Silver investors were mainly concerned with the European crisis and US easing for most of the first half (H1) of 2012. Now, it seems that China is increasingly earning its place on investors’ radars and according to many analysts, it should be.
Silver started the week with upward momentum and a closing New York spot price of $27.34. According to a CME Group market note, some of that positive movement may have been drafted off the historical gains being forged in the US grain markets. These price movements are noteworthy for investors, and were echoed in a Gold Investing News interview earlier this week with Peter Schiff, CEO of Euro Pacific Precious Metals.
When talking about about the relationship between gold, soybeans and other agricultural commodities such as wheat, Schiff indicated that the positive correlation between these agricultural products and silver appears even stronger than with gold.
On Tuesday silver attempted another upward move but macroeconomic sentiment soured and the metal’s price dropped.
Prominent among the concerns was news of China’s $31.7 billion trade surplus, which for many suggested a slowdown in domestic demand and thus another indication of a hard landing. The currency markets shifted to a position that did not favor silver. The euro declined and money began to flowing into perceived safe havens such as the dollar and yen. September silver closed near the day’s low and the final New York spot price was $.53 below the prior close at $26.81.
The release of the minutes from the latest Federal Open Market Committee (FOMC) meeting on Wednesday was a highly anticipated event this week. The reasoning, of course, was so the document could be scoured for an indication of the Fed’s position on QE3. Though QE3 is considered one of the few developments able to prompt a significant rally for silver, investors appear far less reactive or disappointed by the lack of indication that such action lies ahead. Whereas some markets such as gold moved lower following the the release, silver rose and closed above the previous session.
Wednesday’ price increase also occurred despite the fact that it was much publicized that the FOMC minutes revealed that the Fed considers the US economic condition to be more dismal that it had earlier this year.
Investors continue to lack a strong appetite for silver and the pool of active participants tends to be shallow.
Though the most recent Commitment of Traders (COT) report shows a 614 ton increase in net speculative length of Comex silver, that is not being celebrated as a move to recovery or an indication of confidence. This increase follows the previous report’s decline of 817 tons and there is a continuing decline of open interest in this futures market.
US silver Eagle sales for the month of June declined to the lowest level since February 2008. And, ETF investors had been standing their ground, portraying confidence even as the market shifted in favor of the bears. However, last week some of these investors apparently caved, selling over 190 tons of metal from ETFs.
Standard Bank expects investment demand to recover during this second half of the year thereby boosting prices. However, investors who took note of some of the higher analysts projections earlier this year may want to consider that Standard Bank also expresses doubt that silver can maintain a rally above $34-35 in Q3. The bank cites weak industrial demand and high stockpiles in China as a cap for price potential.
Demand from China has been highly correlated with its Gross Domestic Product (GDP), Nigam Arora, Chief Investment Officer of the Arora Report recently wrote. “Slower growth in China has serious implications for gold and silver,” he added.
Arora says negative growth will not immediately translate into negative news for the metal market. These developments are instead of “utmost importance” to long term investors as Chinese GDP is for them an indication of what will happen in the years ahead. Arora says they use this information to help uncover change before it is evident.
Though the real effects of Chinese growth may be a long term issue, China’s economic condition is starting to have a greater impact on markets. Silver investors should therefore note that the nation’s Q2 GDP data will likely garner significant attention on Friday.
Silver faces solid resistance at $28.44 and needs a close above that level for a real upside breakout. To the downside, there is solid support around the June low of $26.10.
On Thursday, September silver closed Comex floor trading near the day’s high, up $.14 at $27.16. The final New York spot price was $27.21
Silver mining stocks were down most of the week. Ahead of the close of US markets on Thursday, the miners were a mixed lot.
Securities Disclosure: I, Michelle Smith, do not hold equity interest in any of the companies mentioned in this article.