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Catching a Falling Financial Knife

Silver Shortage Blamed on "Miner Hedging" as Price Rises with Gold, Global Inflation Data Eyed

Commodities / Gold and Silver 2011 Feb 14, 2011 - 08:53 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF gold and silver rose back to last week's highs early in London on Monday, hitting $1364 and $30 per ounce respectively even as the US Dollar rose to 1-month highs on the currency market.

European stock markets slipped but government bonds and commodity prices were little changed after China reported a further rise in its imports, led by a 5.7% rise in copper demand.


"Physical market is still absent," said one Hong Kong gold dealer in a note, citing a "lukewarm" premium and low trading volumes in Asia's bullion markets despite the return of Chinese traders after the Lunar New Year.

"There is plenty of data out this week," says Standard Bank today, "but of particular importance to precious metals will be the inflation numbers" due from China, the US and the UK.

"[China's recent] increase in interest rates is too little too late given the surge in inflation," reckons Peking finance professor and Sheyin Wanguo Securities chief strategist Michael Pettis.

"Real estate prices have been on an upward tear, while everything in China that might be considered collectible and capable of holding value – gold, jewelry, premium tea, premium liqueurs, stamps, calligraphy, art, antiques, jade, and so on – has surged in price, in almost every case to record highs."

Monday saw Japan's full-year 2010 economic data confirm its fall to third place – in Dollar terms – behind China and the US.

With Japanese society as a whole growing ever older, says a report from Goldman Sachs, the national savings rate could fall from 5% of income in 2009 to possibly negative levels as early as next year.

Copper, zinc and aluminum futures will start trading on the Singapore Exchange from Tuesday, under a deal with the London Metal Exchange.

World No.1 aluminum producer United Co. Rusal believes that a physically-backed exchange-traded trust for investors to track the metal's price will be launched within "weeks" according to its deputy CEO Oleg Mukhamedshin.

"Since the start of the year, [silver investment in US futures] has dropped...6% while the ETF position has dropped 3.9%," says the latest Metal Matters from bullion bank Scotia Mocatta, "[which] might just reflect some repositioning by investors as they adjust their portfolios."

Noting "strong buying" from coin investors and product-fabricators, however, Scotia attributes the current "backwardation" in silver prices – where future deliveries, unusually, are now cheaper than immediate supply – to "a combination of commercial bank borrowing and by [mining] producer-related forward hedging business."

Five un-named silver mining companies apparently sold forward a large chunk of their future production to "lock in" current prices, the Financial Times reported last week.

Needing to borrow physical silver bullion, these miners have helped create the recent supply shortages, suggests Scotia, in London – heart of the world's wholesale precious metals market.

Silver imports to China rose four-fold in 2010, according to official data. The recent Lunar New Years celebrations also saw heavy shipping of metal to the Far East, according to senior logistics executives in Europe.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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Catching a Falling Financial Knife