Wednesday, October 27, 2010

EXPECTATION OF SPOT SILVER FOR THE YEAR A HEAD 2011

Summary:-

1) Silver prices are strong and having overcome the 2008 highs at $21.36/oz, the next upside target is likely to be $25/oz. This will represent something close to a 50% retracement of the fall to $3.53 from the high in January 1980 when, on the 18th of the month, Silver fixed at $49.45.
2)
Investment demand remains all important as it has in recent years been absorbing the supply surplus. There are some signs that investor demand is slowing.
3)
Even though the recovery after the 2008 recession has been much stronger and more robust than we thought it would be, we still feel there are downside risks.
4)
The debt legacy remains a “big unknown” and we feel it might have further negative consequences for the dollar that could lead to a dollar crisis.
5)
The economic and fiscal uncertainty suggests investors are likely to keep their interest in Silver for some time to come, but watch out in case that changes.



Introduction:-

The Silver market promises to be interesting over the next few years as there is likely to be a change-over in the primary driver of demand. In recent years investor buying has been the swing-factor that has driven prices higher, but demand for safe-havens is likely to wane in the years ahead. However, a few new applications for Silver have the potential to become swing factors. In the short term, the global economic situation remains uncertain and there may well be more turmoil in the financial markets before a more sustainable economic recovery gets going. In this case Silver prices have potential to rise further. The longer term outlook for Silver is also interesting with demand seeming likely to undergo a structural change as new technology (including Silver-zinc batteries) emerges, some of which could consume meaningful amounts of Silver. This new technology could substantially reduce Silver’s recent dependence on investor off-take to balance supply and demand. The prospects of this new technology are also likely to make investors even keener to own Silver, although at the moment it maybe too early for them to do so. The biggest risk to Silver’s bull market is if investors start to reduce their exposure to safe-haven investments. Silver has been in a supply surplus since 2003, so a lot of Silver has been bought by investors and now that prices are at levels not seen for 30 years there may be increased interest in taking profits if investors feel that economic growth will provide better investment opportunities elsewhere. The short-to-medium term outlook therefore is very much dependent on how long such investors feel the need to keep, or even increase, money invested in safe-havens. In turn, this will depend on how the global economy performs. New technology promises a new era for Silver, but between now and when this technology takes-off is likely to lead to some wild swings in Silver prices and hence produce numerous risks and trading opportunities.



INVESTMENT DEMAND;-
With Silver supply outpacing fabrication demand in recent years, investors’ off-take has been critical in driving the overall bull market and the emergence of Exchange Traded Funds (ETFs) have been central in facilitating this growth in investment demand. A slight concern is that although the combined holdings in the ETFs have continued to grow, the rate of increase has slowed in 2010. In 2008, holdings in the ETFs grew 39%, they climbed 49% in 2009, but on a pro-rata basis they are so far only showing growth of around 10% this year . The fact that redemptions up until now have been light is one thing, but new purchases have to be made if the supply surplus is going to be absorbed. If ETF buying does not pick-up soon we will start to get nervous, especially as Gold is setting fresh record highs.

More room for speculators:-
Although the level of buying by ETF investors has been slow, as discussed in the section above, funds have been active buyers. The net fund long Silver position dropped during the broad market correction in May and again in late July, but it has bounced back with vengeancein late August and throughout September. This run up in the net fund long position has happened while both longs and shorts have been adding to their exposure, which suggests increased volatility in the near term as one party is likely to have to throw the towel in. From the most recent dip in the net position, which was seen on 27th July, the longs have increased their exposure from 25,308 contracts to 66,066 contracts, a gain of 161%, while shorts have increased their exposure by 265%. However, compared to previous peaks in the net long position, the present position is still 30% below the 2005 peak. As such, there seems good potential for prices to rise if the
situation remains bullish

Supply from Scrap;-
Silver supply from scrap has been falling in recent years as the photo industry has used less Silver and therefore generated less scrap. However, scrap supply is expected to pick-up in 2010 as high prices both in dollar terms and in some key local currencies, such as the Indian rupee, have attracted more old scrap supply to the market. The dramatic rise in Gold jewellery recycling, which is a relatively new phenomenon in developed countries, is believed to have attracted a significant pick-up in old Silver jewellery and silverware recycling too.
With the prospect of higher Silver prices, we expect more scrap to come on to the market, especially from Asia, even though we suspect that there will be solid gains in developed markets too. In 2009, scrap supply fell 292 tonnes, but we believe it may climb 3% in 2010 and 4% in 2011, on the basis that higher prices will attract more old Silver from households. However, should prices start to spike higher, supply from old scrap, jewellery, silverware etc, could pick-up markedly as it did in 1980 when Silver spiked up towards $50/oz.



Government stocks continue to fall;-
In 2009, net government sales from stocks totalled 426 tonnes, which was down from 858 tonnes in 2008 and an average of 2,040 tonnes seen between 2001 and 2007. Sales were therefore 58% lower in 2009, than the recent average. An absence of government sales from China and India and lower sales from Russia accounted for the lower level of stock disposal. Given that India and Russia are buying Gold for their strategic reserves it seems they may be holding on to their Silver too. Likewise, although China might not be looking to diversify its reserves by buying Gold in the open market, it may well be accumulating bullion from domestic producers. Given the trends in official sales in Gold and Silver in 2010, we expect government sales from stocks to continue to decline in 2010 and 2011. It is now estimated that government stocks had fallen to 1,906 tonnes at the start of the year. Although accurate data on government holdings are hard to come by, if the figure now stands around 1,800 tonne level, then the large burden of 23,000 tonnes that was overhanging the market in 1997 has been severely depleted and is likely to limit sales going forward. For 2010 and 2011, we expect sales to drop around 200 tonnes.


Balance:-
The Silver market swung from a supply deficit to a surplus in 2003 and has remained in one since. What’s more, the surplus has been escalating, which makes it even more surprising that prices have performed the way they have. This has happened because strong investment demand has soaked up the surpluses. In recent years, the high level of ETF buying has managed to absorb the net of total supply less fabrication demand, even when fabrication demand has fallen. Another supply surplus will be seen in 2010, but that has not stopped prices rising further and with yet more ‘oversupply’ forecast for 2011, you have to wonder when investors will slow their buying, let alone start to liquidate what they already hold. Cumulatively, since 2003, the implied physical surplus is estimated at around 11,700 tonnes

Technical
After strong gains in 2009, Silver prices corrected in early 2010, but then ran higher again between February and May. Prices then consolidated in a symmetrical triangle until late-August when they broke higher. The count on the triangle was for a $2.70/oz move and a target of $21.50/oz which has now been reached. If you draw a line along the tops since February 2009, then that line is now around $24.80/oz, which has been hit, but prices have since pull back from that line, suggesting it is a valid resistance line. In the year ahead it would not besurprising to see prices extend into the $25-$27/oz range. This is approximately the area that corresponds to a 50% retracement of the fall back from the historic highs near $50/oz, in 1980. If prices were to continue to rise strongly, the 61.8% retracement level would be around the $32.25/oz level.

 


Conclusion and Forecast
The situation in Silver remains very interesting in that the market continues to be in a supply surplus but prices are rising strongly. On the surface, the rally in Silver looks quite vulnerable but the economic and fiscal outlooks suggest there is still room to remain bullish and there are also some exciting potential developments in industrial demand, namely solar cells and Silver-zinc batteries. The time-line of various events is therefore going to be all important. If sustainable economic growth is seen sooner rather than later, then there is likely to be significant investor long liquidation that is likely to lead to a tumble in prices. However, while concerns over economic recovery remain in place then the markets are likely to continue to be concerned about governments’ fiscal policies, their debt burden and methods they will use to try to correct the economic malaise. If the economic uncertainty drags on long enough for demand from new technology to become meaningful then Silver prices could stay up in a higher trading range.
Investors’ interest will remain critical. Demand from ETF investors has slowed so far in 2010 and that is a worry as continued high investor off-take is needed to absorb the supply surplus. Given the economic uncertainty, the potential for more quantitative easing and concerns over the dollar, we would not be surprised to see investor demand pick-up again and in that case we could see Silver’s rally continue. However, if investor interest remains subdued then it will likely make investors nervous and in turn that would increase the risk of a correction.In the near term, there is a risk of a deeper correction in equities and industrial metals as the rebounds in these seem to have run ahead of the economic fundamentals. A correction in equities and industrial commodities would likely cause a pull back in Silver prices too. However, we think the secondary reaction would see more safe-haven buying, especially if another period of economic weakness forced the US to take steps that further weakened the dollar.
Overall we think the longer term outlook for Silver has improved as new technology looks set to provide new areas of significant consumption, which in turn is likely to see Silver prices trade at a higher price. In the short-to-medium term we feel that the economic climate will keep safe-haven demand strong and that could see prices rally further - we would not be surprised to see $27/oz at some stage. However, Silver could experience some very volatile conditions before the new industrial applications become a reality, if investors feel confident enough to liquidate their safe-haven positions. In this case prices could drop sharply and a return to around the $17.00/oz level would not be surprising

 


 

WATCH OUT;- SILVER WILL BE OUTPERFORMER ON BOTH SIDES FOR THE YEAR 2011(IT WILL FALL DRASTICALLY AND RISE DRASTICALLY)WE MAY SEE DAILY MOVES OF 50-1$ MOVES BUT UNDER TONE LOOKS HIGHLY BULLISH FOR MCX TGTS OF 45000-50000 IF 28000 IS UNDISTURBED  MARKET EDITOR NITESH JAIN(9845353951) FROM TRADE COM   JOIN US TO ROCK EVERY DAY IN MCX AND COMEX
 

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