Which US presidential candidate does gold prefer?
Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
As I have mentioned in many of my previous weekly reports on precious metals, silver is relatively unknown by many investors because it is not given the same attention that gold is given. Gold is in its tenth year of gains against the US dollar and has appreciated during this period at an impressive average annual rate of 17.1%, making it one of this decade’s best performing asset classes.
But, what many investors don’t realize is that although silver has risen only seven of the past nine years, silver’s 17.6% average annual rate of appreciation during this period is actually higher than that achieved by gold. Yet, compared to gold, silver is still relatively cheap. And, it is far from its all time high that occurred in 1980 when the price of silver traded for more than $50 an ounce.
Like gold, silver is also a monetary metal, but it also has many industrial applications. Both these precious metals are tangible assets and do have counterparty risk. Simply put, the value of gold and silver does not depend upon anyone’s promise. They have an intrinsic value, and they can be bought and sold practically anywhere in the world for a price which is totally transparent and that is available practically 24/7.
The question that is frequently asked is if the fundamentals for silver look so good, how come the prices are so low? The answer to this lies in the trading of silver futures on Comex, a division of the New York Mercantile Exchange.
The futures market allows the producer of a commodity to hedge the production of that commodity at a certain price before actually making physical delivery. It also gives the buyer the ability to lock in a price months before taking delivery. However, there is no obligation to deliver or obligation to take delivery, and you can simply close the position by cash settlement. (You can either take a profit or loss instead of taking delivery or making delivery).
The problem with this is if you were allowed to hold too many of the contracts, long or short, you could use your monopolistic position to drive the price up or down. And, this is exactly what the bullion banks do despite a law that attempts to prevent the commodity’s price from being effected by the trading of futures contracts by making it illegal for anyone to hold too high a concentration of the contracts. However, this happens all the time in the silver market, by bullion banks that use phony exemptions that allow them to trade almost as many contracts as they like. The main culprits of this scam are JP Morgan and HSBC who sometimes hold as much as 90% of the net short positions of all the registered commercial trading houses.
The good news is that with the introduction of the new Financial Reform Bill, this activity will soon come to an end. In an interview with, Bart Chilton, one of the commissioners whose task it is to prevent this from happening, Chilton made it clear that exemptions that are not used for legitimate hedging will be disallowed. “But, folks that are just in this for the financial speculation, those exemptions should be disallowed,” He also mentioned that one of the problems with these exemptions are that no one knows who has these. “These exemptions are non public.” Chilton went on to say that it he is determined to “bring transparency to these markets, making them more efficient, effective, void of fraud, abuse and importantly manipulation.”
If the CFTC follow through on their promises, then I expect to see the current dislocation between price and fundamental supply and demand for silver adjust which means higher prices in the future. However, in the short-term I doubt if the likes of JP Morgan are going to pay much attention to the statement made by Chilton.
TECHNICAL ANALYSIS
The price of silver still remains stuck in a trading range between $17.50 and $18.50. However, I believe that it will challenge the key resistance of $18.50 shortly.
