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January 4, 2013

Gold & Silver Popping on Fiscal Cliff Deal

As expected & alerted several times, Silver has emerged the biggest gainer in the New Year till now. Silver Prices rose nearly 3.5% to $31.54, the most in the Precious Metals group while Copper & Lead gained most in the Base Metals group after US lawmakers reached a Fiscal Cliff deal on Tuesday. 
A risk-on rally has been triggered across the globe with the US kicking the Fiscal Cliff can down the road for the next two months. The main issues of US Debt Ceiling and government spending have only been postponed & yet to be fought over. Base Metals are all up across the board in the rally triggered Tuesday as the U.S. and Chinese news & Economic data reports suggest 2013 could be a positive year for Base Metals consumption. MCX Silver yesterday shot up sharply to Rs. 59,580 from Rs. 57,896. Comex Silver faces small resistances near $32.50, then $33.85 to $34.30 range & finally near $36.10. If Silver moves above the $36.10 level with reasonable strength, then practically speaking, there would be nothing which could stop Silver Prices from rushing to $50.50 or even beyond to reach new lifetime highs.
According to a survey carried out by Bloomberg, analysts, traders and investors see the silver price rising around 29% in 2013. Let me remind you that a run up in Silver simply to its previous high around $50 will account for a 70% hike. More upside movements in Stock & Commodity Markets can be expected to last till the weekend or till the start of next week. The Debt Ceiling worries could set in as early as next week. US politicians & lawmakers have chosen to kick the can down the road again and again. But as we all know, the can will never disappear. Sometime and somewhere, you might trip over it and fall hard on the ground, or in the U.S. case, into a Fiscal Abyss you can never come out of.

Silver Demand for Investment to Rise further:

Life does not give many chances, and if it does one must be ready to recognize it & pick it up.Silver Investment at attractive levels is one such opportunity & if there is a chance to skew your investment portfolio for the better – It is now.  Silver Demand for investment purpose will compensate for any slowdown in industrial demand as perceived by many, amid global meltdowns. Holdings in Silver backed exchange traded products reached a record 18,854 metric tons in November. Bloomberg data shows investors have added 1,464 tons to their holdings this year, bringing the total value of holdings to around $19.2 billion. 
The Gold to Silver ratio at present suggests Silver is undervalued. Judging by recent reports many expect this to go down to as low as 20 next year as Silver pushes to rise faster than Gold. One of the best indicators of increased Silver Investment demand is Silver Coins sales. Between 2002 and 2011 official government coins and medals total supply increased by 274%, to 118.2 million ounces. Whilst demand for official Silver Coins declined in the first half of 2012, they have not suffered nearly as much as Gold Coins have. In the last year, for example sales of Gold Eagles were down by 36% compared to 2011, whereas Silver Eagles were only down by around 18%. According to data from the US Mint, the purchase of silver ounces exceeds gold ounces by 45:1. Just three years ago it was less than half that amount. 
I expect industrial demand to pick up in the first half of 2013 by anywhere between 5.5% and 7.75%. Chinese economic growth seems to be rebounding which is a major demand source for Base Metals. A report by the Silver Institute also confirms that industrial demand for Silver is expected to rebound after a decline this year. Thomson Reuters GFMS looks for a bounce by 6.5% to 484 million ounces in 2013 as the global economy recovers. Silver ETF demand combined with physical Silver demand will outpace the supply, at least for the next 2 to 3 years. Silver may easily rise to the peak achieved in 2011 at around $50 but investor appetite will ultimately take it further as that will solely be the driver of Silver Prices at that moment.

China’s increasing presence in the Global Silver Market:

China is now the world’s largest market for physical investment and paper trading of Silver Futures, according to a Silver Institute report. Not only is China big on investment, its supply of Silver is also growing rapidly, increasing by 281.5 million ounces between 2002 and 2011. Also, by 2011 demand for Silver Bars and Silver Coins in China accounted for 8% of worldwide net purchases of Silver, soaring to 17 million ounces. The report, entitled The Chinese Silver Market, foresees further growth in both supply and demand thanks mainly to state-owned Chinese mining companies’ investment in expansion, and the increase in Silver fabrication demand which has grown by 137% in the last 4 years. 
China, the world’s top Gold producer is also increasing its Silver Reserves through a policy of decreasing its domestic Silver exports and increasing its foreign Silver imports. China transitioned from a net exporter of 2,900 metric tonnes of Silver in 2005 to a net importer of 3,500 metric tonnes in 2012. China could be increasing Gold and Silver reserves significantly through purchases in its Sovereign Wealth Fund – the purchases that are not made available for public inspection or consumption. 
China can increase its Gold Reserves significantly through in-house production alone being the world’s top Gold producer. As of 2011 it became legal for Chinese citizens to own Silver Coins. This has seen the minting of Silver Pandas increase from 6,000 a year between 2001 and 2011, to 6 million in 2011 and approximately 8 million in 2012. As the Chinese government work hard to redirect savings into Precious Metals we may see them work to build the Silver Chinese Panda into a worthy rival to the American Silver Eagle, which may see supply increase to over 40 million per annum.
The last-minute U.S. deal over tax increases has fixed one problem, but the world’s largest economy must get to grips with a budget deficit that threatens not a “fiscal cliff” but a “fiscal abyss”, China’s Xinhua news agency said on Wednesday. The U.S. government debt, more than 100% of its Gross Domestic Product (GDP), makes the nasty sovereign debt crisis that has toppled many European governments and led to ugly street demonstrations in Greece look like a mere hiccup. If you call over 600 billion dollars of tax increases and spending cuts a “fiscal cliff,” the total US Government debt has created nothing but a “fiscal abyss.”
In separate commentaries Xinhua published on Tuesday on the fiscal cliff debate, it called on the United States to live up to its global economic responsibilities and also blamed its poorly functioning political system for the mess .

Courtesy CommodityTradeMantra.com - Comprehensive market intelligence (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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