Significant Fresh Developments In The Physical Silver Market

[southfork]

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Saturday February 25, 2012 13:30 EST (All prices and information will update automatically every minute on the home page)
Significant Fresh Developments In The Physical Silver Market
February 24, 2012
Commentary on Precious Metals Prepared for CoinInfo.com
By Patrick A. Heller-Liberty Coin Service

In the past week, there have been several developments in the physical silver market, many of which point to further price increases in the near future. However, beyond all the bullish signs, there are three market shifts which would normally tend to indicate lower silver prices in the short term.

Here’s the bad news. On February 16, the COMEX silver market completely emerged from backwardation. Normally the futures markets are in a condition called contango. When a market is in contango, spot month contracts trade at the lowest prices for the commodity. Future month contracts trade at higher prices, often by roughly the prevailing interest rate plus some storage costs. When a market is in backwardation, the spot month price is higher than some or all of the future months. This normally indicates a supply squeeze where buyers seeking immediate physical silver buy contracts to take delivery. During a supply squeeze, prices tend to rise.

A year ago, the COMEX silver market was in backwardation going two years into the future! After prices fell during the summer of 2011, the number of months with future prices below spot month prices declined. Now that the COMEX silver market has returned to a normal contango condition, that is an indicator that the tightness of silver supplies has disappeared.

The higher spot prices of the past week, with silver up more than 6% just this week, have led to an increase in liquidation of physical silver by some investors. As a result, premiums to purchase physical silver have declined. One major indicator on the trend of future prices is when the general retail selling price for $1,000 face value of US 90% Silver Coins is at 2% or higher. If silver is retailing at that premium or higher, the wholesale price is too high for refiners to profitably purchase 90% Coin to melt down. That tends to reduce the supply of physical silver. Since the sudden decline of silver’s spot price in late December, retail demand for 90% Coin was so strong that it mostly traded for more than a 2% premium.

In the past 10 days, so much 90% Silver Coin has been liquidated that its retail premium has fallen well below 2%. As a result, refiners can now purchase 90% Coin to refine, resulting in higher supplies of physical silver. With higher supplies, prices tend to decline.

The last bit of negative news is that the HUI mining stock index declined today. That normally foreshadows a spot price decline for gold and silver on the next trading day.

Now for the good news.

First, when silver rose close to $35 two days ago, it joined gold, platinum, and palladium in trading above its 200-day moving average price. When prices are above the 200-day moving average, that is a buy signal for technical traders.

Second, the COMEX silver options expired yesterday. The normal trading pattern over the past few years when COMEX silver options were expiring is that the spot prices suddenly dropped within 24 hours before expiration. When the spot price declines, fewer call options are in the money. That means that a smaller quantity of silver options would be exercised to get delivery of physical metal. This week, not only did the silver spot price not fall Wednesday or Thursday, they rose. This resulted in more options call contracts being exercised, which meant that demand for physical silver increased. Beyond this, however, the failure of the silver price to be driven down in advance of the options expiration is a major indicator that prices are destined to rise quickly in the near future.

Third, the day for First Notice of Delivery for COMEX March 2012 silver contracts is February 29. Normally, the silver price falls going into the First Notice. With the rising price of silver this week, we could have a repeat of the March 2011 contract expiration. A year ago, there was an unusually large demand for delivery of maturing COMEX silver contracts. I heard multiple reports that some of the companies that owed delivery on the COMEX silver contracts settle for cash because they did not have silver available to fulfill their commitments—at prices as high as $60 per ounce!

Even if the price of silver is mostly rising over the next three months, as I expect, there will be bouts of sudden price drops. If there is no sudden price drop on February 28, we could be off to the races in March.


Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles) and at CoinWeek (http://www.coinweek.com and search for “Heller”). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

[gringott]

The article said refiners are purchasing 90% to refine. I thought it was illegal to do that. Am I wrong?

[southfork]

The article said refiners are purchasing 90% to refine. I thought it was illegal to do that. Am I wrong?

Pre 64 coinage is legal to melt now, thats why 90% might be a good investment down the road, less and less around. I spoke with someone who worked for Silvertowne and have been melting tons of it down.