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Will Strong Silver Push Up Gold
By Patrick A. Heller

Late last week, Chintan Parikh, a commodity analyst for CPM Group in New York, announced that he expects the price of silver to rise significantly in 2010.

The reason for his conclusion is that manufacturers who use silver in their products began rebuilding their inventories over the past few weeks. In the economic downturn of the last couple of years, fabricators have decreased their silver inventories to help with cash flow. The reductions were so severe that Parikh thinks it may take six months of aggressive purchasing to restore their silver inventories to normal levels.

Parikh notes that global industrial demand for silver is continuing to grow over time. He expects that demand from manufacturers will be inelastic, which means that they will be buyers of silver no matter how high the price rises.

I concur that fabrication demand for silver is highly inelastic. For most products, the silver component is such a small fraction of total value that is doesn’t matter. To give you an example, there are now paints available that contain silver. The silver physically kills bacteria, which means that it is not possible for bacteria to mutate and become immune to the metal. Adding silver to the paint only increases the retail selling price about one cent per square foot of surface. As you can see, the price of silver could rise 400 percent and not greatly affect the price of the paint.

More evidence that industrial silver demand is inelastic occurred when the price of silver soared in 1979-1980. Back then, global industrial demand only fell about 19 percent.

Today the future industrial demand for silver looks wonderful, no matter the price. Silver-zinc batteries have been developed for use in hybrid automobiles. Such batteries are expected to be widely used as they have an edge in reducing pollution. This will have the overall impact of increasing silver demand in coming years.

When reporters asked GFMS, formerly Gold Fields Mineral Services, about Parikh’s assessment, they concurred. Neil Meader, research director for GFMS expects silver fabrication demand to return to normal levels in 2010. He said, “It is becoming an increasingly industrial metal and novel new uses will also likely assist the recovery in silver’s demand.”

One part of Parikh’s announcement that I consider too conservative was his silver price projection. In 2010, he expects the price of silver to at least surpass $20.79 per ounce. He thinks it may go as high as $25 in 2010.

As the staff at CPM Group has explained to me in the past, their precious metals price projections are routinely conservative. I think this will prove to be another time. As has long been documented by Ted Butler, there are massive short positions in the silver commodity markets, far beyond trading levels required for the hedging activities of mines and manufacturers. Gold and silver are the two commodity markets where short positions are most extreme when compared with annual global production and demand.

As the price of silver rises, it is highly likely that a growing number of owners of short contracts will cut their losses by repurchasing their positions. (This happened last fall when Barrick Gold Corporation threw in the towel and booked over $5 billion in losses on their 9.5 million ounce short position in gold) As the shorts cover, this will only add further to silver demand, with the potential to really push up the price. In my mind, silver prices of $30, $50 and even higher are possible in 2010.

The prices of silver and gold rise or fall together about 70 percent of the time on a daily basis. As the price of gold was rising in 2009, one of the tactics used to try to hold down that price was for the U.S. government’s trading partners, especially JPMorgan Chase, to issue new short contracts for silver. When gold investors saw the price of silver falling, that dampened their enthusiasm for buying more gold.

Now that the price of silver has been rising, up more than 11 percent already this month, it will likely have the opposite effect of making investors more interested in buying gold. Indeed, the price of gold is already up more than 5 percent this month. I expect the price of gold to continue to rise along with silver, though I expect silver will rise by a higher percentage.

Last Friday, the U.S. unemployment report came in showing further job losses rather than the expected slight decline. Nearly every month for more than the past four years, the prices of gold and silver have been attacked upon the release of the unemployment data, which has almost always been bad news for the U.S. economy. Poor unemployment data will give investors a reason to get out of paper assets like stocks and bonds and into safer assets like precious metals. One way to counteract that effect is to make it appear precious metals prices are weak, which has been exactly the strategy pursued by the U.S. government and its trading partners, who know ahead of time what unemployment statistics will be released.

In advance of the release of last week’s unemployment numbers, the prices of gold and silver were deliberately knocked down by traders who were not seeking to maximize the price they received for the metals they sold. But, once the unemployment data was released, silver and gold jumped dramatically in price. Asian markets traded for the first time Monday morning (Sunday night in the U.S.) since the release of the jobs data. Gold and silver prices were up sharply.

As I predicted last week, the gold and silver markets in 2010 are likely to be more exciting than last year. It is already proving to be hugely profitable to those who already own some, but I think the biggest moves are yet to come.

 



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