Gold and silver are pulling back today. I’m happy to see that, even though I’ve been adding a bunch of bullish positions in gold and especially silver to the Red-Hot Global Small-Caps and Red-Hot Commodity ETFs portfolios recently. Why? Because I want to buy more silver.
Why silver? I’ll quote Kitco’s perma-bear Jon Nadler, who in turn quotes Roubini Global Economics, whose analysts say that:
“silver is better placed than gold to enjoy the global recovery in industrial production. While non-investment demand accounts for 94% of total demand for silver, non-investment demand accounts for only 62% of total demand for gold.
“Silver has several large-scale industrial uses—photography, silverware, solar panels, etc.—whereas the physical use of gold lies mostly in jewelry. Meanwhile, alternative uses for silver have been rising, particularly as demand from the photography industry dwindles due to the shift toward digital cameras. The establishment of new silver exchange-traded funds (ETFs) could also tweak the metal’s price drivers.”
As Nadler and Roubini both point out, silver is an industrial metal as well as a precious metal. And as I explained in a video earlier this week, the economic outlook is improving.
Just this morning, Initial jobless claims dropped 29,000 to a seasonally adjusted 469,000 in the week ended February 27, down from an upwardly revised 498,000 the prior week, the Labor Department said. True, this may be distorted by the “snow-maggedon” that hit the North.
Source: Calculated Risk.
This does not change the fact that the employment situation is terrible, but you can’t ignore good news, either.
Also this morning, the Labor Department reported that productivity is rising. U.S. nonfarm businesses cut hours by 1.3% even as they boosted their output by 2.5%. And the 2009 final numbers are in — For all of 2009, unit labor costs fell 1.7%, the most since the records were first kept in 1948. And productivity increased at a 6.9% annual rate in the fourth quarter, revised up from the 6.2% reported a month ago.
And these are just two of the latest splashes in a stream of good economic news …
- Global trade is recovering. Last year, world trade fell 12%, its worst decline since 1945. This year, containerized ocean shipping is expected to rise 12%, according to a report in the Journal of Commerce.
- Oil demand is rising. After over 18 months of recession, world oil consumption is roaring back to its pre-crash peak. The International Energy Agency says oil demand will probably hit 86.5 million barrels a day this year. That is equal to a thousand barrels a second. The growth in demand isn’t in the U.S. — we’re using oil at 2005 levels. Instead, it’s the growth in China, India and other emerging markets that is driving global demand now.
- Iron ore prices are rising. The so-called cash, or spot, market price of ore delivered to China, the world’s largest buyer, rose to the highest in more than a year this morning. And it’s a sign of things to come. Iron ore contract prices will rise 70 percent in 2010, according to economists at Nomura Holdings. What’s more, the big Japanese financial company says it expects prices for coking coal, used to fuel steelmakers’ blast furnaces, will double in the next two years.
- Other signs of global strength. It’s not just China that is recovering. Japan’s jobless rate dipped in January for the second month in a row, while household spending increased. And Australia’s central bank hiked its benchmark interest rate AGAIN, this time to 4%, in a sign of confidence in that country’s economic outlook.
Much of this recovery is happening outside the U.S., but we still play an important part in the world economy. While I still worry deeply about the long-term outlook for America and its economy, I’m not bearish on America at this time. And increased economic activity in the U.S. should add more heat to already sizzling commodity prices – like silver!
Before we get carried away, it’s important to point out that not all the news is good. Barry Ritholtz over at the Big Picture (one of my must-read blogs) says that a declining Purchasing Managers Index in China is a sign of potential trouble. And it may well be.
Barry says: “The manufacturing industry (in China) has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.”
So maybe the rally isn’t for real. Silver could track gold, and gold could track oil, and while oil looks bullish now, that could change.
Now that I’ve depressed you, let me lift your spirits with another chart. Silver ETFs continue to add to their holdings. Check out this chart from the always-excellent Sharelynx.com …
Notice how holdings of physical metal in the ETFs has soared by about 100 metric tonnes over the last year? Someone is accumulating silver.
I think silver looks like a good opportunity here. And that’s why I’m buying physical silver today for my own account. I’d like to buy it cheaper, but I missed the last bottom while I was traveling. And I’m pretty sure silver will be higher a year from now.
