Silver's “fractured market” with low investor demand

In the Lead: “Silver’s cloudy lining”

Monday’s near-$50 loss in gold elicited some modest physical buying in the Asian markets, but the evening hours were still showing plenty of nervousness in the market with occasional dips to levels as low as $1,665 per ounce. Attempts to patch some of the price damage with a corrective rebound were manifest in the early morning hours as well as at the opening of trading action in New York. The precious metals complex exhibited mixed prices however, as gold and platinum advanced, and as silver and palladium did not initially join the gainers’ club.

Spot bullion started the Tuesday session with a $12.50 rise to the $1,690 bid level as the US dollar fell about 0.23% on the trade-weighted index amid signs that the reaffirmation of the US’ ratings despite the crumbling of the debt “Super committee” was prompting some risk takers to do just that. In fact, the neutral Moody’s stance on the US debt rating also emboldened some players to bid the euro a tad higher albeit nothing substantive has yet come out of the European debt theater to really prompt such types of bets.

Silver fell seven pennies on the open this morning and started the session off at $31.57 per ounce. The white metal has seriously diverged from its yellow partner this year. While gold is still up by some 18% on the year, silver is higher by less than one percent and struggling to maintain even that metric. Making matters worse, at least one area of demand has hit a rough patch in the metal: China.

Bloomberg has reported that “China's trade data revealed that the country's silver imports slumped 26 percent in October from a year earlier. The inflow of silver powder, used in the photovoltaic industry, dropped 20 percent. ‘The (photovoltaic) sector had provided some support to silver prices, but in light of the concern about industrial demand, this is an element that has now softened, thus increasing the importance of investment demand to make up for the fundamental surplus,’ said Barclays in a research note.”

Barclays added that "However, investment demand in silver has also slowed recently, leaving prices more vulnerable to the downside." In fact, photovoltaic-oriented demand (solar panels) was the singular bright spot in the supply/demand picture for the white metal in several recent analyses (see CPM Group NY Silver Yearbook 2011) on its fundamentals. Silver has fallen to or below a long list of moving averages in the washout of 2011. To wit:

Elliott Wave analysts also point out that the miners (XAU) that are supposed to offer heaps of leverage to the price of the physical metals are actually showing a 16% loss year-to-date; something not only unthinkable to anyone who has ever listened to their favorite mining shares gurus at various investment conferences, but something that is indicative of what EW calls a ‘fractured market.’ As such, a fractured market is deemed to be an unhealthy market.

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