Silver

During the first few days of this month, silver continued to rise, reaching an 11-month high of $4.70 a troy ounce in London on January 4. This was more than 15 per cent above the eight-year low of $4.065, the metal reached in November.

But analysts think silver’s strength has little to do with the supply and demand fundamentals. Ross Norman, director of The Bullion Desk, called the rally one of the rare “brief bouts of madness when prices rise inexorably, driven by a tight squeeze on the liquidity.”

The cost of borrowing silver has soared in recent weeks, with one-month silver lease rates around 18-19 per cent by January 4. Norman suggested silver bulls may have tried to take advantage of thin trading volumes over the Christmas break, driving lease rates to 28 per cent, their highest in four years.

The market is experiencing the kind of squeeze last seen in 1998 when the billionaire investor Warren Buffett bought 130 million ounces - about 4,000 tons and roughly 16 per cent of the annual mine production.

After Buffett revealed his hand speculators rushed in, sending the price of silver to a 10-year high of $7.81 an ounce. In the absence of new supply into the market, participants had to borrow metal, forcing lease rates as high as 35 per cent. This time, one-month lease rates were around 25 per cent.

The difference is that, while the squeeze has clearly supported silver prices, it has not forced them as high as some traders had expected. The reason for the tightness remains a puzzle, with some traders guessing that a large silver owner may have decided, for reasons unknown, to stop lending.

Other theorise that one or two big speculators with large stocks of silver are trying to drive prices higher before selling and taking the profits.

High lease rates may be supporting silver, but analysts do not think the fundamentals justify a steep move higher. Silver has recently been weighed down by a lack of demand from key sectors such as jewellery, electronics and photography.

Andy Smith, at Mitsui, points out that Buffett is not the only “high roller” in the market. “George Soros has owned apex silver stocks since 1994 and Microsoft’s Bill Gates holds a 13.7 per cent share in Pan American silver.”

Monthly clearing data from the London Bullion Market Association (LBMA) confirmed a surged of activity in silver last month. The average daily number of ounces of silver transferred Ivory Coast will also receive CFA Fr9 billion from the European Union to support the coffee subsidy, according to the Agriculture Minister Alphones Douati.

But the total still falls short of the CFA Fr30..5 billion needed to subsidise the farm-gate coffee price of CFA Fr200 a kg is the 2001-02 coffee crop reaches the BCC’s forecast of 200,000 tons.

Commodity prices:

According to the Economist Intelligence Unit’s first quarter forecasts for industrial raw materials, hard commodity prices will stablize this year before recovery gathers momentum in 2003.

The rising demand for nickel in the first half of this year is expected to drive prices up sharply toward the end of the year, although they are expected to subside in 2003 as heavy oversupply returns.

Tin prices are expected to remain low into early 2002 as planned production cuts prove insufficient, before a substantial consumption recovery in the second half. Aluminium prices “will inch up slowly through 2002 into early 2003, as demand picks up strongly, before falling in 2003 as the market remains oversupplied.”

For copper, the only hope of price stability lies in reduced output, according to the EIU. “Any sustained price rally will be delayed until late improve, lifting consumer confidence,” said the EIU.