Thursday, September 30, 2010

Second Highest Close for Silver Ever

Brief Notes 

We believe that today’s (Thursday’s) close for silver is the second highest nominal close at a quarter-end ever.  We note remarkably little in the way of quarter-end profit taking.  Silver closed in New York at $21.75 on the cash market, about even with Tuesday’s close and down a couple of dimes from Wednesday’s last print in the electronic session.  That is after silver tested as high as $22.10 in early Thursday trade.   Subscribers to Got Gold Report can look at the linked charts (near the bottom of the last full report) for more on the silver and gold price action.  

COMEX Gold Open Interest High 

The COMEX gold futures open interest is up to more than 619,000 contracts, which is high enough to be concerned over the very short term.  It’s the highest open interest we have ever noted and is likely an all time high.  When the gold open interest reaches new highs it is normally a sign that most all of the speculative firepower that could be expended in gold has already been fired.   The other side of that gold coin is that there is theoretically no upward limit to the amount of open interest or the number of traders – only practical limits.  

Nothing says that the open interest cannot go to 719,000 or 819,000 contracts and nothing says that the number of traders on both sides of the battlefield could not also increase by an equal percentage.  Practically, however, both the number of contracts and the number of combatants in the futures arena are not likely to grow all that fast.  

Gold Silver Ratio Falls Again 

Silver continues to outperform gold.  The gold/silver ratio edged into the high 50s as of Wednesday before edging back up to barely over 60 today.  As the ratio falls it reflects accelerating demand for silver relative to gold as the white metal plays a kind of long-term “catch up” with its yellow cousin.


Silver Catching On 

We believe that silver is on track to restoring its historic relationship to gold.  For many years we have experienced an artificially high gold/silver ratio, largely a result of the demonetization of silver metal by governments and their subsequent dishoarding of silver.  

One of the more important fundamental reasons for our optimism for the future of silver prices:  The main reason silver was artificially undervalued no longer exists.  Government dishoarding is over.  The general public is clueless as to how distorted the silver to gold relationship had been for at least two generations.  To most people a gold/silver ratio in the 50s or 60s seems “normal.”  Of course it is not normal.  We believe a GSR of 60 or 70 is as distorted and abnormal as the price of natural gas would be at 35:1 or 40:1 to oil.  

The general populace are equally ignorant of how little actual physical silver metal is potentially available for “investment” in the form of commercial sized bars.  The supply/demand balance for commercial sized bars is a very large factor in the price of silver.  Very, very few people have any notion of the amount of silver that is extant today, or that the world inventory of silver is likely less than half what it was in the 1980s.  

The collapse of silver in 1980, the illusion of silver oversupply (mainly in the 1990s), and consistently low prices for two decades created a strange world of apathy and disdain for silver that is only now beginning to give way to a new reality.  This is the age of the Internet and although most people have largely remained ignorant of the facts regarding silver, the new higher prices are like a klaxon sounding.  All over the world more and more people are investigating silver as a less expensive alternative to gold.  

Make no mistake about it; the perceived oversupply of silver that caused unreasonably high gold/silver ratios as high as 100:1 in the 1940s and again in the 1990s was an illusion, but the effects of it were real enough.  The effects were such that at least two and arguably three generations of humanity had their perception of the relationship of silver to gold altered.  The effect was to prejudice public sentiment toward silver and to poison the silver investment well. 

Simplistically speaking, that this apathy and disdain for silver happened to coincide with a period when governments were abandoning silver as a monetary basis is at best a fortunate coincidence for  governments of the period, and at worst was part of “the plan” – part of a grand conspiracy by the world’s central banks to clobber public faith in precious metals as money.  Whichever is the case, that is now over.  

Had the world’s political “leaders” and central banks not abused their ability to print unlimited currency following 1971 and the U.S. abandonment of the last vestiges of the modified gold standard, perhaps there would not be so much demand worldwide for gold and silver today.

Alas, the world’s political leaders and central bankers DID give in to temptation.  The only surprise is that it has taken this long for people to realize that fiat money is paper and ink while gold and silver are real money.  

Pendulums Swing Past the Middle 

We strongly suspect we are now on the path of a wonderful, historic and powerful change in public sentiment.  One where the ridiculously negative view of silver of the past morphs into an equally ridiculously positive view of the metal in the months and years ahead.  It is a change a few of us Vultures have been expecting and talking about since the late 1990s.  We are very glad to see it unfold more or less as we expected it might, but perhaps at a slower pace than we thought it would in the 1990s and the early part of the last decade.  

We want to be prepared and to be involved with silver as it returns to its monetary roots.  We want to be involved with silver as it becomes potentially over-popular again in the not-too-distant future.  It won’t happen overnight and it won’t happen in linear fashion, but the zenith of apathy toward silver is well behind us now.  

Like a pendulum which has reached the limits of its swing in one direction and gathers momentum on its return to the other side, we doubt that the GSR will stop at the midpoint (such as the 100-year average in the high-30s or low 40s).  As the populace rediscovers silver money and becomes passionate about it again, would it be all that surprising to see silver return to the same relationship it held to gold for hundreds of years before?  ( We would be surprised if the GSR doesn’t over correct before this precious metals event is done to perhaps as little as 15 or 20 to one.  At $1,300 gold that equates to $65 to $86 silver.)   

With this week’s thrust well above the 2008 former resistance we can now say that silver is in the process of defining the next resistance level – on its way, we think, to restoring its historic relationship to gold. 

We’ll see.  That is all for now, but there is more to come.   




The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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