Analyst Adrian Douglas has done it again. His February 5 article titled “Silver Breaks Its Golden Shackles” shows that since September 2010, silver prices have broken above their consistent relationship to gold prices that have existed since 2003.
For this new analysis, he cross-plotted the gold and silver prices for every single trading day from June 2003 through September 2010. The data created almost straight line correlations for two different time periods. From June 2003 through the end of 2007, Douglas deduced a formula. Using this formula, if one knew the spot price of gold, the formula would calculate the price of silver that would come relatively close. From the beginning of 2008 through September 2010, a different formula could be used to closely calculate the silver price once you knew the gold price for that day.
Douglas considers this seven year correlation of gold and silver prices as one more bit of evidence that silver prices were not determined by free market trading during that time. Douglas’s previous research had shown that the trading pattern for gold over the past 10 years was also manipulated and suppressed.
The analyst recently updated this analysis of the correlation of gold and silver prices right up to a few days ago. The chart shows that since October 2010, silver has stopped trading in tandem with gold and is accelerating its price increases compared to gold.
There are other reasons why silver looks poised for major price increases in the near future.
On Friday, February 4, the spot price of silver closed on the COMEX at $29.075. The spot price was higher than almost every future month price all the way through to December 2015! Recently, the spot price of silver had traded higher than contracts up to a year in the future, but this may be the first time that spot silver has traded above future prices going out almost five years!
When the spot market price of silver is higher than future months, a condition called backwardation, this is a sign of a physical supply squeeze. For the spot price of silver to be higher than almost every month of future contracts is a signal of an extreme supply shortage.
I noted a couple of weeks ago that the retail premium on US 90% Silver Coins had increased enough that it was no longer profitable for dealers to sell the coins to refiners to melt down, thus depriving refineries of this source of physical silver. In his article, Douglas noted that refineries are now declining to accept new orders because of the difficulty of obtaining physical silver to process.
There have been several news reports outside of the mainstream media that China has shifted from being a significant exporter of silver in 2005 to being a huge importer by 2010.
In January, the US Mint set an all-time monthly sales record of Silver Eagle at 6.4 million coins. The Mint had to start rationing coins part way through the month, or the volume would have been even higher.
Since last June, the COMEX silver inventories have declined by more than 10%. Dealer inventories are now so low that they only cover 6.6% of open contract liabilities!
In January, as prices dipped temporarily, my own companies’ sales volume of bullion-priced silver products increased while those for gold declined. Several other dealers have told me similar stories.
Last year the price of silver rose 83.8% during the course of the year. The US government committed to reducing the value of the US dollar, and even is already talking about the next program of inflating the US money supply once the current program ends in June. Along with a number of other reasons that bode well for higher precious metals prices, I feel comfortable with my prediction that the price of silver in 2011 will rise by a greater percentage than it did in 2010. Further, I expect to see significant increases by the end of March.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
Ag says
February 7, 2011 at 10:48 pmGreat article and info, thanks!
Josh says
February 8, 2011 at 12:35 amGreat article! I hope you are right 🙂
Dave says
February 8, 2011 at 12:09 pmThe graphs Adrian Douglas published are, to put it bluntly, worthless. The error bars in the calculated price are quite large. Predicting the price within $2 to $3 per ozt (20%-30% error) is not very useful.
In the second graph, the group of points labeled “silver breaks its golden shackles” could easily be interpreted as a return to the black trend line. Putting another interpretation to it, without evidence is just baseless speculation.
Finally, as anyone with any background in either statistics or science knows, a correlation does not show causation. Price manipulation may exist in the silver markets, but showing two trend lines correlating silver and gold prices is NOT evidence for said manipulation.
Sam says
February 8, 2011 at 1:48 pm“I noted a couple of weeks ago that the retail premium on US 90% Silver Coins had increased enough that it was no longer profitable for dealers to sell the coins to refiners to melt down”
The current melting of 90%/40%/35% US silver coins is something I’ve never seen any information on. Do you have any knowledge of how much of this is/has occurred in recent years? Lots has been written about the big sliver melt in 1979/80 and prior, but even with the information world of the internet I haven’t see any articles on if it is continuing today. I suppose the “Cash for Gold” buyers send most of their junk silver to the refiners. A hand full of 90% dimes/quarters/halfs times hundreds of thousands of people could really add up. Do you think this “new supply” gets melted down or is it creating new $1,000 bags for sale through the retail dealers. At some point the junk coins become rare. Thanks for any insights