Commodity Trade Mantra

Silver will be the New Gold amid the New Financial Market Collapse

Silver will be the New Gold amid the New Financial Market Collapse

Silver will be the New Gold amid the New Financial Market Collapse

The much awaited US Non Farm payrolls (NFP) from the Bureau of Labor Statistics showed employers added fewer workers than anticipated in July and the U.S. jobless rate dropped to 7.4% from 7.5%, indicating an uneven progress in the labor market. After the U.S. data announcement, Comex Gold futures for December delivery rebounded to $1,315 an ounce (less than 0.3%), from earlier losses after dropping as much as 2.5% to $1,282.40, the lowest since July 18. At the same time, Silver futures for September delivery jumped 3% to $20.25 an ounce after dropping to $19.19 earlier. It’s too early to say, but it seems that Silver has started showing signs of a strong support towards the bottom of the July price range, but also seems to face stiff resistance around $20.35 for now. I am quite sure that silver prices will now show more strength on the upside rather than weakness as compared to gold prices, going forward.

Fewer people working a shorter week and for lower pay:

The jobless rate dropped because the civilian labor force declined from 155,835 by 37,000 to 155,798. It also clearly indicates that the U.S. yet remains highly vulnerable to a slower economic growth performance, giving the U.S. Federal Reserve an excuse to push back tapering of the quantitative easing. The number of long-term unemployed, while falling, remains historically high. The increase in July non farm payrolls was the smallest in four months at +162,000, missing market expectations of +185,000, while the June NFP number was revised lower to 188,000. The labor force participation in July once again dropped to 63.4% from 63.5%, while the employment-population ratio remained unchanged at 58.7. Workers spent fewer hours on the job and hourly earnings fell for the first time since October. The average work week for all workers fell to 34.4 hours from 34.5 hours while the average hourly earnings fell 0.1% to $23.98 in July from the prior month, and were up 1.9% over the past 12 months. The report also showed 5.7 percent of Americans who had jobs in June could not get enough hours to qualify as full-time workers. The US is slowly but surely being converted to a part-time worker society. The industry with the most job gains in July was also the second lowest paying one: retail, which saw an addition of 47,000 jobs, the most in eight months. Employment in education and health services showed the smallest gain in a year. The industry that posted a clear decline in workers was none other than Construction. The worst paying industry, the temp jobs, rose by 8,000 in July following a revised 16,000 increase in June. The number of discouraged workers, those not looking for a job because they don’t believe one is available, climbed to 988,000 in July from 852,000 a year ago. This report could probably make the U.S. Federal Reserve think again and a bit more cautious about the “Tapering” down of its huge monthly stimulus program. The question is whether the pace of job gains is enough for the Fed to feel the U.S. economy is ready to get by with less support. The U.S. central bank currently buys $85 billion a month in bonds to keep borrowing costs low. Other after effects of the NFP data today was, the yields on U.S. government debt fell, suggesting investors were less confident the Fed could soon begin easing its bond purchases. Traders of short-term U.S. interest-rate futures boosted bets that the Fed would wait until 2015 before raising short-term borrowing costs. The S&P 500 had posted Thursday its strongest day in three weeks to close above the 1,700 level for the first time.

Earnings fell while Consumer spending increased as inflation pushed higher in June:

While the unemployment rate has fallen by eight tenths of a point over the last year, the share of part-time workers who want more hours has barely dropped. Government salaries fell, reflecting furloughs at agencies as part of Washington’s belt-tightening. As mentioned above, the average hourly earnings fell 0.1% to $23.98 in July from the prior month, and were up 1.9% over the past 12 months. Data on Friday showed a slight gathering of inflationary pressures, with the 12-month reading of the Commerce Department’s gauge of core inflation rising to 1.2% in June from 1.1% a month earlier.  The Commerce Department said on Friday consumer spending (which accounts for more than two-thirds of U.S. economic activity) rose 0.5%, though spending has been held back by an increase in taxes at the start of the year. A price index for consumer spending rose 0.4%, the largest gain since February. It had edged up 0.1% in May. Over the past 12 months, inflation rose 1.3%, still below the Fed’s 2% target. The price index for consumer spending, excluding food and energy, rose 0.2% in June. It was the largest increase since January and followed a 0.1% gain in May. With spending outpacing income growth, the saving rate – the percentage of disposable income households are socking away – fell to 4.4% from 4.6%.

Be careful what you wish for – You may simply get it more than you want:

The ongoing rise in the Crude oil prices is expected to accelerate further, with inflation making its way into the system. In addition, rising oil prices have been cutting in to already lofty equity valuations, as fallout from the “Black Swan” in the Gulf of Mexico expands. There will be a large addition to inflation as collateral damage from currency depreciation wars will show its true impact soon. The pricing in of the Fed’s QE taper-talk has also triggered a yield spike in southern Europe that could deepen that region’s existing debt crisis. Furthermore, sharply rising interest rates have resulted as billions of investors exit perhaps the largest financial bubble ever seen.  The end of cheap real estate refinance has finally arrived as mortgage rates are now approaching five percent. The Fed chief may finally get what he wants – Inflation, but it may simply not stop there for more than a whisper. You cannot control inflation just like that at your whims and fancies. It will rise then move on to rise to and beyond frightening Hyperinflation levels, making their logic for wanting inflation questionable.

A new scandal is all that the markets needed at this point:

The Telegraph reported

US regulators have reportedly been handed evidence that traders at some of the world’s biggest banks manipulated a key rate for derivatives, pocketing millions at the expense of pension funds in the process. The Commodity Futures Trading Commission (CFTC) is probing 15 banks over allegations that they instructed brokers to carry out trades that would move ISDAfix, the leading benchmark rate for interest rate swaps. Pension funds and companies who invest in interest rate derivatives often deal with banks to insure against big movements in the ISDAfix rate or to speculate on changes to interest rate swaps. ISDAfix is published each morning after banks submit bids for swaps via Icap, the inter-dealer broker, in a number of currencies. The CFTC has been investigating suggestions that the banks deliberately moved the rate in order to profit on these deals. Given the hundreds of trillions of dollars worth of interest rate derivatives trades that occur annually, even the slightest manipulation can have a substantial effect. The CFTC, which started to investigate ISDAfix after last summer’s Libor scandal has now been handed emails and phone call recordings that show the rate was deliberately moved, according to Bloomberg.

So far, banks have been fined more than £1.5bn between them over Libor fixing.

Gold and Silver Market Remains Confused and thus Range Bound:

Gold and Silver traders with either – long and short positions alike were kicked out of the market when stop-loss orders were triggered both ways on a volatile high-volume Friday. The jobs data may just about delay when the Fed will taper, but that doesn’t mean tapering is completely off the table. The market place is currently confused on the Fed’s QE tapering in September due to fluctuating economic data and also the lack of a stronger upside momentum leaves gold and silver vulnerable to half hearted selling or buying. The Fed’s tapering decision does not rest on a single print, especially of high frequency and noisy data, but on the margins, between the FOMC statement that gave no hint of a move in September, a manufacturing PMI that showed prices falling and now a soft employment report. Ultimately it’s still a negative for gold as tapering raises “the opportunity cost of holding gold in the future through higher rates. Generally speaking, a move towards a higher U.S. dollar and yields is a toxic environment for holding gold and therefore markets lean toward selling rallies as opposed to buying on dips.

The gold and silver market sentiment as of now seems at the worst possible levels despite an unprecedented and record breaking surge in physical demand for silver, from silver coins to international demand. The gold and silver futures market seems to be caught in a tight range by living on a day to day or more of a data to data basis. A positive economic data coming out of the U.S. sets up the market sentiment for the Fed announcing tapering in September. But weaker data (as seen Friday) starts gold and silver trending higher again as the likelihood of the Fed tapering early gets diminished. A concrete longer term view formation in such circumstances seems impossible to develop. Long term investors are shying away from the futures market while quietly accumulating the physical silver (more that gold as data suggests), leaving the futures market range-bound and lackluster. Traders seem to now prefer trading high volumes for shorter targets rather than holding for longer or larger targets due to global uncertainty, which seems to be at unusually high levels. There are again the market manipulators to deal with. Bullion banks are currently long buyers by every indication, and yet maintain a negative view on the gold and silver futures market. This could be an intentional effort to suppress physical precious metal prices by selling paper so that they can accumulate the real precious metals more cheaply. All said and done, neither the Bulls nor the Bears have a case on hand in the gold and silver futures markets as of now.

The Silver Market has now got all the ammunition it needed:

Holdings in global exchange-traded products for gold and palladium fell in July but they rose for silver and platinum. SLV, Silver ETP holdings are estimated to have risen by a sizeable 536 tons in July, while the GLD, Gold ETP redemptions (Outflows) in July are estimated to have been 52 metric tons. Platinum ETPs have continued to scale record highs and are up 58koz in July, while palladium ETPs are down 44koz. Physical Silver demand has seen an unprecedented and record breaking surge, ranging from silver coins to international bullion demand. On the other hand, Gold seriously needs physical demand to pick up again after the short lived global buying frenzy in April when Gold prices collapsed by over $200 in 2 days. But overall physical Gold demand has not helped offset large sized disinvestment such as outflows from exchange-traded products. The key question here is whether the Gold buyers across Asia and retail interest can continue to absorb disinvestment. I think this seems unlikely, given ETP holdings remain fragile and demand from India is unsurprisingly lackluster, given the massive retail and Gold import curbs imposed in the country. A short-covering rally may not be sufficient to plug the huge gap. The U.S. Mint sales of American Eagle gold coins fell in July and at 50,500 ounces, were the lowest of any month so far this year and down from 57,000 in June, though were still well above last year’s 30,500 July level. Meanwhile, sales  of American Eagle silver coins rose in July to 4,406,500 ounces. This was up from 3,275,000 in June and also up from 2,278,000 in July 2012.

Month

Gold Ounces

Silver Ounces

Ratio of Silver Oz bought per Gold Oz

JAN

150,000

7,498,000

49.98:1

FEB

80,500

3,368,500

41.84:1

MAR

62,000

3,356,500

54.13:1

APR

209,500

4,087,000

19.50:1

MAY

70,000

3,458,500

49.40:1

JUN

57,000

3,275,000

57.45:1

JUL

50,500

4,406,500

87.25:1

TOTAL

680,000

29,450,000

51.36

Data source: U.S. Mint

The average Gold price for the month of July has been $1280. Thus investors have bought $64.64 million worth of American Eagle Gold ounces. On the other hand, the average Silver price for the month of July has been $19.65 and so investors have pumped in a massive $86.59 million into Silver bullion. These figures are based only on the July sales for gold and silver bullion from the U.S. Mint alone.

If you notice in the table above, investors have consistently increased silver purchases, especially after the April price takedown. Also notice the ratio of Silver ounces bought per Gold ounce. This ratio has been rising from 49.40 ounces to 1 ounce of Gold in May 2013 and is now sharply up to a staggering 87.25 ounces of silver to 1 ounce of Gold in as on end of July 2013. I had mentioned in one of my articles earlier (Consistent Silver Demand Clears All Doubts On The Future Price Winner) that, Gold has slumped by around 39% to $1180 from its lifetime peak of $1921 in Sep 2011, while Silver prices have crashed by over 64% to $18 from around $50 in April 2011. Just imagine this : Supposing that these metals rise back just to their lifetime peaks – Gold would return close to 63% on investment while Silver would deliver a mind boggling 180%.

Moreover there are many other factors which clearly show case for a staggering rise in Silver demand in the near future. China raised its target for solar generating capacity to more than 35 gigawatts (GW) by 2015, a stunning increase of 67% above the previous target. The backbone of the solar industry is photovoltaic (PV) technology, which is used to generate electrical power by converting solar radiation into direct-current electricity through the use of semiconductors. As you probably know, a typical photovoltaic solar panel uses a fair amount of silver—roughly two-thirds of an ounce (20 grams), or about the same amount as 80 cellphones or 20 laptops. So a substantial amount of metal goes toward producing these technological wonders. In 2008 the solar industry consumed nearly 19 million ounces of silver. Since 2000, the amount of silver used by solar-panel makers has risen by an average of nearly 50% per year, with demand exceeding 47 million ounces in 2012. PV consumption now represents 5.6% of all industrial use of silver. It’s estimated that over 50 million ounces of silver will be devoted to just the solar industry this year.  All this extra capacity could have a significant impact on the silver market. According to the Silver Institute, approximately 80 tonnes of silver are required to generate one GW of electricity. For more on the same, read : A Photovoltaic Silver Bull in China and What It Means for Investors

With huge curbs and government restrictions on gold imports and buying in India, wealthy Indians may have moved their gold buying offshore to places in the Middle East like Dubai. But for average Indian citizens being shut out of the gold market by the government, they have quickly turned their attention to the silver market. In 2012, India imported about 1,900 tons of silver. But through May of this year, imports have already surpassed last year’s total at 2,400 tons. In 2012, there were 24,478 tons of silver mined globally. That means India so far this year imported roughly 10% of world production. If the country continues on its current pace of silver imports, over the next 12 months, it will import nearly 50% of global silver production. That would be a titanic change in the supply/demand equation for silver. For more on the same, read : Investing in Silver a Winning Move as India’s ‘War’ on Gold Continues

Watchout! – Silver will surely be the New Gold or the wealth preserver amid the New Financial Market Collapse, triggered by a plethora of reasons discussed and written about several times earlier. The rising global Debt situation and expected Inflation retain top slots on this list followed by several others like, rising interest rates, bond market yields, stock market fallout, currency debasement, manipulation and corruption, etc. I am now all the more sure that the future moves in Silver will dwarf all movements in Gold, even if Gold sees a large upside going forward. Get ready for the all new changes soon to occur, and well! Keep that silver well stacked and safe.

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