Poor Man's Gold Shows Poor Fundamentals

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"Silver is probably going to fall more than gold in percentage terms," said Wolfgang Wrzesniok-Rossbach, head of sales at German metals trading group Heraeus.

"From an industrial and jewellery point of view, there has clearly been a decline in demand. There has been a lot of additional material coming to the market in the form of scrap."

The surplus in the physical silver market is expected by some analysts to rise to around 2,500 tonnes from a surplus of around 900 tonnes in 2007. The physical gold market could see a surplus this year of 600 tonnes from 500 tonnes last year.

"Fundamentals come into play when prices are coming down," said John Reade, analyst at UBS. "Silver doesn't have gold's fundamentals."

Silver is often a byproduct of other metals such as lead, zinc and copper, where miners are trying to ramp up production with some success. That means more silver on the market and together with scrap recycling, supplies are set to jump this year, while overall demand, including that from ETFs is expected to fall.

"Silver is very dependent on one source of demand -- ETFs. You can't get excited about silver in the same way as gold. Silver doesn't really have the same cachet," Briggs said. "Demand from the photographic sector has been falling fast ... It's no longer an important source of demand."

As for gold, we noted last week that when the tally is in on the gold liquidations that really started in earnest around the 18th of this month from the ETF, the picture will be a bit disconcerting. Mineweb now has that tally, courtesy of Royal Bank of Canada Capital Markets. Here is the complete picture:

"In a regular weekly valuation tables report on precious metals & minerals, analysts at RBC Capital Markets have noted that the Streettracks Gold ETF (NYSE:GLD) recently experienced its largest ever three-day decline in its physical bullion holdings. The fund, an exchange traded fund (ETF) that offers investors a proxy investment indirectly into physical gold bullion, is the largest of its kind in the world. The Streettracks Gold ETF was launched late in 2004, and, since then, has maintained a totally dominant stature among gold ETFs listed and traded around the world.

For some time, RBC CM has monitored the aggregate gold ounces under management - the so-called OuM - at the five largest gold ETFs, with the latest finding pointing to a holding of 26.3m ounces of gold. Streettracks holds 19.0m ounces of this total. According to RBC CM analysts, its was between April 21 and 24 that around 1.63m ounces of gold was redeemed by the Streettracks Gold ETF, marking the largest ever three-day decline in the fund's gold holdings. The redemptions, note the analysts, represented 6% of the total gold held by the five major gold ETFs.