Trade volume this year experienced at least indicate the movement of the silver market is safer than gold as is often suggested

Silver's high fix, when it was way overbought, was $48.70 on April 28th. Gold held up briefly as silver toppled over, but as the commodities sector as a whole got caught up in the onslaught, gold in particular, was sold in order to raise cash against margin calls. Gold's high fix was $1,546.50 on the morning of 3rd May.

The speed of the falls of these two metals is well-documented, but for the record, silver dropped to a low fix of $32.50 in 12th May, while gold fell to a low fix of $1,478.50 on 17th May. These were falls of 33% and just 4% respectively. On an intraday basis the price declines represented the unwinding of part of the most recent very sharp upward legs that had commenced in late January. Silver's move was unwound by 75% and while gold's correction was obviously much shallower, it was still over 40% of the post-January move.

Gold's post-August 2009 uptrend has been by no means severed and in the immediate term gold would have to drop towards $1,450 before the support came under threat. Silver moved into more perilous territory, but here, too the overall medium term uptrend - discounting the March-April spike - is also intact.

So what of the flows of funds in and out of the markets while these moves have been taking place? Silver is often cited as a much smaller market than gold, with this accounting in part for its higher price volatility. The approximate value of last year's mine production, for example (taking the annual average price) was $14.9 billion, while that of gold was $106 billion, seven times as large as silver. Trading patterns have been shifting and recent silver activity, on a pro rata basis compared with mine supply, has been much larger than that of gold.

Gold turnover in the first-continuation on COMEX last year, at $5.5 trillion, was 4.1 times as much as silver's first-continuation turnover. Silver volumes have rocketed this year, however and gold turnover of 2.8 trillion in the year to late May was only 1.6 times as much as that of silver. Between the start of this year and the third week of May, silver turnover on Comex had reached $1.7 trillion, thus exceeding turnover of the whole year, while the daily average volume (based on turnover and daily close) at $17 billion, compared with $5 billion daily in 2010 - and this, it must be remembered, was merely the first-position contract.

COMEX first-position silver turnover, contracts and $M

Silver price future, silver price chart, silver market progress

Source: Thomson Reuters, MineWeb

The gold:silver ratio since the start of this year has averaged 41.8:1 (compared with 62.1:1 in 2010), so this recent performance is pretty impressive; whether it can be sustained, however is open to some doubt as the metal's recent price performance is likely to deter some speculators and investors. Silver is renowned for this kind of capricious behaviour and this recent short sharp shock is likely to scare away more than just the faint-hearted, suggesting that the gold:silver ratio should continue to widen.

COMEX speculators have already been voting with their feet. The CFTC figures for 24th May show that speculative silver longs were 9,386 tonnes and shorts were 3,949 tonnes, giving a net position of 5,437 tonnes. At its recent peak on 5th April, the net speculative long was 8,773 tonnes, comprised of 13,047 tonnes of longs and 4,273 tonnes of shorts. In other words, the combined speculative long+short position in early April was almost 17,200 tonnes and by late May it was down by 23%. The actual recent low was the previous week and there was a smidgeon of fresh long side interest in the following week so there is some tentative interest returning to the market, but we are unlikely to scale the April highs in the foreseeable future.

Meanwhile in the major Exchange Traded instruments, the net inflow of funds into silver between late January and the price peak was $760 million. Some $1.4 billion left the funds during the correction, and a further outflow of more than $660 million has taken place since. Roughly $790 million when into the major gold funds while between late January and the peak in early May, while in the correction the funds lost $1.2 billion. Since then, however, although there were subsequent outflows the gold funds have stated turning round and have enjoyed fresh net investment of over $150M, giving us additional evidence that while gold is moving back into favour, silver market players may still tread with caution for the time being.


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