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04-05-2011, 08:05 AM
Business Times - 04 May 2011
Hock Lock Siew
Is silver's climb mere speculation?
By MICHELLE TAN
SILVER is continuing its ascent as it inches towards greater highs on rising speculation.
Pessimists on the silver story feel the saga is about to end, with silver prices having gone ballistic of late.
To recap, silver prices plunged sharply on Tuesday last week, diving about 10 per cent in a day before subsequently clawing back its losses over the latter part of the week.
Optimists attribute silver's incredulous appreciation to extreme optimism in the investment community and reason that, at such times, price volatility tends to be more prevalent.
But is this precious metal's stupendous rally really a case of extreme optimism - or one of excessive speculation?
'I think what you're starting to see is a tremendous amount of speculation in the market, and it's being driven by the silver ETF (exchange- traded fund),' said Kevin Grady, a metals trader with MF Global.
This is evident in the ever increasing demand for silver ETFs such as the iShares Silver Trust.
Last Thursday, the popular silver ETF saw a trading volume of nearly 180 million - well above its 10-day average volume of 104 million.
Historically, when vast numbers of people start to carry out day-trading activities in a market, one can usually infer that a market correction might be imminent.
Traders and fund managers generally hold the consensus that they would not be surprised to see a sharp correction similar to that of last week's again soon, although they do not deny that the price of silver and its related ETFs could still see some upside.
That said, actions speak louder than words. With some funds stepping up on accumulating hedges against the potential downside of silver and its related ETFs, what does that tell investors?
Should one continue to join in the silver rush - or perhaps take profits and go on a nice holiday?
Last week, US Federal Reserve chairman Ben Bernanke seemed to have lent a hand to the gold and silver story as he signalled that the Fed would be accommodative by keeping interest rates low for some time. He also conceded rising inflation, which he expects to be temporary - all of which would support the claims of gold and silver proponents.
In addition, India's largest bullion importer MMTC has indicated plans to double its silver purchases to 1,500 tonnes to tap surging investment interest in the metal.
Likewise, HDFC (one of India's largest banks) seems set to buy more precious metals such as silver to meet demand from its clients.
'Certainly, what I can say is the silver market remains supported by the fact that it's illiquid, relative to gold. We haven't seen a great decline in industrial demand, and that's because it's pretty inelastic. If you're going to make a cell phone, you need a little silver,' noted James Steel, chief commodities strategist at HSBC.
Furthermore, silver is likely to continue to be viewed as a cheap proxy to its much costlier counterpart - gold - to tap into the inflation play.
Since the metal is backed by a good set of fundamentals and relatively inelastic demand, it does not seem as if silver and its related ETFs such as the iShares Silver Trust have hit a secular long-term top as some initially proposed.
After all, almost all investments track a zig-zag path as they appreciate, marked by occasional pullbacks and rallies. And the climb of silver should be no different.
Hock Lock Siew
Is silver's climb mere speculation?
By MICHELLE TAN
SILVER is continuing its ascent as it inches towards greater highs on rising speculation.
Pessimists on the silver story feel the saga is about to end, with silver prices having gone ballistic of late.
To recap, silver prices plunged sharply on Tuesday last week, diving about 10 per cent in a day before subsequently clawing back its losses over the latter part of the week.
Optimists attribute silver's incredulous appreciation to extreme optimism in the investment community and reason that, at such times, price volatility tends to be more prevalent.
But is this precious metal's stupendous rally really a case of extreme optimism - or one of excessive speculation?
'I think what you're starting to see is a tremendous amount of speculation in the market, and it's being driven by the silver ETF (exchange- traded fund),' said Kevin Grady, a metals trader with MF Global.
This is evident in the ever increasing demand for silver ETFs such as the iShares Silver Trust.
Last Thursday, the popular silver ETF saw a trading volume of nearly 180 million - well above its 10-day average volume of 104 million.
Historically, when vast numbers of people start to carry out day-trading activities in a market, one can usually infer that a market correction might be imminent.
Traders and fund managers generally hold the consensus that they would not be surprised to see a sharp correction similar to that of last week's again soon, although they do not deny that the price of silver and its related ETFs could still see some upside.
That said, actions speak louder than words. With some funds stepping up on accumulating hedges against the potential downside of silver and its related ETFs, what does that tell investors?
Should one continue to join in the silver rush - or perhaps take profits and go on a nice holiday?
Last week, US Federal Reserve chairman Ben Bernanke seemed to have lent a hand to the gold and silver story as he signalled that the Fed would be accommodative by keeping interest rates low for some time. He also conceded rising inflation, which he expects to be temporary - all of which would support the claims of gold and silver proponents.
In addition, India's largest bullion importer MMTC has indicated plans to double its silver purchases to 1,500 tonnes to tap surging investment interest in the metal.
Likewise, HDFC (one of India's largest banks) seems set to buy more precious metals such as silver to meet demand from its clients.
'Certainly, what I can say is the silver market remains supported by the fact that it's illiquid, relative to gold. We haven't seen a great decline in industrial demand, and that's because it's pretty inelastic. If you're going to make a cell phone, you need a little silver,' noted James Steel, chief commodities strategist at HSBC.
Furthermore, silver is likely to continue to be viewed as a cheap proxy to its much costlier counterpart - gold - to tap into the inflation play.
Since the metal is backed by a good set of fundamentals and relatively inelastic demand, it does not seem as if silver and its related ETFs such as the iShares Silver Trust have hit a secular long-term top as some initially proposed.
After all, almost all investments track a zig-zag path as they appreciate, marked by occasional pullbacks and rallies. And the climb of silver should be no different.
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