Guest Article by Tony Davis – Atlanta Gold & Coin Buyers ……….
The recent turbulence in the silver futures market has many silver coin and bullion investors concerned. In a matter of only two months, the price of silver has dropped approximately 18%, leading many pundits to announce that the silver bull market that began in 2008 has finally come to an end. However, further research indicates that the bottom in the silver market may be in, and that the price of silver may be poised for a nice rebound. We’ll discuss three fundamental reasons why we believe that the price of silver may be at or near a bottom and why now may be the best buying opportunity in three years.
First and foremost, it’s important to understand that the spot price of silver, which is commonly quoted on websites such as www.kitco.com, is the price of silver in the silver futures market. Investors, speculators and industry-related companies buy and sell silver futures contracts to hedge against increasing or decreasing prices. Commonly used terms, such as short and long, mean that individuals and companies are predicting a drop or rise in the price of silver. Generally speaking, companies close out their short positions and go long when they are predicting an increase in the market.
Investment Banks are Closing Out Short Positions
In fact, this is exactly what we’re currently seeing in the market, according to this report. According to an article by David Franklin and David Baker at Sprott Group, the outstanding short positions in the commodities market, which are primarily held by investment banks, have reduced from 259 million ounces in February of this year to 20 million ounces at the end of June. This is a significant turn of events in a relatively short period of time. Furthermore, regulatory filings show that JP Morgan, the physical custodian for SLV (the largest silver ETF), has increased their position in the SLV fund by 500% through the end of April. This is a significant long position for the company that many individuals believe has long been manipulating the silver market.
JP Morgan is Taking Physical Possession of Silver Bullion
On a related note, The TF Metals Report indicates that JP Morgan is taking physical delivery of silver bullion in upwards of 90% of the contracts that are being settled. This is in stark contrast to typical futures contracts, in which only 3% of contracts settle with the delivery of physical bullion. While JP Morgan’s recent accumulation may be in anticipation of demand for physical delivery requests in the future, it’s just as likely that JP Morgan is anticipating that the price of silver will rise from its current levels. Otherwise, taking physical delivery of millions of ounces of silver seems counterintuitive.
The Price of Silver is Approaching Mining Costs
Last but not least, the price of silver is approaching mining costs, which means that we could see a decline in silver production, delays or the closing of more expensive mines. We have recently seen this in the gold market, with Barrick recently announcing that they will delay construction and mining of the Pascua Lama mine due to lower gold prices. Recently, Pan America’s CFO chimed in on the subject , indicating that mining costs should help to establish a floor in the silver market. Pan America’s average mining costs in the first quarter of 2013 were $17.29 an ounce; not much lower than the current spot price. Some mines in various countries are more expensive in which to operate, and will likely begin to close if prices don’t rise from current levels, which will result in further shortages in silver bullion.
In summary, we’ve highlighted three specific reasons why we believe that we’re near or at the bottom in the silver market. Large investment banks typically don’t close out their short positions unless they believe that the price of silver is poised for a rebound, which we’re seeing according to regulatory filings. Additionally, JP Morgan has recently increased their position in SLV, the largest silver ETF, and is taking physical possession of silver bullion at rates well above the historical average. Lastly, the price of silver is quickly approaching mining costs, which would indicate that we’re approaching a floor. If prices don’t rise from current levels, we’ll likely begin to see a decline in production and the closing of mines, resulting in further constraints on an already tight physical bullion market.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website at www.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744.