overbought in the short term (particularly silver); 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.

http://static.seekingalpha.com/uploads/2011/5/6/saupload_goldcore_bloomberg_chart2_05_05_11.png

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 continued this week.

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.

http://static.seekingalpha.com/uploads/2011/5/6/saupload_goldcore_bloomberg_chart3_05_05_11_small_ thumb1.png

Store-of-value, safe-haven bullion buyers should hold their nerve and continue to accumulate and 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.

http://static.seekingalpha.com/uploads/2011/5/6/saupload_goldcore_bloomberg_chart4_05_05_11_small_ thumb1.png

Inflation risk (and the possibility of stagflation and hyperinflation) today mean that cash can become trash very fast; 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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.



Read some of the comments on this story.....

[Sparky]

An interesting aspect of physical versus paper: Most of the selloff in physical from this plunge would be in the form of large investment bars, e.g. from COMEX or required selling by SLV. This contributed to the shortage in smaller units in 2008; low price but no corresponding availability it small units. I recall in 2008 it was easy to buy 100-ounce bars when there was a shortage of 1- and 10-ounce.

[Ponce]

To me....."Paper PM is only one step below paper dollar"........... ;D

[Serpo]

Silver’s Correction – We’ve Been Here Before



By James Turk, Founder of GoldMoney.com

May 9 (King World News) Silver’s price drop last week has been variously called historic, extraordinary and unprecedented. It was none of those, as is clear from the following chart (above). We’ve been here before, note the four red ovals. All four outline similar drops in price over short periods of time.



This chart is prepared on a log scale so that the distances shown on the chart can easily be compared in percentage terms. In other words, last week’s drop in the silver price from near $50 is essentially no different in percentage terms from the drop that occurred once $15 was approached in 2006 or the drop after $8 was reached in 2004. In both of these prior instances, silver bottomed after the drop, marking a level from which it climbed to eventually make a new high.



The drop in silver’s price in 2008 was different. Silver continued lower, breaking down from the red oval, but we all know why that happened. Lehman Brothers had collapsed, and in the subsequent rush for liquidity, every asset class was hit – even gold and silver. It was a classic example of the ‘baby being thrown out with the bath water’.



So what is ahead for this current correction? Repeats of 2004 and 2006, or another 2008? My guess is none of the above. It took several months after these three previous corrections before silver climbed above the high price that preceded the correction. This time I expect silver will take only several weeks before exceeding $49.78, the 31-year high reached on April 25th. The reason?



As evidenced by silver’s backwardation, which began in January and continues to this day, the demand for physical silver has really accelerated. As a result of last week’s price decline, backwardation has roughly doubled in size. This is clearly a a signal of strong demand for physical silver, and further evidence of a point I have been making for some time, that the paper silver market is losing its significance as a price discovery mechanism.http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/5/9_James_Turk_-_Silver_Will_Hit_New_Highs_in_a_Matter_of_Weeks.ht ml

[Plastic]

To me....."Paper PM is only one step below paper dollar"........... ;D



But intrinsically TP is above both of them since it won't scratch when used.

[SLV^GLD]

To me....."Paper PM is only one step below paper dollar"........... ;D


They're precisely the same thing if you take the word dollar at it's definition. The only difference is the paper dollar is accepted anywhere you can find a cash register.

[Sparky]

...
In other words, last week’s drop in the silver price from near $50 is essentially no different in percentage terms from the drop that occurred once $15 was approached in 2006 or the drop after $8 was reached in 2004. In both of these prior instances, silver bottomed after the drop, marking a level from which it climbed to eventually make a new high.


The drop in silver’s price in 2008 was different. Silver continued lower, breaking down from the red oval, but we all know why that happened. Lehman Brothers had collapsed, and in the subsequent rush for liquidity, every asset class was hit – even gold and silver. It was a classic example of the ‘baby being thrown out with the bath water’.
...


I agree with the first part of this, which is what I've been saying for a week, i.e. there's nothing new about this correction.

But the second part remains to be seen. If the current bottom remains in the $33-$35 range, then it's just like 2004 and 2006. If it continues down to $21-$26, then it's just like 2008. But I don't know why they have concluded that the latter is out of the question; it took months for silver to find the bottom. What's to say we don't get into the $20s in June or July? Remember, there was all the talk of "continued physical demand" in 2008, as we couldn't get our hands on any at $9. But it didn't stop the spot price from getting there. Why can't this happen again?

And for those who don't think the paper price matters: until we enter some new paradigm, the spot price determines the redemption price of your silver, either in FRNs or anything else. Whatever you could have bartered for your ounce of silver two weeks ago, you ain't getting the same deal today because of the paper spot price. Some day that may change, but it hasn't changed yet.

[PatColo]

Silver’s Correction – We’ve Been Here Before


By James Turk, Founder of GoldMoney.com
[...]

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/5/9_James_Turk_-_Silver_Will_Hit_New_Highs_in_a_Matter_of_Weeks.ht ml


good chart in there:

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/5/9_James_Turk_-_Silver_Will_Hit_New_Highs_in_a_Matter_of_Weeks_fi les/shapeimage_24.png


" When asked about silver specifically Turk stated, “At times like this it is important to stand back and take a look at the big picture. So the key point here Eric is to focus on the chart (above) which does a great job of illustrating this. If we put last week’s price drop into context and focus on all of the factors that have been driving silver higher for ten years, it’s logical to conclude that the big price jump in silver is still ahead of us. "


Even with the log scaling visually evening out percentage moves, that recent run was the biggest of the 4 major breakout/rallys shown on the chart- breaking out over $20 last Aug-'10 and running to nearly $50 eight months later.

[bellevuebully]

Even with the log scaling visually evening out percentage moves, that recent run was the biggest of the 4 major breakout

If you filter out the noise in 08 and retrend the action, it tames the wild appearance of froth.

[Sparky]

That's a good chart BV. If you add the third "end of consolidation" bar in August '08, it will show the three spike (tall bar)/consolidation (short bar) cycles. It would indicate that $50 is not around the corner; we have to go through another consolidation first.

[bellevuebully]

That's a good chart BV. If you add the third "end of consolidation" bar in August '08, it will show the three spike (tall bar)/consolidation (short bar) cycles. It would indicate that $50 is not around the corner; we have to go through another consolidation first.


Possibly. There is a variable though. Although I don't know what the mathematical implications would be, I could theorize on certain aspects.

If you notice the cycle period between the first and second and the second and third highs, you notice that they are approx. 2 years apart. The fourth high came only 3 years after the third, representing a 50% increase in period. I view this not to portend that the period until the next peak will be equal to the first two durations (2 years), or even to the third (3 years), but that it may actually be truncated to 1 year.

My reasoning for this is once you break the pattern as happened in '08, it was only an abberation in the technicals, not the fundementals. What this break may end up doing is adding volatility due to pent up demand. It may act as a coiled spring so-to-speak.

Picture a spring that is in an equadistance oscillation, compressing and expanding at the same period and amplitudinal gain. On the forth compression however, the forces of natural oscillation are overcome and the spring is forced into an unnaturally compressed state. Those forces are then released suddenly from an undetermined bottom, well below the trend that was set.

Picture the action of the spring upon release. The peak to peak and trough to trough periods would shorten due to the violent release of energy. Boing! The previous momentum of the market would determine how high those peaks might go, based on reasonable logrithmic gains.

Obviously this is all complete conjecture, but if it happens, I'm starting a newsletter. hahaha ;D

[Son-of-Liberty]

Kitco has no Silver available for delivery to Canada at this point, not even 1000oz bars. Although they still have product to sell to the US.

Last I talked to my local dealer it was a 4 month wait.

[Sparky]

That's a good chart BV. If you add the third "end of consolidation" bar in August '08 [correction: Aug '10], it will show the three spike (tall bar)/consolidation (short bar) cycles. It would indicate that $50 is not around the corner; we have to go through another consolidation first.


Correction: The third end of consolidation, of course, was August '10, not '08!

[bellevuebully]

Kitco has no Silver available for delivery to Canada at this point, not even 1000oz bars. Although they still have product to sell to the US.

Last I talked to my local dealer it was a 4 month wait.


Saw that this morning. First time I've seen it in 10 years. Probably indicates overbundance of supply, lol.