Thursday, September 14, 2006

yep, I don't know much

Specifically, on silver I've proven to be a bit of an idiot. That is, I've been acting on ignorance. Two things...

First, a swing of 20% in silver in a few days isn't as wild as I thought. Silver is a small market with a low price per unit.

Second, there are some very good macro reasons for silver to be turning down that have little to do with manipulation - well, in a way.

See, what appears to be happening is summed up this way:
1) Some key investors (size/quantity) think we're entering a recession;
2) THE major component of a recession is that because businesses are slowing down they buy fewer raw materials;
3) Those investors see this as lower demand for commodities, which means lower prices for commodities, which means they SHORT commodities;
4) shorts push the price down in anticipation. If that seems like a self-fulfilling prophecy it mostly is, especially in as small a market as silver.

By the way, as near as I can find out only about 10% of silver is for investment. Something on the order of 45% is for industrial applications of one sort or another, and another 35% is for jewelry and other end-products. Now I've seen press that because of the ETF the investment proportion is climbing, but the highest I've seen so far is 15%. Unlike gold, most of silver is not (at this time) a safe haven for money. Most being the key...

I'm noticing a lag in silver relative to other commodities other than gold. I'm going to guess - almost wish - as to what's going on. I think it's two subtle points reinforcing one another.

First, there is that slight increase in the monetary psychology of silver. It's not large but it's there. And unlike gold, silver is the 'refuge of the middle class'. I can buy the nominal minimum - an ounce - on almost any paycheck.

Second, and possibly even more wishful, is the jewelers. See, there are indicators that the autumn Indian Gold boost isn't happening this year. That's the boost that happens as jewelers in India buy gold to make their products for the holiday sales window. Thing is, they seem to be a bit unhappy this year about the price of gold. They also may be anticipating the recession - slower sales. But it's quite possible - and there are subtle signs (or maybe seeing what I want to see) - that they're making more silver instead of gold due to that same affordability.

All that said, here's what I think we'll see.

Commodities - including gold and silver - drop some more.
Since recessions are defined by poorer business performance, we'll see stocks decline. Bonds... I'm ignorant, but my guess here is that the inflationary pressures will keep bonds from moving into higher prominence. Thus the 'safe haven' will be dollars - with a subsequent strengthening.
As it becomes much more apparent we're in a recession - that is, when it's not the discussion of investment houses and economist but rather Newsweek and Fox/CNN - then gold and silver will shift to their hedge roles, joining dollars.

Gold may touch $450, and will certainly stare at $500. Silver, well, I wouldn't be shocked at $9, though $8 would be a bit too far.

But that's short term. Again, as the recession is recognized the precious metals will climb again. Possibly by the holidays, and certainly by March, they'll be back near today's levels.

If I get a bounce (possible) between now and then I'm going to sell half my silver for short-term gains and buy it when it drops. Half, because (grin) I could be wrong.


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