Shanghai Futures Exchange Starts Silver Trade

May 6, 2012 at 22:41


Silver and China are coming full circle. In the mid-1930s the academic journal Foreign Affairs noted how “the world was startled by the news that China had abandoned the silver standard” after foreign miners began dumping surplus metal into China.

Seventy-eight years later, this coming Thursday, the Shanghai Futures Exchange begins trading silver contracts. China Daily noted there had been an absence of silver trading ability in China and — significantly — it would make the market more liquid.

The silver buffs jumped on that one, predicting the end of big Western speculators manipulating the price, which so many of them believe has been occurring.

However, silver still tends to behave as it did more than 80 years ago. That Foreign Affairs article noted “the ups and downs of silver have been more marked than those of any other commodity.” Same now. China Daily noted “the price of silver has long been volatile,” recalling last year it dropped 13 per cent in a single session.

Chinese commentators expect the silver contract to do well as most retail investors there prefer that metal to gold, because its minimum purchase value is lower. But silver is also imbedded in the Chinese psyche: It was long the basis of China’s currency and in 1935 the Shanghai-based biweekly Finance and Commerce reported personal hoards of the metal in China were estimated at 1.27 billion ounces.
China is not only the world’s largest gold producer but is becoming the biggest importer too. We will wait and see whether the same import demand builds for silver.

Shanghai futures trading could mean additional investment demand for silver, just as we have seen Chinese retail investors stock up on gold.

But, more importantly, we might see Chinese corporates looking to pick up silver projects (and companies) abroad, just as they have begun doing with gold deposits and producers.

If Standard Bank’s bullion strategist was right in February, China has very large stockpiles of silver, estimated as being sufficient for 15 months’ fabrication demand. So China does not need physical silver today — but buying foreign silver assets is about demand in the years ahead.

It seems all the gold and silver roads are leading to China.

A note from London-based Libertas Capital on the state of the platinum sector contained this intriguing sentence: “Chinese demand for palladium jewellery fell to an eight-year low, indicating the fashion change toward gold may be permanent.”

News from the sector over the week included PanAust (PNA) pouring its first gold-silver dore, a semi-pure alloy of the two metals, from its Ban Houayxai project in Laos. PNA is planning output of 85,000 ounces of gold and 200,000 ounces of silver this year.

White Rock Minerals (WRM) has made another silver discovery. Its Mount Carrington gold-silver project near Drake, northern New South Wales, already has a resource of 284,000 ounces of gold and 23.3 million ounces of silver.

Drilling at the Mozart prospect within the project area has returned an intersection of 33m at 97 grams/tonne silver, Mozart being one of 10 near-mine and regional targets to be drilled this year.

The Drake mineral field has been yielding precious metals discoveries since 1853. Work started up again in the 1960s and was explored by several parties, including the former CRA. Mount Carrington was acquired in 2008 by Rex Minerals (RXM), which has since made headlines with its South Australian copper-gold finds, WRM being demerged in mid-2010 to take over the NSW work.

A private client adviser tells us all the signs are there’s not much time left to get aboard the gold bandwagon before it heads off to $US2,100.

“It is imperative that any buying of gold stocks is done early,” he says. “Now that many market investors have reduced their gold exposure we are likely to see a much clearer move up in gold stocks as the oversold condition is unwound.”

An article from one of the more reliable US gold websites was attached, showing how well gold has done since April last year, being up 5 per cent. By contrast, silver has lost 35 per cent of its value over 12 months, the senior US mining indices are down by 25 per cent, and juniors by 46 per cent. Yet gold stocks have been taken out back and given a good kicking along with all the others.

The damage done, for example, to the West African gold sector by investor pessimism has been dramatic. At Friday’s close, Azumah Resources (AZM) was at 28 cents, compared with a 52-week high of 62 cents. Gryphon Minerals (GRY), which has 2 million ounces in Burkina Faso, closed at 92.5 cents against its high of $2.05, and Ampella Mining (AMX) at $1.03 is down from $2.46. And all these against a reasonable gold price and sound progress by the companies involved.

Badly hit too has been Perseus Mining (PRU) even though it has runs on the board. It closed at $2.50 but has hit $4.05 over the past 12 months. Warwick Grigor at Canaccord-BGF terms PRU’s performance “outstanding” with cash costs in the March quarter of $723 an ounce against guidance of $950/oz.

“It is rare to find a company that has consistently delivered on its promises and reported only good news for such a long period,” Grigor said in his Friday client note.