Saturday, November 20, 2010

The Economist - 20-26 November 2010

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Is the Silver Correction Over?

The silver 2hr chart below suggests a strong statistical probability that silver bottomed on Tuesday/Wednesday. Note the following:
  • Silver has retraced Fibonacci 62% (purple line) of the recent short-term run-up
  • Price has broken out of a wedge pattern to the upside – breakouts from wedge patterns are statistically quite reliable indicators
  • Price bounced convincingly off the short-term support line (blue)
But also note: the indicators (below) suggest that the “recovery” is heading into overbought territory – perhaps reflecting the velocity of the bounce – but this is not particularly significant for forecasting purposes.
Like you, I increased some of my silver holdings on the strength of these probabilities.
Note also that some silver stocks came back to fill their earlier gaps up – also a good sign. FR is a good example.
Gold has also just broken out of its wedge pattern – but there is yet less statistically significant information to confirm a solid “breakout.” (more)

The coming cocoa correction

An improving political climate in the Ivory Coast could result in a cocoa production boom. Combine this with slowing economic growth in the U.S. and Europe and the commodity looks downright expensive.

Cocoa futures aren't looking so sweet these days.

We're short cocoa, mainly because of the potential for an improving political situation in the Ivory Coast – the world's largest producer of cocoa – and the potential for slowing demand as global growth slows sequentially.

From a consumption perspective, the U.S. and Europe are the largest consumers of cocoa. In fact, 16 of the 20 world's top consumers (on a per capital basis) are European countries; by some estimates Europe consumes more than 40% of the world's cocoa. In aggregate, developed countries consume more than 65% of the world's cocoa, with North America being the second-largest consuming region after Europe. In total, the world will consume somewhere on the order of 3.6 million tons in 2010.

Interestingly, while developing countries are growing demand at a slightly higher rate than developed countries, it is only marginal, as developing demand is expected to grow at under 2% this year. (This is in comparison to higher demand growth for more essential commodities such as oil, copper, etc.)

From a demand perspective, since chocolate is considered a specialty item and not a necessity, we would expect demand for it to wane in slower economic growth periods. As we've noted, we expect both U.S. and global growth to slow sequentially going into 2011, which will curb consumption patterns, particularly for nonessentials such as cocoa. (more)

Widespread Silver Bar Shortages

As of today, there are no longer any regular wholesale supplies of the 1 ounce through 100 ounce silver rounds and bars available for immediate delivery. It may be possible to locate incidental quantities of some product, but most wholesalers are now promising two to four weeks delivery to allow time for the silver to be fabricated.

As a result of the shortages, premiums have started to rise. So far, the increases have been modest, on the order of 0.5-2%. However, if the shortage grows, expect to see further and larger premium increases in the coming weeks. We could see a repeat of the late 2008 gold and silver buying frenzy, where product availability got as slow as 1-4 months after payment.

At the COMEX close yesterday, registered (dealer) silver inventories fell below 50 million ounces. Even if you include the eligible (investor) silver inventories in the COMEX bonded warehouses, which are not available to fulfill COMEX deliveries unless the investor specifically chooses to do so, there were barely 107 million ounces to fulfill around 725 million ounces of contractual obligations. COMEX silver inventories are now down more than 10% from mid-June even while the amount of silver owed has soared!

As the price of silver almost continuously rose from $17.98 on August 23 to $29.36 mid-day on November 9 (a 63% increase), the COMEX had not changed its minimum requirements for leveraged accounts. It would be a normal process to periodically bump us the minimum amounts for margin accounts as prices rise, but this was not done until November 9, when the margin requirement was increased from $5,000 per contract to $6,500.

On September 16, the COMEX further raised the silver contract margin requirement to $7,250—even though the price of silver had been dropping since November 9! What is suspicious is that a lot of “insiders” were liquidating their silver positions starting the afternoon of November 15. Is it possible that they may have received advance notice of the coming change in the minimum margin account requirement and sold in anticipation of lower prices the next day? (more)

Chart of the Day: Consumer Debt to GDP

HES Radio: World Financial Report

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Bloomberg Businessweek - 22-28 November 2010

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