Bloom on Silver

Our reasons for focussing so closely on Silver at the current time are threefold:

• We have a significant investment risk exposure to precious metals in general, and to silver in particular.
• As can be seen from the monthly chart of closing prices below, there is confluence of an intermediate (down) trend line, and an intermediary (up) trend line. A "breakout" is imminent, and it is desirable to determine whether the breakout is likely to be to the upside (next significant resistance at $5.50 - with target of $6.50) or to the downside - indicating a resumption of the Primary Bear Trend.

Source: www.futuresource.com

• In the past two weeks - immediately preceding and following the opening of the Shanghai Spot Market in silver trading, there has been significant volatility on the USA COMEX market, as evidenced by the following chart

Source: http://tfc-charts.w2d.com/chart/SV/73

The significant price drop on Tuesday, followed by the apparent upside gap on Friday indicate trading activity that was outside the boundaries of "normal" activity.

During the past week, the following matters of significance came to our attention:

1. Commitment of Traders increased on the short side

In week of July 8th - 15th, Commercial short position increased by 38 million ounces = 2.4 weeks' world-wide demand. Total short position of Commercials now 241.5 million ounces, which is equivalent to:

• 29% of annual demand of 838mm oz (15 weeks demand)
• 41% of annual mine production of 585.9mm oz (21 weeks of mine supply).

Note: "Commercials": Silver - 48,294 contracts (Increase of -7,612 contracts)

Sources: www.findbrokers.com/hightower/futcot.pdf (Commitment of Traders)

www.silverinstitute.org/production.html (Annual Demand, 2002)

2.Lease rates rose

Silver Lease Rates increased by .05% during week ended July 18th, indicating a rise in demand for leasing. (As an aside, note the significant change in gold's 2 month lease rate)

Source: www.kitco.com/market/LFrate.html

An implication of this, is that there was an increased need to "deliver" against some open short contracts.

3. Speculative buying activity on TOCOM (Tokyo Commodities Exchange) increased

The following indicates an increase in speculative (buying) activity on Tocom in the June 2004 contract

July 17, 2003

Note: Contract unit = 60 Kg. Open interest on TOCOM is therefore 40 mm ounces, or 5% of annual world-wide demand.

Volume traded on July 17th was 7 million oz, or 42% of one week's world-wide demand. 82% of total was in the June 2004 contract, whilst 46.5% of total open interest is in the June 2004 contract. Also of significance is that slightly more than 50% of all trades were "new purchases" - indicating increased buying activity.

Conclusion

On July 17th, there was disproportionate buying activity in the June 2004 contract indicating a significantly increased level of speculation that the silver price will rise over the next 12 months.

Source: www.tocom.or.jp/kurani/metal_e.html

As an aside, although level of Trading on TOCOM is high relative to word-wide annual demand, the volume of inventories on TOCOM is very small (767,712 oz) as can be seen from the following, and fell in June by 31,000 oz:

(Precious Metals) As of June, 2003

*1 The number of warehouse receipts outstanding at the end of the month
*2 The number of warehouse receipts issued during the month
*3 The number of warehouse receipts canceled during the month
The delivery unit of silver has been changed from 30kg to 60kg. The new unit is applied to contracts whose delivery takes place in and after April 1997. Currently, therefore, in circulation are both warrants of 30kg and 60kg

Conclusion

Activity on TOCOM is predominantly speculative in nature. Ie Participants do not typically expect to take physical delivery.

Note: The London Metal Exchange - which commenced trading in Silver in May 1999, ceased trading in Silver in January 2002. Source: www.lme.co.uk/2422.asp

The main centres for Silver trading at present are Comex, Tocom and the newly established Shanghai Spot Market.

4. China Issued a significant Report on its silver supply activities

"China is expected to produce a total of 2,400 tons of silver metal from silver ores as well as slightly over 2,000 tons of silver metal from recycled metal scrap, according to Tang. The country's silver consumption is pegged at only 1,800 tons in 2003".

Source: Dow Jones Newswires as reported on www.investmentrarities.com/07-08-03.html

Note: 2,000 tons of scrap = 84.5 million ounces, which represented approximately 45.7% of all world scrap recycling

According to the same report, "Last year, the government sold 1,600 tons of silver from its reserves, making it the world's largest seller of silver."

Observations

• China consumed only 1,800 tons but produced 4,400 tons (155 million ounces) AND reduced its Government stockpiles by 1,600 tons (56 million ounces). Ie China supplied roughly 25% of the entire world-wide silver requirements, and roughly 46% of all recycled silver.
• China has emerged as the dominant world player in silver scrap recycling. In turn, this "swing" factor gives them enormous leverage over "new" technologies in the field electronics and superconductivity. It follows, that the view that China is merely a source of low cost manufacturing is highly simplistic.

The following is an important quote from an article published by the CPM group.

"The issue of silver sales from Chinese government stocks has been one of the most pervasive topics of discussion in the silver market, and perhaps the most misunderstood. The topic came to a head in early 2000 when rumors were circulated of large amounts of silver entering the market. Not so coincidentally, these rumors began at the same time that the liberalization of the Chinese silver market was taking a great leap forward on January 1, 2000. The Chinese silver market has been closely controlled by the People's Bank of China since the Communist Revolution in 1949. The PBOC has been moving toward deregulating the gold and silver markets within the country, and extricating itself from the role of national market maker. This has led to massive shifts in the flow of silver around China, compounded by structural changes in the Chinese photographic industry that has led to large amounts of silver that formerly went to Chinese film makers now being available for export. These changes have radically transformed the entire metals market within China, and have led to increased exports of silver, and gold, over the past few years.

The inaccuracy is the assumption that these exports represent here have been some sales from these stocks, but they are a small portion of the total amount of metal being exported. Some estimates by PBOC silver sales run as high as 60 million ounces. Chinese government sales actually have been around 10 million ounces or so per year in recent years, and are expected to be roughly 12.0 - 14.5 million ounces in 2001. Most silver exports have been by domestic refiners processing base metal concentrates and domestic scrap.

In the long run the new laws may lead to a decrease in exports as domestic refiners now can receive higher prices within China, reducing the incentive to smuggle metal out, and domestic consumers and investors now can pay lower prices for silver within China."

Source: www.bullionfund.com/Silver%20Myths%202.doc

Conclusion

The lack of transparency regarding the size of China's silver stockpile is hampering accurate analysis of the overall silver market. However, given that China disgorged over 55 million ounces from its stockpile last year - relative to the actual "10 million ounces or so per year in recent years" (to 2000) - it follows that China has certainly been depleting its stockpiles at an accelerating rate.

5. Comex Silver Stockpiles

COMEX silver stockpiles and "eligible" silver stocks are published on a weekly basis on www.sharelynx.net/Markets/Charts/CMX-AG-Stockpiles.htm

As at the time of this writing (July 20th ), the information for the week ended July 18th was not available.

However, readers may refer to the above website to form their own conclusions. As at July 11th, stockpiles at COMEX were 107.36 mm oz, of which 61.69mm ozs was being held on behalf of third parties (eligible silver)

Summary and Overall Conclusions

The silver price fell in the early part of the week, due - in large part - to an increase in the open short position of Commercials, which rose by 38 million oz.

In the past week, three pieces of evidence emerged to support the view that, on balance, the price of silver is likely to break UP from the apex of the triangle on the Monthly charts:

• Silver lease rates rose during the week - indicating an increase in demand for leasing by short sellers needing to deliver
• There was an increase in speculative buying on TOCOM
• China reported a significant increase in the rate at which it has been disgorging its stockpiles - indicating that it has been largely responsible for the "artificial" cap on prices in the recent past. Although there is no transparency on the absolute level of China's remaining stockpiles, it seems reasonable to conclude that China's ability to continue at this level of disgorgement is waning.