Silver tops $45.50, gold $1,500; correction imminent?

As regards silver, the analytical team at Standard Bank (SA) notes that the patterns of accumulation in the ETFs that deal with the white metal warrant some caution. The team notes that “there has been a significant slowing down in ETF buying, as during the second half of 2010; we calculate that 3,105 tonnes were added to holdings. This raises a caution that, despite strong rallies this year, investor interest in silver is no longer as supportive as it was in 2010.”

The SB team further observed that “this corroborates recent CFTC data which appears to indicate, through a dramatic increase in short silver positions over the past two weeks and last week’s fall in speculative longs, that there is a growing expectation amongst markets participants of a correction in silver prices. However, with reduced interest from ETFs, resistance to such a correction could be less than it was in 2010.” Also of note is the fact that – according to Abraham Bailin, ETF Analyst at Morningstar – “silver has only been this expensive relative to gold twice in the last 25 years. Both of those instances lasted for only a few weeks before the ratio normalized. You would have to venture back to the 1970s to find any length of time when silver remained more fashionable than it is today.”

In the background, crude oil nearly recaptured the $110 per barrel price tag and while some analysts attributed the spike to post-election violence in Nigeria, the bulk of the gains in black gold were largely a result of dollar weakness and the pre-opening rally in US stock index futures. Crude has been the subject of mammoth speculative activity ever since Col. Gaddafi first showed signs of not having both oars in the water in February. The conflict in Libya now appears to be dragging on beyond the expectations of the UN-sanctioned intervening forces.

Spot gold dealings opened with a gain of $8 per ounce and were quoted at the $1,502.70 per ounce mark in New York. The confluence of higher moving averages, higher daily closings, higher trading volumes and higher open interest levels all led to the momentum-based buying on display this morning. The achievement of the psychological threshold prompted Clive Lambert, the Director of Technical Analysis at FuturesTech to warn that "usually we get a bit of volatility on [gold] at a key psychological mark, so take care today. We might see a shakeout trade lower as people pile in at $1,500/oz and then get hosed." Once again, the metals-backed ETFs marched to a slightly different tune as they showed a drop of 0.07% in the GLD vehicle from Monday to Tuesday. The GLD has basically lost balances in five out of the past six months. Meanwhile, the 14-day Relative Strength Indicator in gold stood at 72.9 as of last night.

According to the Wall Street Journal, “traders also warned that clusters of options — which give a seller the right to buy or sell at a certain price — around $1,500 an ounce could keep a lid on prices if investors decide to take the opportunity to cash in on gold's rally. While put options — the right to sell — could be followed through, call options — the right to buy — could be sold in an attempt to avoid paying out for gold at such a high price.”

Meanwhile, scouts from CNBC were on the hunt for a gold bar – any gold bar – to borrow from any dealer willing to lend it to them to be put on display for this morning’s early show. The picture is complete. A simple line item from Barclays Capital explains the fever succinctly: “Commodity assets under management rose to a record $412 billion in March.” Not a bubble. Just an all-time record in another niche where the money has piled up sky-high.

Until tomorrow,

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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