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Silver Market

What Should Silver and Gold Investors do?

Today there was an article on CNBC telling us that the Bull market in silver is finished. Last week we heard that the Bull market was finished in Gold. What is an investor to do with all the noise around us? When silver was approaching $50 in June 2011 the media was happy to tell its viewers and readers to buy. It is very difficult to focus on the end game when the media continues to get it wrong.

The public keeps falling for the same trick year after year. Peter Schiff, Congressman Ron Paul and Marc Faber all said that the real estate bubble would burst while the media laughed at them. Today we have the media telling us that it is ok to bring our hard earned currency back into the stock market. Does all seem well to you? My gut feeling is telling me that something is terribly wrong with the system and that the risk of a serious crisis is still a possibility.

I would like to share with you my approach to precious metals investing. My approach may seem ultra conservative, but it has worked for almost a decade. Physical metal in my possession or 100% allocated in my name in a private vault is the only way to go for my family. I do not worry about the ups and downs of the silver and gold market. When it is time for a purchase, I do not try to time the market. When the cash is available I place an order. People ask me, ¨Randy why are you not worried about silver and gold crashing?¨ My reply is easy, do you really think that the governments around the world are going to show restraint when it comes to devaluing their currencies?

Here are a few reasons to not trust currencies.

  1. China has signed 16 currency trade agreements bypassing the US Dollar.
  2. Ben Bernanke and the Fed have announced that they want to continue to devalue the US Dollar.
  3. Trade wars, nations trying to keep their products cheap by devaluing their currencies, recently Brazil said the government will use this tactic.
  4. Governments around the world are devaluing currencies to pay off national debt, instead of raising taxes. Raising taxes is political suicide.

The other question people ask is, “when will you sell?¨. The answer to this question is a very personal one, but my approach is pretty simple. I have a set goal for the value of my metals. When the price reaches that value, I will then sell my silver and gold and buy real estate or possibly equities. For me the precious metals are a tool to build wealth. When I sell, I am just moving to a different asset class. When I can buy a $100k house for 600 ounces of silver it will be time for me to sell. Similar to everyday life, if we don´t focus on set goals, we will accomplish very little. Even if it takes another five years for silver and gold to reach my price goals I am okay with it.

Will there be times in the climb forward, when silver and gold take large price drops? Of course there will be, but these are the times when the market just gave you the opportunity to buy more precious metals at a discount. I am just an average guy who wants to be able to sleep good at night. I don´t want to be worrying whether or not my call or put options are in the money. So if you want peace of mind, please do not listen to the media, focus on your goals and you will be ok.

 By: Randy Hilarski - The Rare Metals Guy

Buy Silver…Now!

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Precious Metal - Silver

Silver is an amazing metal…which is why it’s likely to soar over the coming years…

You see, silver has more than 10,000 uses. It’s one of the world’s best conductors of heat and electricity. Inventors filed more patents on silver uses than any other precious metal in the world. And when silver is used for most industrial and technological purposes, it is used up forever… It simply costs too much to try to recycle the tiny bit of silver from every cell phone or casino chip.

I’m not saying industry is going to use up all the world’s silver. That simply can’t happen. But scarcity is a real issue.

Our rapid consumption of silver leaves very little to meet any uptick in demand from investors. A spike in interest will send prices spiraling higher…

Here’s a breakdown of the silver market. The table below shows the percentage of the total amount of silver consumed by each category over the past four years…

As you can see from the table above, only 12% of the silver supplied to the market made it to bullion in 2010. That means only a little more than 100 million ounces of silver became bullion for the entire investing world.

That’s a tiny fraction to sop up all the investment interest in the world.

Of that silver, about 43 million ounces went to exchange-traded funds like the iShares Silver Trust (SLV) and the Sprott Physical Silver Trust (PSLV).

That means you could buy all the extra silver bullion for about $2 billion. We could buy all the surplus silver bullion from the last four years for about $10 billion.

That’s the same as the market value of the iShares Silver Trust today. If you wanted to build another silver fund, you couldn’t. There just isn’t enough silver bullion out there to fill the order.

Even trying to amass that much physical silver would send the silver price soaring. It’s a simple market fact… When there is more demand than supply, it drives the price up.

And the economic problems confronting Europe and the United States have increased interest in precious metals… Silver gained a colossal 174% from August 2010 to April 2011.

In May 2011, however, the price collapsed 31% in just four weeks. The bull market simply ran up too far, too fast… and the decline wiped out many highly leveraged silver traders.

The big money is tiptoeing back into silver.

Last month, commodity trading advisors, pool operators, and hedge funds — the “big money” — weren’t interested in silver AT ALL…

But as they move back into the market, silver prices could soar. Let me show you what I’m talking about…

Jason Goepfert created SentimenTrader, a service that tracks investor sentiment toward various asset classes. According to Jason, silver just bounced off its most pessimistic reading in four years.

The so-called “commitment of non-commercial traders” hit 10,352. That’s incredibly low. The last time sentiment numbers were that low was in August 2007. Six months later, the price of silver was 59% higher. It rose from $12 per ounce to $19 per ounce.

I went all the way back to 2002 and found that silver sentiment bottomed near 10,000 six times… On average, the price of silver rose 33% in the next six months and 54% over the next year. This chart shows the last four times it bottomed…

Here’s how the silver price performed after each of the last four times silver sentiment bottomed out…

The best return came after Bottom No. 2, which coincided with the US banking/credit crisis. Silver soared an eye-popping 405%, including its parabolic rise in 2010.

As those numbers indicate, silver is one of the most volatile assets in the world. Over the last year, silver has seen massive price swings, including an 81% rally and two 30% drops. That forced many traders to liquidate their silver holdings in order to meet emergency short-term requirements. (Plus, the debacle at commodity broker MF Global has scared many folks out of the market.)

But the long-term drivers of gold and silver’s uptrends are still in place. Enormous and growing Asian economies like China and India are getting richer…and they have deep cultural affinities for precious metals. Plus, the Western world has lived way beyond its means for a long time…the debts and liabilities it has taken on can only be paid back with devalued, debased money. This is bullish for “real money” assets like gold and silver.

With sentiment so negative toward silver (and just beginning to turn back up), it’s a great time to take a position in this long-term bull market.

If gold and silver prices are nearly certain to rise over the next few years (and probably rise dramatically), the simplest way to play that trend is to buy bullion…real, hold-in-your-hand silver coins.

And I recommend everyone do just that… Buy some silver and store it away.

Regards,

Matt Badiali ,
for The Daily Reckoning

Buy Silver…Now! originally appeared in the Daily Reckoning. The Daily Reckoning provides over 400,000 readers economic news, market analysis, and contrarian investment ideas.

 

Silver Set To Reach New Highs

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Silver Bullion

So what is the story with silver – did the bubble burst? Is it headed for $50 an ounce or more? What about the gold/silver ratio: Is it headed towards new lows or new highs and what does it really mean? What is the real supply and demand picture for silver?

Silver remains a precious metal despite years of being the “bastard stepchild” to gold. An attempt to corner the silver market drove prices to historical highs in 1980 and more recently towards $50 an ounce based on several proven and unproven factors including short covering of a reportable massive JP Morgan (JPM) short position inherited from the takeover of Bear Stearns, global economic concerns resulting from sovereign debt defaults to currency devaluations to political unrest.

Technically, I have a strong case that silver has been tracing a corrective pattern off of the 2011 highs which may be complete with the larger bull market advance in full force again. Fundamentally, the same story presents itself over and over again – silver is set to advance reaching new highs that will surprise and astound many.

HISTORY

Historically, silver has been an indispensable metal for over 5000 years. Evidence can be found in Anatolia (modern day Turkey) of the first major source of mined silver dates which back to 4000 BC and served craftsman throughout Asia Minor, the Near East, Crete and Greece. More sophisticated processing of silver was developed in about 2500 BC in what is now Armenia.

Fast forward eighteen hundred years to the Greek civilization where historical writings and physical evidence suggest the Laurium mines near Athens were producing about 1 million troy ounces a year. In fact, through the 1st century AD, the Laurium mines were the largest individual source of world silver production.

After the Greek domination in mining silver spread to Spain, the Punic Wars brought in Roman rule and the expansion of exploiting Spanish silver extended to other areas of Europe. Spanish mines provided for the domestic silver needs of the Roman Empire. Historical records though, suggest the actual production levels did not rise significantly even though mine production in Spain dominated the first 1000 years AD. Expansion in production took place in the 500 year period from 1000 – 1500 AD as mining locations increased and mining technology began to improve.

During the next 375 years silver mining and production was dominated by the Spanish as colonies were established in South America (Bolivia and Peru) and in Mexico. Eighty five percent of world production was attributable to Bolivia, Peru and Mexico. After 1850 production increased substantially as the United States and several other countries began mining and world production jumped from around 40 to 80 million troy ounces a year by the 1870’s.

The 20th Century ushered in an explosion of technologies that enabled world production to jump again to about 190 million troy ounces a year. Major mines were established in the United States, Canada, Australia, Central America and Europe. Technology introduced steam-assisted drilling, mining, mine dewatering, and improved haulage enhancing the ability to handle ore and increasing the exploitation of ores that contained silver.

As the 20th century progressed improvements in electrorefining techniques ushered in easier separation of silver from other base metals which increased the sources of silver. Ultimately the increase in output of silver-bearing residue led to refined silver production.

HOW SILVER IS USED TODAY

The demand for silver can be broken down into three main areas: Traditional, Industrial, and New Technologies.

  • Traditional
  • Coinage
  • Photography
  • Silver Jewelry
  • Silverware
  • Industrial
  • Batteries
  • Bearings
  • Soldering
  • Catalysts
  • Electronics
  • New Technologies
  • Medical Applications
  • Solar Energy
  • Water Purification

The latest annual figures reveal that in 2010 over 487 million ounces of silver were used for industrial applications, 167 million ounces were used by the jewelry market, over 50 million ounces producing silverware and over 10 million ounces in minting coins and producing medals.

Industry continues to rely on silver’s unique properties such as its strength, malleability and ductility. As well as its electrical and thermal conductivity, its high reflectance of light and the ability to handle extreme temperature ranges.

GOLD/SILVER RATIO

Under the direction and guidance of Alexander Hamilton as Secretary of the Treasury the U.S. Government set the first formal gold/silver ratio under the “American Act for Establishing a Mint” in 1792 at 15 ounces of silver for every one ounce of gold or 15:1 The act was put in place to facilitate at what ratio they would coin gold and silver. Based on the relative value that was present in Europe the gold/silver ratio was used to reflect the commercial value of each metal. While this may have been the case in Europe it did not extend further east where in India, parts of Africa and East Asia the gold/silver ratios were reported as low as 1:1.

Beginning in the 19th century gold increased in popularity in Europe and the U.S. as a more stable monetary asset. By the end of the 19th century the demonetization of silver was well underway and picked up speed in the 20th century as most countries discontinued their silver from currency circulation and began dumping their silver stockpiles driving the monetary demand even further into the abyss.

The early 20th century saw the gold/silver ratio drop to 100 ounces of silver to one ounce of gold. It should be noted that at that time the mine production of silver was not 100 times that of gold nor was the abundance of silver money 100 times that of gold. The prejudice of governments and mints during this time predicated or perhaps manipulated the gold/silver ratio from 15:1 to 35:1 and as high as 100:1 as government dumping of silver took place. Records indicate that between 1965 and 2000 government(s) sold 3 billion ounces of silver versus 150 million ounces of gold. Currently, it is reported that governments hold only 60 million ounces of silver versus 1 billion ounces of gold. It would appear that silver is now more rare than gold.

Gold Silver Ration as of October 2011

Source: thechartstore.com

Today, the gold/silver ratio is still used by many to determine which metal is undervalued or overvalued, which in essence doesn’t make sense since the gold standard as a monetary system was abandoned and replaced by fiat currency systems around the globe. There are additional ratios between the precious metals such as:

Approximately nine times as much silver as gold is pulled from the earth each year. The majority of this silver is used by industry.

According to the United States Geological Service (USGS) the general belief amongst mining companies is that there is only about six times as much silver in the ground that is mineable, although there are published reports claiming there is 15 or 20 times more silver in the earth, (this ratio is the natural occurrence ratio and not the reserve base ratio.)

  • Over the past 10 years, approximately 40 times more silver was NOT earmarked for coins and bullion and this is what the price ratio of gold to silver tends to reflect.
  • 9:1 is the silver to gold annual mine production ratio
  • 6:1 is the USGS estimated gold to silver in the ground ratio
  • 1:1 is the year to date investment dollar demand ratio
  • 1:3 (more silver than gold) is the physical ratio of gold and silver coins/bullion

THE MID & LONG TERM PICTURE FOR SILVER

Supply and Demand

Undoubtedly supply and demand for any product will ultimately rule its price. That said the demand side for silver over the past year or so propelled prices to astounding levels. Investor interest and fabrication demand spurred by the industrial segment recovery easily offset the increase in supply.

Total silver supply rose by 15% in 2010 primarily on the return of producer hedging (61 million ounces), government sales (net sales increased with Russia being a major seller) and recycling where the decline in photographic scrap was balanced by a strong rise in industrial, silverware, and jewelry recycling. Mine production saw a very modest expansion of 2.5%.

Demand for silver was robust in 2010 as well. Industrial demand rebounded 21% and was the largest contributor to the 13% increase (879 million ounces) in fabrication (see inset for detail), which includes jewelry and coinage. Together the net increases in demand offset the continued losses in photography and silverware.

Net investment jumped by 47% to an all-time high of 178 million ounces (most of which took place within the last four months of 2010.) ETFs and physical bars ruled last year with the Comex seeing less of a commanding role via silver futures.

Pent up demand remains in the market as investors seek out “safe havens” when quantitative easing in the United States remains in the near term picture and European sovereign debt problems remain unresolved. The economic outlook thus far continues to support silver’s safe haven status as monetary policies are unlikely to be significantly tightened anytime soon and the sovereign debt crisis grows.

Silver’s Fabrication Uses

Industry: Silver is the best electrical and thermal conductor of all metals and so is used in many electrical applications. The most significant uses of silver in electronics are in the preparation of thick-film pastes, in multi layer ceramic capacitors, membrane switches, and silvered film in electrically heated auto windshields. Silver is used in the fabrication of photo voltaic cells, coating material for compact discs and DVDs, mirrors, and batteries. Jewelry and Silverware: Silver possesses working qualities similar to gold, enjoys greater reflectivity and can achieve the most brilliant polish of any metal. Photography: the age of digital photography has diminished silver’s usefulness within this sector. Radiography, graphic arts and consumer photography though continue to use film manufactured with a very high purity silver. Coins: Historically, silver was more widely used in coinage than gold, being in greater supply and of less value, thus being practical for everyday payments. During the latter 19th century silver was phased out in favor of gold. Investors though remain buyers of coin and bullion especially in the U.S., Australia, Canada, Mexico and Austria. Source: GFMS Ltd. World Silver Survey 2011

Silver (Physical)

After a stellar rally to nearly $50 ounce silver put in a needed correction. The correction itself consisted of two steep and at times precipitous declines separated by a three month upward biased sideways move. The correction did fit the profile and it appears that off of the 26.15 (September intraday low) silver has resumed the larger advance. However, without strong upward momentum it leaves open the possibility for an additional down leg taking place before prices head higher on a more sustained basis.

Technically, the long term charts continue to support and suggest additional downside remains in the picture for now. The stochastic oscillator is pointing lower and is currently in neutral territory. The MACD is beginning to register oversold and the MFI oscillator continues to show money is stronger on the buy side rather than sell side.

Silver Spot Price

The chart below (courtesy of thechartstore.com) reveals silver’s upside potential when prices have been adjusted for inflation (PPI) and suggests silver will reach $100+ levels over the longer term.

Silver Prices

iShares Silver Trust (SLV)

In contrast the weekly chart for SLV reveals a more convincing picture that the larger advance may indeed be back in force. The stochastic and RSI oscillators support the advance continuing over the midterm with MFI oscillator being the caveat; pointing lower indicating money is exiting rather than moving into SLV.

iShares Silver Trust

Silver Mining Companies

Some have argued that silver mining companies have lost their appeal (luster) and a check on the table below does show some dismal year-to-date returns. However, when compared to the outstanding and incredible returns on a two and three year basis the picture becomes much clearer. As in the physical metal itself, silver mining companies have been in the process of tracing out corrective patterns. The longer term supply and demand picture continues to support higher prices for mining companies as well. The companies included in the table below are focused (earn 50% or more of revenue) in silver mining and exploration with a market cap of $1 billion or more.

Coeur d’Alene Mines Corporation (CDE)

Coeur d’Alene Mines Corporation is the largest U.S.-based primary silver producer and a growing gold producer. The Company has three new, large precious metals mines that continue generating significantly higher production, sales and cash flow. In 2011, Coeur will realize the first full year of production and cash flow from all three of its new, 100%-owned mines:

  • San Bartolomé in Bolivia;
  • Palmarejo silver/gold mine in Mexico,
  • Kensington Gold Mine in Alaska.

In addition, the Company is expecting new production from its long-time flagship Rochester mine in Nevada. The Company also owns non-operating interest a low-cost mine in Australia, and conducts ongoing exploration activities near its operations in Argentina, Mexico and Alaska.

Coeur d’Alene Mines Corporation

Pan American Silver Corp (PAAS)

Pan American Silver Corp. was founded in 1994 with the mission to be the world’s largest low-cost primary silver mining company. Achieving this by constantly increasing its low-cost silver production and silver reserves. Pan American owns and operates seven silver mines in Mexico, Peru, Argentina and Bolivia. In 2010, Pan American produced a record 24.3 million ounces of silver. In 2011, the Company expects to produce 23 to 24 million ounces of silver and 76,000 to 78,000 ounces of gold. Pan American operates the La Preciosa silver project, located in Durango, Mexico. Pan American also owns the Navidad silver project, one of the largest undeveloped silver deposits in the world, located in Chubut, Argentina.

Pan American Silver Corp (PAAS)

Silver Wheaton Corp. (SLW)

Established in 2004, Silver Wheaton has quickly positioned itself as the largest silver streaming company in the world. Silver Wheaton has entered into a number of agreements where, in exchange for an upfront payment, it has the right to purchase, at a low fixed cost, all or a portion of the silver production from strategically selected high-quality mines. The company currently has silver streaming agreements covering 16 operating mines and three development stage projects around the world. Silver Wheaton’s portfolio includes silver streams on Goldcorp’s Peñasquito mine in Mexico and Barrick’s Pascua-Lama project straddling the border of Chile and Argentina. With low fixed cash costs and unhedged silver sales creates significant shareholder value by providing considerable leverage to increases in the silver price while reducing many of the risks faced by traditional mining companies.

Silver Wheaton Corp. (SLW)

CONCLUSION

Silver may indeed still be in a correction with an additional down leg on its way, but the longer term picture continues to favor the trend remaining up. Due diligence remains important for each investor to perform in accessing whether silver is appropriate in diversifying portfolios. Should additional price weakness drop prices below $30 (basis silver futures or SLV) a long term buying opportunity would exist. Silver mining stocks are an additional way to add silver to one’s portfolio. Here again due diligence is recommended in choosing which company is appropriate.

Both gold and silver remain important investment choices in protecting against the ongoing global economic calamity. Long term planning and portfolio diversifying should include the addition of both.

Again, I am drawn to quote an old Mercedes advertisement where the announcer states

“Perception is not always reality.”

This quote continues to rule the day as speculators flood in and out of the markets taking their turns at controlling the price, albeit short term, since there is much more paper silver than physical metal to cover the commitments. The price of silver has dropped (within the context of a correction) as the fundamental picture favors higher prices. It can then be said that misconceptions weigh heavily as traders (speculators) move in and out of positions.

By: Michael Filighera
Source: http://seekingalpha.com/article/306118-silver-set-to-reach-new-highs

Silver Futures Near 31-Year Highs On Economic Recovery, Inflation Fears

NEW YORK (Dow Jones)-Silver futures neared 31-year highs Friday as investors flocked to the metal as both an inflation hedge and beneficiary of the global economic recovery.

Silver for February delivery rose 72.6 cents, or 2.3%, to settle at $32.298 a troy ounce on the Comex division of the New York Mercantile Exchange. It was the metal’s strongest close since March 7, 1980.

“It’s riding on the back of gold at the moment, which is being driven by inflation fears,” said Stephen Flood, director of Dublin-based bullion dealer GoldCore.

Silver, a precious metal akin to gold, is benefiting as a hedge against rising consumer and producer prices, with inflation gaining in Europe and China. While inflation in the U.S. remains tame, some believe the Federal Reserve won’t be able to control longer-term price pressures stemming from ultralow interest rates-which also boost the allure of non-interest bearing silver and gold-and Fed purchases of U.S. Treasurys to stimulate the economy.

At the same time, the economic growth that is sparking inflation fears is also prompting a resurgence in manufacturing and consumer purchases. That’s a further boon for prices of silver, which is more widely used in manufacturing than gold.

“It’s benefiting from optimism on the global economy,” said Ralph Preston, market analyst at Heritage West Financial.

Silver’s use in electronics, solar panels and medical applications is helping offset declining demand for use in photographic film as digital photography becomes ever more ubiquitous.

Silver, which has gained 5.4% this year and 20.5% since a two-month low hit Jan. 25, would probably be at record highs now but for that spike in 1980, when the Hunt brothers of Texas famously attempted to corner the silver market and pushed prices above $40 per troy ounce.

“It’s a much more orderly market” nowadays, Flood said.

But as silver’s allure as an inflation hedge and quasi-industrial metal rises, short-term investors have been piling in, prompting some concern that the metal may be due for a big price pullback.

 Recent buying in silver has been a “fund feeding frenzy,” including a “camp that refuses to see it for being a bubble in the making,” Jon Nadler, an analyst at Montreal bullion dealer Kitco Metals, said in a note.

Silver is a short-term investor darling because it is cheap compared with gold prices, and its market is much smaller and more volatile than gold’s, increasing both the risk and the chances for quick profits.

“It continues to be the favorite of speculators,” said Bill O’Neill, a principal with Logic Advisors.

Investor interest is also surging in silver-backed exchange-traded funds, which trade like stocks and back their shares with bullion bought on the market.

Holdings in the world’s largest such fund, iShares Silver Trust, rose 1.611 million ounces in the week to Feb. 17. Zurich Cantonal Bank’s silver ETF reported silver inflows of 296,000 ounces over the same period.

In addition to the outlook on the economic recovery and rising inflation, silver is gaining extra support as a cheaper so-called safe-haven investment than gold amid worries about unrest in the Middle East and sovereign debt problems in Europe.

On Friday, Portugal’s debt problems were of particular concern as the cost of insuring Portuguese debt rose amid renewed pressure from within the euro zone for the country to seek a bailout from the European Union and International Monetary Fund.

Amid the price gains, UBS upped its one-month silver forecast to $35 from $25.50. The bank also increased silver’s three-month price estimate to $33 from $27.

Gold and silver are also receiving a lot of attention from the physical market, particularly in Asia, where demand for metal bars, coins and jewelry is particularly high.

Some support may also be coming from silver miners boosting their hedging programs as they expand production and seek insurance against increasingly volatile prices.

-By Matt Whittaker, Dow Jones Newswires; 212-416-2139; [email protected]
-Francesca Freeman contributed to this article.

Piling Back Into Silver for the Long Haul

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Precious Metal - Silver

The silver market has been even more spectacular on the way down as it was on the way up. Since I claimed that silver was in a blowoff top on April 25, silver has lost 25% of its value. However, due to long-term fundamentals as well as shorter-term technical considerations, we believe it is time to begin scaling back into silver long positions.

Here is a link to a chart of silver with aggregate open interest on silver futures on bottom.

Note how open interest swells and peaks during silver rallies, and bottoms during the bottom of corrections. The reason for this is that the open interest on silver futures rises or falls with the amount of speculators in the market. For example, the recent sharp dropoff in open interest indicates that many long speculators were liquidating their positions, causing a sharp fall in the number of open contracts.

However, silver’€™s rally on Friday brought a renewed uptick in open interest, which we believe may mean a return of Managed Money to silver. As denoted by the white dotted line, the aggregate open interest in silver futures appears to be in a long-term uptrend, albeit with a bumpy ride along the way. We have been waiting for Managed Money to return to their previous high of net length, but the recent silver rally was fueled almost entirely by retail ETF and physical buyers. Managed Money’€™s prescience in staying away from the silver rally after September 2010 was uncanny, but we believe the long-term fundamentals of the silver market will eventually draw them back in.

Fundamentals

Ironically, while commodity markets sold off this week, bullish fundamentals for commodities actually strengthened. Jean-Claude Trichet’s dovish statements indicating that further rate increases were unlikely is further affirmation that developed economies have extremely limited ability to raise interest rates. The fact that even Trichet, the most hawkish developed economy central banker, is unwilling to raise rates more than nominally indicates the growth dilemma that the world’€™s major economies face: either maintain low interest rates, fuel speculative asset bubbles and fan inflation, or raise interest rates and risk renewed recession.

The US dollar’€™s recent weakness against the euro provided much of the last legs of the upward surge in commodities, but the unexpected US dollar rally on Thursday was too much for commodities to bear. The euro falling by 2% against the dollar unleashed the floodgates on selling by weak longs. However, going forward I firmly believe that both commodities as well as the dollar index will rally. While the dollar will continue to lose value against commodity and emerging currencies such as the Australian dollar, Canadian dollar, and Brazilian real, the dollar should do well against the euro, pound and yen due to the superior economic position of the US. In such a manner, the dollar as measured by the dollar index can rally along with strengthening commodity prices.

If further dollar index rallying causes more short-term pain for commodities, I would advocate being a heavy buyer of commodities, as fundamentals are only getting more bullish. As the market realizes that long-term fundamentals of commodities are unrelated to the dollar index, both can rally in tandem.

Trade Recommendation

We would recommend scaling into a long futures position in silver, as well as the sale of put options. However, due to the extreme volatility inherent in an ongoing correction, investors should not take out their full position at once, but instead be ready to buy more in case of further correction. We view $30/ounce as a hard floor on the price of silver, and the purchase of silver futures anywhere between 30-35 as an attractive long-term entry point.

As a trade, an investor could buy the July silver futures contract for 36.145 and sell the June 40 call for $1. The net effect of the trade would be an entry price on silver of $35.145. The $30 strike price puts should be sold on silver during corrections, going out as far as the December 2011 expiration. The purchase of bull call spreads can also be explored by traders who wish to gain greater upside leverage to silver prices.

We continue to favor investment in SLW as the premier silver equity. Due to the high implied volatility of SLW and recent massive underperformance of SLW compared with silver, we view the sale of put options against SLW as a highly attractive trade. The January 2012 $35 put options could be sold for $6.25, giving an investor the effective entry price of $28.75 for SLW stock. On a long-term basis, $28.75 is an excellent entry point for SLW stock, and the investor will profit handsomely if SLW is above $35 upon expiration.

May 11th, 2011
By Anathan Thangavel

Swiss Metal Assets appears on Deutsche Welle Television Show