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Gold and Silver

Why Silver Could Outperform Gold Through 2018

Things are starting to look up for silver as industry observers believe it will outperform gold this quarter and into 2018.

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Originally Published by Goldcore

Both precious metals have ultimately performed below expectations given the positive macroeconomic and geopolitical backdrop.

However, things are starting to look up for the industrial precious metal as industry observers believe it will outperform gold this quarter and into 2018.

In a recent Metals Focus report, the precious metals consultancy concluded that we do expect silver to eventually outperform gold.’ 

Whilst demand for silver coins in the US has been weak, there are some indicators that suggest this physical demand is beginning to pick up, alongside industrial demand. For example, there has been robust silver ETF demand and in September there was significant uptick in those taking immediate delivery on COMEX.

This year has also taken many market participants by surprise as silver demand has fallen in a number of areas. One of which is India.

The Metals Focus report for the Silver Institute believes that Indian demand in 2017 has not matched the decades’ unprecedented silver demand due to higher prices and a clampdown by Indian government on unbanked money in the drive to the cashless society.

However, incomes and the economy and both growing which leads the report to conclude that demand will come back to the country with a bang.

Gold-Silver ratio shows silver undervalued

In June, silver hit a low of $15.60/oz, since then it has recovered somewhat. The gold-silver ratio is also higher than expected, given gold’s performance of late. Earlier this year it fell to as low as 68, but has recently been stuck between 74 and 80.

Gold-Silver ratio

The modern historical average is around 40 to 1. The long term historical average is 15 to 1.

Not only is silver undervalued relative to gold but also to increasingly over valued stocks, bonds and property markets.

Given silver’s industrial role and the fact that geologically there are just 15 particles of silver to every one particle of gold, it is likely that the gold/silver ratio will gradually return to below the 100 year average of 40 to 1.

At the current depressed gold price this would put silver at nearly $32/oz.

India’s love for silver

Love for gold in the world’s seventh largest economy is well-documented but few are aware of its feelings towards silver.

In 2016 India’s demand for silver accounted for just 16% of global demand. The report summarises the all important context for this:

India is one of the world’s largest silver markets, with a very traditional core in a diverse market. To put this into perspective, India consumed 160.6Moz (4,996t) last year, which accounted for a noteworthy 16% of global silver demand. It is not only the scale of Indian demand that matters; the country’s dependence on imported metal means that changes in Indian offtake can impact those countries that supply bullion to India.

The sheer scale of the Indian silver market resonates across much of the country, from physical investment, through to day-to-day activities.

It is also integral to India’s cultural and belief systems. It is therefore not surprising that silver is an important part of Indian festivities and weddings.

For example, it is considered auspicious to gift silver during weddings or for the birth of a child. All this means that silver’s appeal extends across most income groups. Even so, the silver market in recent years has evolved considerably in line with the growth in the Indian economy and the rise in
incomes.

Regarding demand, jewellery, silverware and physical investment account for around 75% of total Indian silver demand. With jewellery and silverware accounting for more than 50% of total silver demand.

Investment demand is increasing from a very low base.

composition of Indian silver demand

In 2010 the two markets combined accounted for 1,200t. By the end of the decade the Silver Institute believes ‘the market will expand further to around 109Moz (3,400t), driven largely by healthy economic growth.’

Industrial demand accounts for just 22% of Indian demand and, like investment silver, it has struggled in recent years. The report explains, that this was due to an economic slowdown:

‘This saw Indian demand fall from 45.7Moz (1,421t) in 2010 to 35.9Moz (1,115t) in 2015. However, with the economy improving over the last two years (GDP growth is back over 7%), we expect industrial demand to continue to rise in the coming years.’

Outlook has a silver lining

World Gold Council data-provider Metals Focus’ conclusion will bring some hope to silver investors:

the case for further price gains, for both silver and gold still appears strong. Together with negative interest rates (in real or nominal terms) in several key currencies, expectations for Fed rate increases have also been pushed further out. This should make the case for a weaker dollar going forward. Along with heightened geopolitical concerns, investment demand should strengthen. While gold will be the main beneficiary, silver prices should also improve.”

Overall, silver will not only step back up to the plate but it will excel the lacklustre performance of this year.

“Given silver’s much smaller market (compared with gold) it should experience greater price volatility. This in turn should see silver prices eventually outperform gold, both later this year and into 2018”

A buying opportunity

We can sit and ponder where we think the price may or may not go in the last three months of the year. We can also sit and hypothesise as to why both gold and silver haven’t performed better this year. Neither of these scenarios help our portfolios.

Instead we have to focus on what we do know – silver is currently relatively cheap when considered against a backdrop of heightened geopolitical concerns, rising inflation and ever-prominent and increasing debt risks.

History tells us that very little currently at the forefront of both economic and political concerns are going to be dealt with without negative consequences. History also tells us that silver has a key role to play as a safe haven in your portfolio.

Academic research echoes this sentiment.

Should you believe the politicians both here and across the pond that the economy is improving, this is a further reason to hold silver as part of your portfolio. In 2012 Belousova and Dorfleitner concluded that

‘Adding silver or platinum to a portfolio [of stocks, sovereign bond and the money market instruments] during bull markets reduces volatility and enhances return.’

When looking at all four precious metals’ role as a safe haven between 1989 and 2013, against the S&P 500 and US 10 year bonds, Lucey and Li (2015) found that ‘silver was a safe haven at times during which gold failed to be’but also during far more quarters than both platinum and palladium.’

The iShares Silver Trust ETF (SLV) rose $0.16 (+1.02%) in premarket trading Wednesday. Year-to-date, SLV has gained 3.97%, versus a 14.17% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #14 of 36 ETFs in the Precious Metals ETFs category.

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Gold and Silver

How To Survive The Assault On Silver (SLV)

Surely, the competition for alternative investments such as Bitcoin, Eleutherum and other block-chain deals is fierce and with stocks hitting all-time highs literally every few days and with volatility at record lows, not many people have retained sufficient focus to concentrate on silver based upon the pure economics of demand and supply.

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Surely, the competition for alternative investments such as Bitcoin, Eleutherum and other block-chain deals is fierce and with stocks hitting all-time highs literally every few days and with volatility at record lows, not many people have retained sufficient focus to concentrate on silver based upon the pure economics of demand and supply. Mind you, analysis of the supply-demand equilibrium for financial or non-financial assets is a useless exercise because the SUPPLY for items HATED by the central banks such as gold and silver is fabricated by way of swaps and loans and illusory WGC figures while DEMAND for items LOVED by central banks such as stocks and bonds is also fabricated by way of journal entries from sovereign treasury accounts or accelerated credit creation. Compounding this felony lies the moral hazard present in the elevated stock markets that have been largely buoyed by central bank largess as opposed to macroeconomic expansion on a global basis. Taking away the proverbial “punch bowl” now could be analogous to tightening credit in 1931, generally regarded as the major accelerant to the economic conflagration of the 1930s. At the least, traders are now unequivocally convinced that the Fed “has our backs,” a direct and total contrast to the dark days of 2008, when they were convinced that the Fed had erred in its role as an omnipotent watchdog over the banks. All it took was shuffling a few trillion in the direction of Washington and the “fix”, as they say, “was in.”

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Everyone in the markets these days is “behaviorally trained” insofar as it pertains to the expectation of “outcomes.” This is especially true of the precious metals where fifty years of central bank interference was capsulized with a ten-year moonshot to $1900 gold and (once again) $50 silver back in 2010-2011. Silver has remained my absolute top pick for the balance of the year but in deference to calling spades as they would appear, I called the bottom in the PMs about ten times between 2015 and 2016 and each time I was beaten about the face and arms until I went skulking off into hiding. Here in the final few laps of 2017, it would appear that silver is beginning to awaken and as the chart below would infer, some long-term downtrend lines are going to be summarily vanquished if the silver price stays simply “flat” over the next quarter.

ballanger3.png

Speaking of being “comfortably numb,” former Fed Vice-Chair Stanley Fischer most certainly qualifies due to his reply to a question from Sara Eisen regarding the Fed’s “legacy” when he said that “their actions prevented a Great Depression from evolving.” Really? An organization owned by the major member banks in N.Y. and London that was supposed to oversee bank behavior sits by as it proceed to vaporize the system in 2007-2008 and Mr. Fischer lauds its actions because it bailed them all out with purchases of every toxic investment ever made by the perpetrators with taxpayer funds? That is like thanking the arsonist firefighter for dousing the flames from the fire he set in your living room.

CNBC lionizes these academic egghead clowns at every and all turns because the S&P 500 continues to hit record highs every day when all that this banker class have done for the past fifty years is ruin the purchasing power of your currencies and enrich themselves. I want an interview where Sara Eisen asks “Mr. Fischer, what exactly were you DOING when the bankers blew themselves up?” or “What exactly is on your balance sheet that someone else will buy?” If the toxic slime it bought from member banks in 2008-2009 was lethal then, how is it any less so now? The “normalization” of the central bank balance sheets will NEVER, EVER occur and they know it. They talk about it; they write about it; they think about it; but in the end that is all they will do. They made the blunders of the banker class simply “go away” and that means never to be seen again.ballanger4.png

The chart posted above is a compelling optic for making a bet on the return of “vol” to the marketplace because there has been a palpable absence of any kind of corrective behavior since investors shrugged off the North Korean missile tests in mid-August. Not hurricanes nor missile tests nor mass murder in Vegas could upset the apple cart as the rampaging bull took out all resistance levels in this latest near-vertical ascent. One of the signs of an impending top in any market is when, after a prolonged period of slowly rising prices, the chart goes “vertical” (meaning “straight up”), which is nearly the case with U.S. stocks.

ballanger5.png

As is the case in this next example, the Nikkei 225 average did the same thing from 1980 to 1990 until the final exhaustion gap to the upside failed, rolled over, and solidified the “top.” However, while it is fairly easy to spot a top in terms of the x-axis (time), it not only impossible but also very dangerous to try to spot a top in terms of the y-axis (price). Any market that goes “vertical” after a prolonged period of gradually rising prices is a market on its last legs and while we have not yet gone truly vertical, the last few weeks have seen the S&P’s trajectory steepen and that is enough to invoke caution in this camp. This is a period for the S&P quite similar to the 1980s parabolic in the Nikkei 225, and before I hear the chorus of “Sour grapes!” and “But it’s different this time!” and “You are over the hill!”, I want you all to remember those fateful words of 2009: “As long as the music is playing, you’ve got to get up and dance.” (And we all know how THAT played out…)

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The open interest in gold futures continues to decline so it is no surprise that the Commercials have covered again this week albeit by a relatively paltry amount. I wrote back in July that I expected accelerated demand from the Indian wedding season and the Italian jewelry trade inventory restocking to exert upside pressure on gold and silver prices in the months of September through November and thus far the rally ended in the beginning of September with a big jump in the Commercial net short position to roughly 270,000 contracts. That figure has now plunged to just under 230,000, which is to be expected. The tiny amount of covering by the bullion banks is explained by the “up” week we just finished and since we had a strong rally since the Tuesday COT cut-off reporting period, I see the number advancing next week. I have not replaced the SIL calls nor have I added to the JNUG position and that is just fine since I have a fully-paid-for position at around $13.37 and am using zero leverage.

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The first weekly rally in five weeks for the precious metals has left me less than invigorated so as we head into the fourth weekend since autumn began, I am thankful for the changing of the colors in the north woods, the relative calm on lovely Lake Scugog with the summer boating crowd now absent, and the company of my faithful Fido who has returned from five weeks of hibernation under the tool shed, safe from the rants and tantrums of this humble penman, but still sleeping near the exit and with one eye permanently open.

Smart dog.

The iShares Silver Trust ETF (SLV) was unchanged in premarket trading Monday. Year-to-date, SLV has gained 8.60%, versus a 15.11% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #17 of 35 ETFs in the Precious Metals ETFs category.

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Gold and Silver

Gold Tops $1300 As Post-Golden Week Surge Continues

Who could have seen this coming?

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Gold is up almost 4% this week, surging back above $1300 as China gets back from holiday…

Who could have seen this coming?

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Gold and Silver

The Only Russia Story That Matters

The World Gold Council has reported that the Central Bank of Russia has more than doubled the pace of its gold purchases, bringing its reserves to the highest level since Putin took power 17 years ago.

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Original Link: Daily Reckoning

The World Gold Council has reported that the Central Bank of Russia has more than doubled the pace of its gold purchases, bringing its reserves to the highest level since Putin took power 17 years ago.

Russia’s desire to break away from the hegemony of the U.S. dollar and the dollar payment system is well-known. Over 60% of global reserves and 80% of global payments are in dollars. The U.S. is the only country with veto power at the International Monetary Fund, the global lender of last resort.

Perhaps Russia’s most aggressive weapon in its war on dollars is gold. The first line of defense is to acquire physical gold, which cannot be frozen out of the international payments system or hacked.

With gold, you can always pay another country just by putting the gold on an airplane and shipping it to the counterparty. This is the 21st-century equivalent of how J.P. Morgan settled payments in gold by ship or railroad in the early 20th century.

Russia has now tripled its gold reserves from around 600 tonnes to 1,800 tonnes over the past 10 years and shows no signs of slowing down. Even when oil prices and Russian reserves were collapsing in 2015, Russia continued to acquire gold.

But Russia is pursuing other dollar alternatives besides gold.

For one, it’s been building nondollar payments systems with regional trading partners and China.

The U.S. uses its influence at SWIFT, the central nervous system of global money transfer message traffic, to cut off nations it considers to be threats.

From a financial perspective, this is like cutting off oxygen to a patient in the intensive care unit. Russia understands its vulnerability to U.S. domination and wants to reduce that vulnerability.

Now Russia has created an alternative to SWIFT.

The head of Russia’s central bank, Elvira Nabiullina, has reported to Vladimir Putin that “There was the threat of being shut out of SWIFT. We updated our transaction system, and if anything happens, all SWIFT-format operations will continue to work. We created an analogous system.”

Russia is also part of a reported Chinese plan to install a new international monetary order that excludes U.S. dollars. Under that plan, China could buy Russian oil with yuan and Russia could then exchange that yuan for gold on the Shanghai exchange.

Now it appears Russia has another weapon in its anti-dollar arsenal.

Russia’s development bank, VEB, and several Russian state ministries are reportedly teaming up to develop blockchain technology. They want to create a fully encrypted, distributed, inexpensive payments system that does not rely on Western banks, SWIFT or the U.S. to move money around.

This has nothing to do with bitcoin, which is just another digital token. The blockchain technology (now often referred to as distributed ledger technology, or DLT) is a platform that can facilitate a wide variety of transfers — possibly including a new Russian-state cryptocurrency backed by gold.

“Putin coins,” anyone?

The ultimate loser here will be the dollar. That’s one more reason for investors to allocate part of their portfolios to assets such as gold.

Regards,

Jim Rickards
for The Daily Reckoning

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