Gold and silver on sale

This Week:

-Time for reflection

-Predictions for 2012?

-A fine time to be closed

-Gold and silver both on sale

-Silver in Backwardation

Happy New Year and welcome to 2012, the year when the world ends!  Or at least that’s what some would you have believe.  Actually we mention the Mayan calendar because one of this weeks articles makes some comments on it.  CHINA, 2012 AND VON MISES’ CRACK-UP BOOM.  As usual links and intros to the rest of this weeks articles are at the end of this article.

Time for reflection

We hope you took some time out with family and friends over the holidays and reflected on the important things in life.  We managed to get to the beach during the fine spells and even a spot of fishing.  Now that we’re back on deck we’ve also reflected on the performance of gold and silver in New Zealand dollars over the past year.  We also pondered a bit on what might be in store for 2012 prices.

Predictions for 2012?

Making predictions is a suckers game for sure in this strange world.

But a safe bet would be more volatility.  There’s just too many troubles on the horizon for it not too be.  Not long before Christmas we had the announcement that the Fed was basically bailing out the EU with dollar swaps.

Then just days prior to Christmas we had the next “saviour” announced – the ECB lending to big European banks at close to nothing who then buy the bonds of the failing nations that the ECB is forbidden from buying.  The banks pocket a handsome spread, the ECB effectively is buying the bonds as they allow the banks to hold them as collateral and then rinse and repeat.  So one way or another it’s likely we’ll see more funny money sloshing around from one market to the next searching but never finding a home.  Thus sending prices in various sectors up and down.

And let’s not forget about the USA’s amusingly titled “debt ceiling”.  This has had virtually no publicity but the debt ceiling has almost been breached again and so Obama will request another raising of the limit this month sometime to the tune of $1.2 trillion.  It will be interesting to see if it gains much publicity this time around or whether the troubles in Europe (conveniently/ coincidentally?) keep the magnifying glass off the US a while longer.

The precious metals bull market will remain intact while the likes of the issues mentioned above continue.

A fine time to be closed

The period from 24 December 2012 until Monday the 9th January was an interesting time to have most of our suppliers shut down, as gold and silver both weakened further from where they were in just the week prior to Christmas.  And so when the lows came in there weren’t too many buying options for those interested.  Since then they have bounced back up slightly but to our way of thinking the prices are looking very cheap for both at the moment.

Gold and silver both on sale

In fact, for the first time in quite a while we think gold and silver are both at good levels for buying right now.  For most of 2011 either one or the other was generally a better buy, but as we write gold is only just above it’s 200 day moving average at NZ$2052 and silver is still well below it’s 200 day moving average.  And as we contemplated in this weeks feature article which we mentioned already, could the lows be in already?

It’s also obvious that sentiment towards gold and silver is very low.  We’ve not seen either mentioned in the mainstream press lately – another indicator of it being a better time to buy.

Silver in Backwardation

Another reason why silver in particular looks ripe for the picking was an article we read over the break by Keith Weiner explaining how silver is in backwardation.

We’ve met Keith a couple of times at the Professor Fekete Gold Symposiums in Auckland and he is an expert on tracking what is known as the “basis” in the futures market.  Now we know this futures stuff can be tough to get your head around and we have been writing and rewriting trying to explain this in simple terms.

Then as luck would have it we just got an email from the MoneyMorning.com.au who had also picked up on this subject so we will instead “borrow” some of their explanation…

“The main sign [that the correction in silver is over] comes from the silver futures market.

It is now cheaper to buy a silver futures contract than real, physical silver. Silver rallied more than 60% the last time we saw this happen towards the end of 2010. As I write this, physical silver is US$28.98 / ounce. A silver futures contract is $28.93 / ounce.

This 5-cent difference may sound like small bickies but it is very important. Futures contracts are usually higher than the price of the commodity. Not so much as a price predictor but more to reflect the cost of storing the commodity and the opportunity cost of the capital.

When the futures price dips below the commodity price like this, even by just 0.2%, it is a clear signal to expect higher prices. The market calls this ‘backwardation’.

The silver market went into backwardation a few weeks ago on 28 December 2011. The next day, silver started a three-day bounce that increased the silver price by 12%. This included silver’s biggest one-day move in over three years – a 6.6% jump.

Backwardation tends to happen when there is a shortage of a commodity. The result is a much higher commodity price, which encourages people to sell. Backwardation was in play during the last silver rally that drove the price from $25 / ounce to its peak of $49.50 / ounce.

This is a very exciting development for silver investors. It’s also good to put the silver market in some historical context to see what the next few months could bring.

Like gold, silver tends to set its low point for the year in the first six weeks of the year.

In six of the last 10 years, the low price for the year was set by 8 February.

With a significant correction behind us, and backwardation now in play, it’s easy to imagine we may see the 2012 low point for the silver price very soon. That’s if we haven’t seen it already.”