Gold and Silver: Tenacious Commodities In The Face Of Change

The market has been ‘trading heavy’ for a while. With oil being the exception, the commodities complex is trading in a downward trending channel. The U.S. dollar has also strengthened on the Euro aftermath.

Nevertheless, several silver longs are still holding their positions since open interest has remained high, despite the move down from the 32 region. Open interest will usually fall on big declines like this, but many longs have hung on, and some believe the big shorts want to force a real washout before covering a large portion of their positions.

The Silver Market could still go down 25 or lower before all the bulls are gone. This would match 2008 when silver traded down from near the 20 level to bottom at 8.40.

Hedge funds are playing this move from the short side. As a group, they are net short silver contracts for the first time in seven years.

Regardless of the reality of a shaky financial system and little change in the fundamental picture for silver, the global economy remains largely stuck in a slow growth, non-inflationary mode. Silver tends to perform better in a decidedly inflationary environment.

Conflicting Reports on Silver:
The Silver Institute recently reported surging industrial demand that achieve a record high annual level of almost 500 million ounces in 2013. In addition, the organization said that sales of American Eagle Silver Bullion Coins in the first two months of 2013 were 43 percent higher than seen during the same period in 2012.

In its Precious Metals Definer report, the Standard Bank mentioned that it expected Silver Prices to struggle for the rest of 2013. This subdued forecast was largely due to a significant silver inventory build-up in China that could only be accounted to a substantial increase in domestic demand.

The Standard Bank also pointed out that China became a net importer of silver for the first time in 2010, after having traditionally exported the metal.

Gold and Silver: Tenacious Commodities in The Face of Change

The problem is that the prices of Gold and Silver are not going up or down that much. As a trading vehicle, precious metal prices seem relatively stable, and physical metals provide no significant return on investment.The physical metals remain locked in safes or hidden away in private stashes doing nothing, and refusing to multiply.

Yet what does change are the values of OTHER commodities: fiat currencies such as the U.S. Dollar and the Euro, as well as the level of desire among investors for unencumbered assets.

Fiat currencies also trade against each other in pairs, and their exchange rates reflect value relative only to one another. Since fiat currency purchases less food and fuel than it did a year ago, it remains a devaluing asset.

From MF Global to Cyprus, the Case Improves for Precious Metals:
As MF Global and GM bondholders might attest, expedience tends to win out over the rule of law, morals and common decency in a financial crisis, unless of course you are in the ‘club’.

What with the Cyprus debacle and capital controls appearing increasingly likely, decreased confidence in the financial system will probably follow. As time goes on, the un-mined supply of gold and silver dwindles continually, while the existing above ground supply is falling into ever stronger hands.

Furthermore, debt based fiat currency in circulation is increasing by billions per month (soon to be trillions) and this increasingly debased medium of exchange is not an unencumbered asset.

In this economic environment, smart people will be trading encumbered assets for unencumbered ones, especially a commonly accepted asset and hard currency such as Silver or Gold that is increasing in rarity on a daily basis. As soon as the price of Silver becomes irrelevant, that will the moment the real financial crisis hits.