Oil prices slowed their bull charge yesterday as the White House desperately applied the brakes. But that bull run won’t slow for long.
And that has big implications not only for prices at the pump, but for precious metals as well.
President Bush did four things …
1) He waived regional clean-air specifications for summer-grade gasoline in order to boost imports of motor fuel to the United States.
2) He ordered that deliveries to the nation’s emergency reserve be suspended.
3) He gave refiners extra time to pay back emergency oil loans, and
4) He said Congress should find a way to approve permits to build new refineries a year after they are filed.
Talk About Rearranging
Deck Chairs on the Titanic!
President Bush is swimming against a tidal wave of forces that are likely to push oil and gas prices sharply higher this summer.
We’ve already seen the first warning signs, with gasoline inventories falling for seven weeks in a row. But most of the problems are beyond our borders and beyond our control. Indeed, right now,
- Iran’s nuclear showdown with the U.S. is stirring the pot of geopolitical uncertainty.
- Venezuela’s mercurial president, Hugo Chavez, is seizing the operations of some foreign oil companies and hiking taxes on others, discouraging exploration in the country with the biggest conventional oil reserves outside of the Middle East.
- China’s economy is booming, kicking its energy consumption into overdrive. Its gross domestic product grew 10.2% year-on-year in the first quarter. Meanwhile, China’s auto industry reported a record 1.73 million vehicles sold in the first quarter of this year, a rise of 36.9% over the same period in 2005. That’s also boosted China’s oil imports — by over 25% in the January-March quarter.
Result: Economists are scrambling to refigure forecasts for China’s oil demand. Just a couple weeks ago, the International Energy Agency (IEA) forecast that China’s demand for crude would grow just 5.5%, or 360,000 barrels a day.
And it may go higher. China boosted its power generation capacity 14.9% in 2005 and plans another big increase in 2006. That increases energy demand across the board.
So the long-term trend in energy is up. But you know what else this affects: Precious metals.
As Oil Heats Up,
Metals Catch Fire
Chinese have a high cultural affinity for precious metals. Their booming economy now gives them more money to pour in to gold and silver.
Meanwhile, booming oil sales also put more money in the pockets of Persian Gulf oil princes, and they also have a growing appetite for precious metals.
This one-two combo should help stoke the fires under the prices of gold and silver — fires that are already about to roar thanks to powerful long-term forces at work.
But in the short-term, metals are undergoing a correction. And this is handing investors a …
A Great, New Buying Opportunity
— Especially in the Silver Market
Last week, silver suffered its biggest two-day swoon in 23 years on Wednesday and Thursday. Then on Friday, it rebounded like it had springs on its feet, marking its biggest one-day gain in 11 years. On Monday came another swan dive. And yesterday, up it went again — surging 78 cents to $12.56 on the May contract, a jump of 6.7%.
I’d wager there are veterans of the trading pit in New York who would rather be locked in solitary confinement with a serial killer than try to trade silver right now.
But why go crazy trading silver? Just investing in silver for the medium and long term can generate more than enough profits. So unless you like straight jackets, it’s not worth messing around with the short-term ups and downs. Plus, when others are afraid, that’s your opportunity.
In fact, just last week, I asked you to think about what you would buy when silver pulled back. Then, guess what: Silver pulled back.
But the sell-off hasn’t even dented the long-term uptrend for silver — and that means great buying opportunities are within reach.
It’s hard to say exactly what triggered the sell-off. But if I had to point at any one thing, I’d say it had something to do with this:
The New York Mercantile Exchange and the Chicago Board of Trade increased their margin requirements on silver futures contracts. At the NYMEX, margins for the silver futures contract increased to $3,750 from $3,250 for clearing and non-clearing members and to $5,063 from $4,388 for customers.
So the timing was too close for coincidence. A bunch of people with silver contracts suddenly had to meet new margin requirements and contracts were liquidated.
In a frothy market, that meant a waterfall of liquidation. But it also means that the sell-off in silver wasn’t driven by fundamental economic factors. It was mostly technical and temporary. And silver could shrug it off very quickly indeed.
The Silver ETF Cometh
After all, the silver ETF is about to launch. Investment funds are already piling into silver ahead of the ETF’s debut.
After all, investment funds like to play it safe, and considering how the gold ETF is driving both price and demand for the yellow metal, it’s a safe bet the silver ETF will do the same. And they’re not just buying gold and silver: Fund investments in commodities will rise 38% this year to $110 billion, according to Barclays Capital.
The real question is what the silver ETF — and other sources of demand — will do for the price of silver longer term. I’ll get to that in a moment. But first, an update on …
The Silver Supply/Demand Squeeze
Last week, I told you how above-ground stockpiles of silver were dwindling, from over 220 BILLION ounces years ago to probably less than 300 million ounces today. I also told you that mining couldn’t keep up with new demand.
Now consider this: Despite rising prices, U.S. silver output keeps falling. The price of silver soared 30% in 2005, but U.S. mine output actually fell 2%.
And the rate of decline is getting worse:
- In December, U.S. mines produced 98,400 kilograms of silver — down 16% from a year earlier.
- In January, U.S. mine production of silver fell yet again, down 10% to 89,000 kilos, off a whopping 25% from a year earlier.
- February’s production numbers aren’t in yet. But what we do know is that U.S. silver exports fell 66.1% in February from January, and slipped 37.3% from a year earlier. That’s symptomatic of falling production, a surge in demand, or both.
Do you think, with silver prices soaring, that U.S. miners aren’t pulling out all the stops? Of course they are. At these prices, they want to get every last ounce they can to market. And yet production keeps falling!
Sure, there’s some new production coming online in other parts of the world — Mexico for example. But it’s just not enough. It can’t keep bridging the gap between accelerating demand and swooning production at the older mines.
As of 2004 (the most recent data), China had the world’s sixth largest silver reserves and was the world’s fourth largest silver producing country, churning out 63.4 million ounces annually. Although its production is fragmented — coming from a bunch of smaller mines — it grew rapidly in the 1990s.
Problem …
China’s Silver Consumption Is Growing
A Lot Faster Than Its Silver Demand
Chinese imports of silver were up 200% year-over-year in both January and February. So …
Soon — probably this year or next — China is going to become a net silver importer.
China’s silver consumption may rise 10% this year from 2,550 tons in 2005, according to China state analysts. That’s probably a low-ball forecast; it may have to be adjusted upwards mid-year. Plus …
China Looking to Launch
Spot Trading of Silver
In July of This Year!
With all the excitement over the new silver ETF that’s about to debut in the U.S., don’t forget that other countries are introducing new precious metals trading vehicles as well.
In China, the Shanghai Gold Exchange hopes to launch spot silver trading on its bourse in June or July. Although it would be called spot trading, delivery for the silver would be allowed to extend as long as 120 days, almost like a three-month forward contract.
There is already spot trading of silver on the Shanghai Platinum and Silver Exchange, also known as the Huatong exchange, but that’s state-run and overregulated. While monthly trading volume of silver on the Huatong is now over 30 tons, it’s not meeting expectations.
Traders believe that a spot market on the Shanghai Gold Exchange has the better potential to really open the doors to the masses — setting the benchmark for silver in China and boosting investor demand.
Industrial Use of Silver
Is Booming in China
If you want to see heavy use of silver, go to China’s Jiangsu Province, a booming industrial center.
Just in January alone, and just in this one province, imports of silver surged to 25.5 tons — a nearly 20-fold increase over the year-earlier period.
Reason: To weld its electronic components in a way that meets EU standards, the electronics manufacturing industry in Jiangsu is switching from lead-bearing tin rods to silver-bearing tin rods.
Sound like an inconsequential change? Far from it: This single event in a far-away Chinese province can have a very noticeable impact on silver markets all over the world.
China’s Silver Stockpiles Falling
China has been bridging the gap between supply and demand by pulling from its silver bullion inventories.
Result: China’s silver stockpiles fell from 67 million ounces in 1999 to 34 million ounces in 2004. And now … who knows? When they get to critically low levels, and that forces China to bid more aggressively in the world markets than they already are … that’s when we could see prices really take off.
Newsflash: It’s not just China
China gets a lot of attention, but other nations are also doing their part to shift the precious metals sector into overdrive. Some prime examples:
India: The Securities and Exchange Board of India has already passed new regulations allowing mutual funds to launch precious metal ETFs. Indian mutual funds seem to have been caught flat-footed by the decision, but it’s only a matter of time before new silver and gold ETFs debut in India.
As in China, a growing middle class with a strong affinity to precious metals, is rushing to buy gold and silver in a myriad of forms.
Britain: The London Stock Exchange is introducing a silver ETF this month. Unlike the U.S. ETF, it won’t be backed by physical silver. Instead, it will track the price of silver using futures contracts. Still, it’s one more way people can trade silver, and, in my view, it can only add to demand.
Dubai: The Dubai Gold and Commodities Exchange (DGCX) introduced its silver futures contract on March 28. Since gold trading on the DGCX has taken off like a rocket, it wouldn’t be surprising to see silver do well, too.
It’s only fitting that Dubai have a silver contract because that’s where some of the staggering oil profits reaped by Persian Gulf countries are likely to go.
And the oil money is pouring in: Middle East oil exports hit $685 billion in 2005 — a 44% jump from 2004. And now in 2006, it’s even larger. So the fat-cats of the Middle East are:
- swimming in money, and, at the same time …
- terrified of Islamic revolution spilling over the border from Iraq or across the Strait of Hormuz from Iran.
It’s Not Just Silver!
The global gold supply is also tight and getting tighter.
South Africa, the world’s #1 gold producer, is about to be knocked off its perch by Australia.
Why? Simple: Australian gold production is rising, and South African gold production is falling off a cliff.
In fact, South Africa’s gold production plummeted from 673 tons in 1980 to 296 metric tons in 2005. That’s an 82-year-low!
And like we’re going to see soon in silver, even while new supplies are slumping, the demand from ETFs is surging. The already-existing gold ETFs now hold over 561 tons of gold and accounted for 223 tons of gold investment during 2005.
Just since the start of this year, they’ve added over 137.5 tons. That’s 1.5 times South Africa’s total production for the same period!
But ETFs aren’t the whole story. Indian consumer demand for gold rose 14% in 2005, according to the World Gold Council. India alone accounts for almost 20% of global jewelry consumption. Consumer gold demand rose 4% in the United Arab Emirates … 12% in Saudi Arabia … 7% in China. It’s booming worldwide.
That doesn’t mean we can’t see corrections — far from it. In fact, I wouldn’t be surprised to see silver have a short-but-sharp pullback after the silver ETF is introduced — a case of “buy on the rumor, sell on the news.â€
But if that’s what happens, it will be a great buying opportunity.
Two Fast-Lane Vehicles
For the Gold Rush
Here are two funds to consider …
American Century Global Gold Fund (BGEIX) is a no-load fund that has a total expense ratio of just 0.67% (less than half the category average). It’s up 11.2% in the last three months and 76.8% in the last year. Its portfolio is stuffed with gold companies, but many of them produce silver as well.
U.S. Global Investors World Precious Minerals (UNWPX) is another no-load fund. It has a total expense ratio of 1.48% and holds companies that produce not only gold, but also platinum and silver. It’s up 26.4% in three months and 98.99% in the past year. Wow.
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Yours for trading profits,
Sean Brodrick
P.S. For the latest on what’s happening with precious metals and energy, check out my blog at www.RedHotResources.blogspot.com.
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
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