Behind the silver boomlet - peering into depths
Neil Behrmann
London:- Silver is attracting the attention of investors and speculators who shifting funds from bonds and equities into cheap commodities.
Precious metals market participants, who were used to a trading band of $4.40 to $4.80 an ounce for many moons, were caught off balance when silver suddenly headed for current levels of $5.10. Traders said that there was talk of a "high net worth individual" taking a sizeable stake in the precious metal. Once the price was in an upward trend, managed futures managers and other speculators began buying. Trading volume was above average. Hecla and other silver shares jumped and silver helped boost gold.
Remember the Hunts and Buffett
The silver saga intrigues me, even though most metals analysts are wary of supply and demand fundamentals. Investors tend to look at silver from a different psychological stance. Despite a 15 per cent rally in the past four weeks, it is still only a fraction of its all time peak of $50 an ounce, last seen in 1980, bulls contend. Then Bunker and Herbert Hunt, the oil tycoons, were trying to corner the market. That squeeze failed dismally and silver headed south. Huge speculative stocks bought in the late seventies by the Hunt brothers and Middle Eastern speculators weighed on the market for more than two decades. In 1998 Warren Buffett was a big buyer and the price surged by around $3, rising above $7. Subsequently quotes sagged towards $4 again.
Zinc production collapse damages silver supplies
Frank Lucas who heads Loeb Aron, a boutique mining finance firm, said late last year, that silver's fundamentals were better than the majority of analysts believed. The precious metal would out gun gold and platinum, he predicted. Silver is a by-product of zinc and zinc prices and production have collapsed, leading to lower silver output. Frank suspects that the silver glut of recent years has shrunk considerably.
CPM Group's Jeffrey Christian, another silver bull when the price was languishing below $4.50, maintains that the market is strong because physical demand currently exceeds supply. The price has reached the upper limits that he forecast a few weeks ago. The amount of silver due for delivery on Comex in coming weeks exceeds exchange stocks. If buyers take delivery, the price could jump. Dealers also caution that speculators have purchased out of the money options and delta hedging could cause another price spurt. Jeffrey expects a pull back, prior to a rally, but believes that the metal will encounter heavy resistance at $5.50.
Kamal Naqvi, precious metals analyst of Macquarie Bank is a silver plated sceptic.
"Silver continues to struggle with its dual personality as a precious and industrial metal. Generally speaking, there appears to be good physical and speculative interest below $4.50. Holders have begun to stop selling from their inventories," he says.
"However, producers and hoarders increase sales at prices of $5 or more. Jewellery and silverware, outside India, remain dependent upon fashion trends and the economic outlook. Jewellery appears to be resilient but silverware is suffering. In India, there has been a modest recovery in demand but much depends on the rupee price of silver and agricultural incomes. Industrial demand - largely electronics - continues to be weak. Demand from photography has been affected structurally by the rapid emergence of digital photography. Silver could test $5.50 an ounce, but will probably slip back to the $4.5, to $5 trading band later in the year, he says.
Neil Behrmann is editor of www.marketpredict.net
August 3, 2003
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