17 June, 2015

Newsletter - The DELAIRE Report

Gold prices have extended last weeks’ gains, due to some short covering in the futures markets and some renewed safe-haven buying amid the collapse of the Greek talks with its European creditors.

Negotiation between Greece and its creditors collapsed after just 45 minutes of meeting on Sunday. It’s reported the European Union officials blamed the failure on Greece, which failed to offer anything new for securing the EUR 7.2 billion funding.

Greece’s Prime Minister Alexis Tsipras urged the country’s creditors to get “realistic” a day after weekend negotiations failed to bridge major differences, setting the stage for Eurozone finance ministers to make a final push to reach a deal to avert a default.

He said the Greek government would wait “patiently” until the country’s creditors – the European Commission, the European Central Bank and the International Monetary Fund (IMF) – become “realistic.”

The comments came ahead of yet another crucial meeting of Eurozone finance ministers on Thursday, where further talks on Greece’s finances are to take place and just two weeks before an IMF debt repayment deadline and the expiry of the European part of the country’s bailout.

Fears are mounting that Greece will soon run out of money, with no agreement yet on reforms that the country would have to implement in exchange for access to 7.2 billion euros (8.1 billion dollars) in remaining bailout funds.

Greece still owes the International Monetary Fund about $1.7 billion this month. Then, in July and August, the European Central Bank is due almost 6.8 billion euros ($7.6 billion).

Investors are worried about the worsening Greek debt crisis while many market participants believe that the metal could fall lower before the end of the year due to a possible Fed interest rate hike.

Frankly, I can’t see how it is possible for Greece to repay its debts, and I have long maintained that a Greek exit is imminent. However, it is possible for the financial leaders to continue to kick the can down the road and extend more time for Greece.

While traders watch the developments in Greece they remain fixated on whether the Fed will raise rates or not.

The U.S. central bank will begin its two-day meeting on Tuesday, with a statement to be released on Wednesday afternoon.

It is widely expected that the Fed will not change current monetary policies but will hint at a September rate hike. As the Fed remains data dependent, it is difficult to predict what their actions will be. Almost as soon as there is a release of some positive economic data, some bad news follows.

Data on Friday showed U.S. producer prices in May recorded their biggest increase in more than 2-1/2 years, while U.S. consumer sentiment rose more than expected in June. However, only a day before, the International Monetary Fund (IMF) reported that it had slashed its growth outlook for the U.S.

The IMF now sees U.S. GDP at 2.5% for 2015, down from the 3.1% it was predicting as recently as April. But it didn’t stop there. It also advised the Federal Reserve to hold off on an already-long-overdue interest-rate increase until the first half of 2016, citing “pockets of vulnerabilities” in the U.S. including lagging wages and a still-struggling labour market.

It also warned that the dollar is “moderately overvalued” and that a further marked appreciation would be “harmful.”

The IMF said the Fed should keep its cheap money flowing even if there’s a risk of “slight over-inflation” relative to the central bank’s 2% inflation target.

If this slowdown in the U.S persists, the Fed would be under even greater pressure than before to boost growth via inflation-inducing monetary policies like zero interest rates. The only problem is: The Fed has had its key rate stuck at zero since 2008; it can’t go any lower. The only action it can take, is more quantitative easing (QE), or purchases of Treasury bonds and mortgage-backed securities.

Meanwhile, as the price of gold continues to languish near major lows and while traders remain bearish, it is interesting to note that based on past trends, the price of gold tends to drop to a seasonal low during June.

On average between 2001 and 2012 before the introduction of quantitative easing, causing serious market distortions, gold moved higher between mid-June and early October.

In the unlikely event that the Fed raises rates in September, gold looks poised to continue higher over the long-term as investors will likely seek out its wealth preservation qualities as the U.S. Dollar continues to lose value in real terms.

The global economy is not strong, and in fact could not tolerate higher interest rates. The ongoing currency war will also serve to keep currency values down as economies fight to keep moving forward.

The continuing depreciation of the dollar and other fiat currencies has already been set in motion and the only one asset class can offer meaningful protection from this inevitable scenario is gold. It has stood the test of time as a reliable store of value not dependent on government promises or obligations.

Current gold prices offer investors the best time of the year to buy physical gold. Smart investors and speculators buy when prices are low and when sentiment is miserable.

Newsletter - The DELAIRE Report

ar that the silver price fared so poorly, Leyland explained that silver output was high in part because “70 percent of silver supply is just as a by-product, and it’s completely insensitive to the price of silver. That’s just because it’s produced along with gold, copper, lead and zinc.”

Furthermore, he said, when it comes to primary silver producers, “most of the mines are still quite comfortably producing silver below what the silver price is. Their cash cost is below the silver price, so they’re not having to restrict production.”

That said, those producers are having to make some other restrictions. Specifically, said Leyland, “what they are having to do is stop investment — they’re not making the kind of margins where you would be investing in new mines at the moment, and that’s why I think we’re probably going to see that 2014 was the peak year for silver production.”

Demand surpasses supply

Though silver supply was high in 2014, there was no shortage of demand. In fact, demand clocked in at 1,066.7 million ounces, the fourth-highest level since 1990, leaving a deficit of 4.9 million ounces.

However, while last year brought strong silver demand, GFMS states that it was down 4 percent from the level seen in 2013. That might sound disheartening, but Leyland was quick to point out that 2013 was a year of unusually high silver demand. “A lot of these comparisons for 2014 have to be taken against the very high base year of 2013,” he said.

In terms of where exactly silver demand came from in 2014, the firm notes that industrial applications account for 56 percent of all physical silver demand. Leyland spoke briefly about a couple of fields in that sector to watch, with one being the wearable tech market. “Certainly it’s a growing market, [and] we see continuing movement towards wearable tech,” he said.

He’s also got an eye on the solar industry. It’s not a new source of demand for silver, but according to Leyland, silver offtake from the solar industry rose in 2014. “Silver’s quite well placed to benefit from any increase in underlying demand for solar panels,” he said.

Coins and bars and silverware are other key sources of silver demand, but as with industrial demand, offtake from those sectors was weaker in 2014 than in 2013. Interestingly, silver demand from the jewelry sector saw a slight uptick in 2014, reaching a record 215.2 million ounces. The rise there was largely driven by increased demand from India, which offset “sizable falls in China and Thailand.”

Silver to average $16.50 in 2015

By now it’s no secret that the silver price didn’t fare particularly well in 2014. Indeed, according to the GFMS report, it averaged just $19.07 per ounce — that’s down 19.8 percent from 2013 and is the white metal’s lowest annual average price since 2009.

As mentioned, that price decline came amidst a slight deficit in the silver market, raising the question of why exactly there was a price drop and not more balance. Explaining, Leyland noted that the steep fall was “due to silver’s role as an asset class, the role that the over-the-counter market has.” In other words,”silver is, along with gold, less attractive as an asset class as we approach a rising interest rate environment. So a lot of institutional investors have gotten out of silver and gold positions over the past couple of years, and that’s been a prime driver behind the price decline.”

The GFMS report is even more emphatic on the rate hike’s importance to the silver price, noting that two themes are essential to understanding silver’s price action in 2014: concerns about tapering of US quantitative easing and anxiety about China’s ability to drive growth. The firm notes that those factors were “broadly negative over the course of the year,” though the white metal saw “two sustained rallies” during 2014.

When asked if those themes will be relevant again in 2015, Leyland answered in the affirmative, noting that in terms of the former, the market has been “trying to price in … the impact of interest rate increases in the US.” Whether that’s happened or not remains to be seen, but his opinion, it likely has. That means “it’s quite possible we’ll actually see a counterintuitive reaction to higher rates when they come. There may be a slight increase in the silver price towards the end of the year.”

Currently GFMS predicts that the rate increase will come towards the end of summer, perhaps in August or September. That said, Leyland admitted, “our guess is as good as anyone’s.”

All in all, the firm is predicting an average 2015 silver price of $16.50. In terms of exactly how the metal may move for the rest of the year, Leyland said he thinks “there is room in the coming months for a bit more weakness.” However, he added, after the rate hike, “we would expect a little bit more money to move into silver and a correction to the upside to happen. We’re expecting the fourth quarter to finish around $17 per ounce.”

Looking further into the future, he said, “I think after four years of declines in average annual prices we’d expect the silver price to trend higher over the next couple of years.”


About the author

David Levenstein is a leading expert on investing in precious metals.  Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.