Silver New Record Near $42/oz - Speculative Sentiment Remains Tame and Allocations Miniscule Compared to Equity and Bond Markets

By @ibtimes on

Gold and silver rose to new record nominal highs (all time and 31-year respectively) in Asian trading overnight. Both have given up earlier gains with profit taking being cited. Cash silver surged nearly 3% in Asia to $41.9525 an ounce, a new 31 year high, before trading at $41.31 an ounce. 

Cross-Currency
Cross-Currency Rates at 1315 GMT

Silver's nearly 3% surge in trading in Asia may indicate that the long expected short squeeze may be underway. Bullion banks with very large concentrated short positions may be being forced to buy back their short positions - propelling silver higher.

This could shortly see silver surge over the record nominal high of $50.35/oz.

At the same time caution is merited as silver has risen nearly 10% in April so far and over 33% year to date. Speculators need to be very cautious as margin requirements may be increased again and profit taking could lead to sharp falls in price. Leveraged speculation is extremely high risk and should be avoided by investors and savers.

Those looking to buy bullion coins, bars and certificates need to focus on the long term and remember that they are buying financial insurance and not to make a profit or a return. Dollar, euro and pound cost averaging into silver is worth considering given silver's recent sharp rise in price.

While silver is overvalued in the short term, the concentrated short positions and the strong fundamentals could propel it much higher sooner than most expect.

Total
Total Silver ETF Holdings

Continuing talk of speculative fever or frenzy is hyperbole. Bullion dealers internationally are busy. However, it is important to note that buying has not increased massively and is around levels seen after the collapse of Bear Stearns and Lehman Brothers and at the higher of the first phase of the sovereign debt crisis. Some dealers have been talking up sales in an effort to raise profile.

Proof of the lack of animal spirits in the silver market is seen in the data which shows that speculative sentiment on the COMEX (as seen in the Commitment of Traders/ COT data - see chart below) is subdued. While the total silver ETF holdings increased to a record, they are not far above the levels seen in December 2010 (see chart above).

Importantly, even at $41.30/oz the dollar value of the total silver ETF holdings remains very small at just over $20.5 billion.

To put that number in perspective, today bankers put a prospective value of around $60 billion on Glencore, one of the world's largest commodity trading companies. BP has set up a fund worth $20 billion to cover legal claims from the oil spill disaster.

Apple (AAPL) has an enormous market capitalisation of $311.43 billion and Google $186 billion suggesting that the real frenzy and bubble may again be in the tech sector and on the Nasdaq.

The global forex market turnover averages some $3.9 trillion per day. The NYSE's turnover is $35 billion per day and the US Treasuries turnover is $400 billion per day

Allocations to silver are tiny and silver remains the preserve of a very small amount of investors internationally.

This is slowly changing but investment demand for silver is increasing from a near zero-base and is miniscule compared to allocations in equity, bond and derivative markets.

CFTC
CFTC CEI Silver Total Open Interest/Futures - 5-Year Daily

The macroeconomic and geopolitical fundamentals remain very bullish with many unresolved issues in the world - including in the Middle East and Africa, the Japanese natural and nuclear disasters and sovereign debt risk in the EU and the US.

While a US federal shutdown was averted, the problems experienced are an indication that the US is not immune to the sovereign debt problems being seen in the eurozone.

The economic aftershocks of the natural disaster and subsequent nuclear disaster continue to reverberate. A growing appreciation of the risks posed by 'black swans' is leading to financial insurance and safe haven demand for gold and silver.

Gold

Gold is trading at $1,467.57/oz, €1,017.31/oz and £897.32/oz.

Silver

Silver is trading at $41.13/oz, €28.51/oz and £25.15/oz.

Platinum Group Metals

Platinum is trading at $1,796.50/oz, palladium at $790/oz and rhodium at $2,350/oz.

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