Gold and silver rose marginally for a second day yesterday as bargain hunters and value buyers continued to accumulate.
The dollar was up marginally as was oil and stock markets eked out marginal gains.
News that international gold scrap supply (mostly consumers selling jewellery) has for the first time in 30 years surpassed international jewellery demand. Looked at singularly, this is ostensibly bearish. But it is bullish from a contrarian perspective as it shows that there is little or no gold mania. Speculative bubbles only develop when there is a mainstream perception that you must invest in a certain asset class as it is going to rise much higher. Clearly this is not the mainstream perception today, nor has it been in recent months, as the man and woman in the street are selling and not buying gold.
The public's selling is being confronted by very significant investment demand for gold from more astute players who continue to accumulate and indeed from central banks (such as the People's Bank of China) who are becoming net buyers. Some of the best minds in the investment world such as Richard Russell, Marc Faber and George Soros remain bullish on gold. They realise that nothing has fundamentally changed with regards to the global financial system and economy and they warn about systemic risk and the likelihood of sharp inflation in the coming years.
The physical gold and silver market remains tight and this tightness appears to be deepening, particularly in the silver market. The contango in silver has almost completely disappeared and backwardation looks likely in the coming weeks which shows how tight the physical marketplace is.
The COMEX Dealers Silver Inventory has fallen sharply in recent days - from over 70,000 ounces to less than 63 million in a few days or some 10% (the inventories were over 80,000 ounces in December). This is a very large drawdown in a matter of days and if it continues could be a prelude to silver resuming its bull market and approaching its recent nominal high of $20/oz in the coming months.
The very rapid increases in prices that were seen from August 2007 to March 2008 when silver rose from $11oz to over $20/oz could be seen again if investors internationally continue to enter the extremely small, in terms of value, silver market. As seen in the excellent chart above from Share Lynx and posted at Le Metropole Cafe (GATA's Bill Murphy), all the silver bullion on the COMEX is only worth some $1.4 billion. This $1.4 billion is a tiny, tiny fraction of the value of deposits, equities, bonds and derivatives internationally which are worth some $2000 trillion.
There are some 793 billionaires in the world today according to Forbes (down from 1,125 in 2008). The billionaire list's total worth stands at $2.4 trillion, down from $4.4 trillion in 2008. Many of these billionaires (not to mention sovereign wealth funds and other large value investors) could easily corner the silver market as the Hunt Brothers (one of only a few billionaires in the world in 1980) did in the late 1970s leading to silver's record price of $50/oz nearly 30 years ago.
This is sure to make those institutions with unprecedentedly large short positions in the silver market (currently being investigated by the Commodity Futures Trading Commission (CFTC)) very nervous and could lead to a massive short squeeze.
A huge amount of silver has been used up in industrial applications since 1980, meanwhile the population and wealth of the world has increased very significantly. Silver remains less than a quarter of the price that it was in 1980. Silver's fundamentals remain as sound as ever if not sounder, and prudent investors should have an allocation in silver.