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Are you bullish on silver yet?
Admittedly, it’s been a wild ride for the white metal this year,
as it rocketed from below $30/oz. in February to $50 in late April, only to
be slammed back to $32 two weeks later. As of this writing, it’s
recovered to just north of $40.
With that kind of volatility, one can be excused for being somewhat
skittish about the market. But the fact is, the
future looks very bullish for gold’s baby brother. We’ve been
covering supply and demand factors on a regular basis in this letter, but
today marks the arrival of a singular event that
should have a profound effect on prices going forward.
On this day – July 22, 2011 – dollar-denominated Chinese
silver futures are scheduled to begin trading on the Hong Kong Mercantile
Exchange (HKME), thus giving Asian (especially Chinese) investors direct
access to the metal and offering an alternative to the longtime dominance the
U.S. has enjoyed in silver-bullion trading.
This follows the HKME’s launch of trading in gold futures on May
18. Both metals will be priced in U.S. dollars, with physical delivery to
specified depositories in Hong Kong – a major conduit for the flow of
metals into China.
Implications?
For one thing, the new market ends the hammerlock the Chicago
Mercantile Exchange (CME) has had on silver trading. Because of the
competition, the CME will have less leeway to change margin requirements
– as it did when it raised them three times in a week – by nearly
an aggregate 100% – in late April/early May, sending the silver price
into its tailspin.
In addition, investors in China and throughout the far East will find
it easier to buy into bullion. This will be the first time that Asia will be
able to conveniently purchase silver futures contracts and if they wish, to take delivery. Previously, those investors had to
purchase CME-based contracts (if they were allowed to at all) that traded
through the Hong Kong Futures Exchange, according to CME rules.
Consider also the price differential between gold and silver. With the
former trading at 40X the latter, silver presents less of a barrier to entry
to smaller or first-time investors.
The HKME also offers another advantage compared to the CME. Its
standard contract is for 1,000 troy ounces vs. the CME’s 5,000-ounce
minimum. Once again, creating increased liquidity for the customer was the
goal.
As Albert Helmig, president of the exchange, puts it, “The new contract will enable
buyers and sellers in China to trade effectively with their counterparts
across the world, while at the same time allowing investors to gain exposure
to silver-price movements and broaden their investment portfolio.”
All of this should spark a silver rush that is already running full
throttle. As the U.S. dollar has weakened, the Chinese – historically
protective of their hard assets – have been running for cover. Demand
for the metal soared by 67% in China in the past three years, and the country
was responsible for 23% of global consumption in 2010.
That’s likely just the beginning. China has a staggering $3.2
trillion in currency reserves, and as the “value” of fiat money
deteriorates everywhere, they’ll want to move out of it. Imagine the
effect on metals prices if just a fraction of one percent of those reserves
went into gold and silver.
Institutional investors have taken note. New York-based Newedge USA – which was the biggest
futures-commission merchant by measure of customer assets on deposit as of
May – cites climbing physical demand in Asia as the catalyst that will
drive silver prices, by its estimate, to $70/oz. in the near term.
One final note: Helmig says that the
HKME’s future plans call for trades priced in yuan
as well. That would be in keeping with the exchange’s motto – Chinese
access, Asian pricing, and global risk management – and it’s
a move that could really throw the floodgates wide open.
No secret what a flood of new demand will bring: Higher prices.
If you’re not yet bullish on silver and the handful of companies
that mine it, perhaps you should be.
[Not only is now a good time to
stock up on physical silver, the increase in demand will likely drive up
silver producers’ stock prices. Casey International Speculator provides insights on the most
promising junior companies in the U.S. and Canada, as well as worldwide. As
always, a trial subscription is risk-free for ninety days.]
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