JULY 19 2007 11:30AM - Strength in gold and silver today has contributed to a breakout in the HUI above 370, which represents the highest intraday level for this popular index since May 15, 2006. The XAU has also broken out, reaching its highest level since May 12, 2006, which was the day after the bull market high of 171.71. Meanwhile, the dollar appears to be stabilizing just above 80 on the dollar index but is certainly not out of the woods. In any case, even a small move by the dollar to the downside can be expected to drive the PMs higher, as was the case today. I wouldn't rule out a major advance by the monetary metals at this point based purely on market sentiment and technicals, even in the face of a moderate rise in the dollar.
On the fundamental front, I am expecting the iShares Silver ETF SLV to break the 140 million ounce barrier any time now with demand for this ETF appearing to have returned lately as evidenced by the rising NAV. Volume has yet to recover but when it does, a lot of silver could end up being added to the ETF's coffers in a short period of time.
Over in London, daily trading volume in silver declined in the month of June to 112.4 million ounces per day as just reported by the LBMA, indicating that a seasonal lull of activity is at play in the physical markets. This level of trading is still relatively strong, however, in comparison to the average trading volume during the current bull market. That average is 117 million ounce per day since July 2003, but accounting for the rise in the price of silver, the actual dollar trading volume is obviously much higher now than it was near the beginning of the bull market. In fact, I would consider the recent London trading volume to represent modest but steady interest in physical silver at current prices, which is a big positive in my book.
I'm also starting to see the low silver lease rate as a potential positive, in the sense that it could very well indicate an unwillingness to borrow silver into the marketplace due to widespread fear that the price could explode to the upside and result in a large loss for the metal lessee. In effect, the current situation is in marked contrast to the persistent selling and shorting of silver throughout the late 1990's and up to 2003 as various hedging and derivative strategies required the disposal of physical metal in the spot market. Perhaps of all the positive forces supporting higher silver prices, I would be tempted to list this factor as number 2 after the advent of silver ETFs. Certainly more important than emerging industrial uses of silver such as radio frequency tags (way in the future), wood preservatives (the jury is still out but I am leaning toward pessimism in this area) and the like. This should come as no big surprise since I have been very conservative and at times downright negative on the issue of growing demand by industry as a major factor in silver's price rise. Indeed, I remain virtually the only serious student of the silver market who seems to feel this way, in stark contrast even to the establishment expertise as recently demonstrated by Virtual Metals' (now VM Group) Jessica Cross.
This low silver lease rate is sort of a double-edged sword, however, since it probably also means that speculation is largely absent from the physical market at present. Such speculation often shows up in the spread between short and long lease rates, which tend to widen as a result of the arbitrage strategies employed by professional market participants. Although I haven't updated my own chart of silver lease rates, a quick peek at the Kitco site does seem to show the beginnings of perhaps an encouraging trend: the spread between silver lease rates appears to have bottomed in June and may be poised for a rebound at least to historic norms. I would consider such a development to be very encouraging as speculative interest is by far the most powerful price driver in the markets, whether it is silver, copper, oil, stocks, real estate or what have you. Thus, the level of speculative interest toward silver is something on which we should keep a close eye. Right now, there appears to be nowhere to go but up.
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