Silver Market: King World News Mysterious London Source Could be Telling the Truth

Posted by ironstock on Feb 18, 2011

Silver has broken out to new multi-decades high, passing through the Jan. 3 intraday high of $31.21 with relative ease on Thursday, closing at $31.51 per ounce on the Comex.

Are prices now set to soar? Those closest to and most expert in the silver market say, there’s a good chance of it—one expert is well-known, the other anonymous.

Comments by a periodically-quoted anonymous London source to King World News, made most recently on Feb. 15, has the silver market hopping in anticipation of a massive short squeeze potential in silver–which, incidentally, Ted Butler of Investment Rarities estimates a total of as high as between two and three billion ounces worth of shorts (including bank certificates and pool accounts) need unwinding.

“We have serious backwardation, a supply shortage, short interest growing on SLV and now we have the Chinese waking up to the fact that there is metal in SLV and saying, ‘let’s go get it,’” the anonymous London source told King world News. “Let’s not forget the paltry inventories on the Comex.  Any short would have to be frightened by that data,” he added.

Speculation that the iShares Silver Trust ETF (SLV) doesn’t have an adequate supply on hand to affect delivery to the Chinese could topple the first domino to an eventual threat of a force majeure in the ETF—or a “suspended” delivery in the event of an “emergency as a result of which delivery, disposal or evaluation of silver is not reasonably practicable,” according to provisions in SLV documents.

There are only two possibilities to resolve the tightness in the silver market, precious metals guru, James Turk, told King World News.

“One . . . the silver price has to rise in order to dislodge physical metal from the strong hands that now own it,” he said. “Two, the shorts declare force majeure and use government force to let them escape from their untenable position.”

In agreement with the anonymous source, Turk interprets backwardation in the silver market as super bullish.  “Look for a short squeeze in silver already underway as evidenced by the backwardation to intensify as we move toward silver option expiry at the end of this month, and silver delivery on March futures contracts in early March,” he stated in the Feb. 10 interview.

The intensifying backwardation Turk mentioned has indeed increased markedly, from 13 cents on the 2015 contract on the day of his interview of Feb. 10, to more than 70 cents below spot on Thursday, Feb. 17.

A counter argument to the Turk case could be made that silver producers want to lock in what they may perceive as attractive delivery prices for the next five years—especially during a period of exceptionally low financing costs.

If the counter case is a reasonable one, why aren’t all metals (or at least a majority) in backwardation? Copper is in backwardation, but the other base metals are in contango.

Other than silver, the other precious metals, such as gold, platinum and palladium are not in backwardation. In fact, the king of precious metals, gold, is showing a contango in the June 2015 contract of nearly $200.

So what’s so special about copper and silver?

King World News’ anonymous source may be correct in pointing out China’s gorilla-size finger in the silver market. The only other significant metal other than silver in backwardation is copper, which is a well-known strategic metal voraciously imported and consumed by the Chinese economy.

Silver, interestingly enough, appears to be another metal that China cannot satisfy its own demand with domestic production.  Once a significant net exporter of silver, China is now a large net importer of the white metal.

“In 2005, China was a net exporter of nearly 3,000 tonnes (3 million kilograms) of silver,” stated Commodity Online. “Last year, in 2010, China imported more than 3,500 tonnes of silver. Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010.”

Silver’s dual purpose as an important industrial metal as well as a traditional role as a monetary metal in the Chinese culture dovetails nicely with the observations of the King World News’ anonymous London source. Double-digit GDP growth and reports of rapidly rising consumer prices in the world’s second-largest economy lends a lot of credibility to the story of an impending call for delivery of the SLV inventories by the Chinese.

“Demand for silver in China has risen sharply in recent months and years,” the Commodities Online article continued. “Growing middle classes and savers in China, India and other Asian countries have been turning to ‘poor man’s gold’ and using silver as a store of value. Gold has risen above its historical nominal high in local currency terms internationally and silver is seen by many as a cheaper alternative.”

While many articles have been written and interviews conducted about China’s insatiable appetite for copper, not much coverage has been spared regarding China’s 180-degree turn around in the silver market and its apparent impact on the price of silver.

A four-fold increase in China’s net imports of silver is yet another eye-popping statistic out of the People Republic, not to mention a frightening development to the silver shorts on the Comex.

It would be difficult to imagine this particular issue not becoming more widely disseminated by major media outlets, unless, of course, the issue can longer be ignored as the silver price begins moving at multiple percentage gains to new highs on a regular basis.  It appears that King World News’ anonymous London source could be telling it the way it really is, confirming in real-time what the periodic cold data tells us is true.

http://www.beaconequity.com/silver-market-king-world-news-mysterious-london-source-could-be-telling-the-truth-2-2011-02-18/