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Hi-Lo Silver!

By Jon Nadler       Printer Friendly Version
Nov 21 2008 4:26PM

Good Afternoon,

A day of strong gains concluded a week that saw gold at under $700 and above $800 - a level at which the metal was last seen on October 20. Options expiration, fund buying, short-covering, and a return of modestly higher risk appetite on a day when stocks did not undergo a meltdown for a change (and actually added $495 ! points), all converged to give gold its best day in nearly two months. 

Contributing Kitco technical analyst Merv Burak scored again this week, correctly having called the short-term outlook as bullish in his Monday analysis. For the time being, Merv's medium and long-term technical indicators remain in the bearish column, projecting gold to be aiming for an eventual $480, with a stop around $630.00 -

A difficult external environment made for a somewhat softer dollar (losing 0.26 on the index to 88.07) and briefly enabled safe-haven plays in oil (just about recapturing $50) and precious metals as well.  At last check, NY gold bullion was maintaining a better than 6.5% gain on the day, with a $50.00 sprint to just under $800 per ounce. Next stop? How about 50/50 $845 or $745. Fair enough.

Silver went into the final stretch of the day with a 67 cent rise to $9.59 per oz. Platinum climbed $39 to $813 and palladium added $3 to $177 per ounce. Stocks straddled the unchanged mark in the afternoon hours, and still tried to scrape a gain together for the day. Still, they are scraping along a very rocky 11-year low...

More dominoes to report overnight, and big ones they were. Singapore fell into recession, Toyota will cut 3,000 jobs, Eurozone manufacturing and services contracted at the fastest rate in a decade, Goldman slashed US growth forecasts and projected 9% unemployment, and much of the biotech sector appeared in peril as funding became harder to find than the elusive gene therapy solution. The list of brighter news was pretty slim, but $1.99 gasoline and a suspension of evictions and foreclosures by "Frannie" until Jan. 9 are nice early presents to troubled US households.

The biggest domino (some say too big) to teeter in the US, has now become Citi. Unable to stem the freefall in its share price, the bank's board convened today to consider its options. Including that of a sale of all, or parts of the behemoth. However, word from the top was that there will be no slice & dice of the firm. GM -albeit reportedly being circled by vultures from China - also won't be thrown to the predators. That's if Ms. Pelosi gets her way. Anyway, as of the last quick tally, anyone with $2 billion could buy all of GM, and anyone with about ten times as much pocket-change could lay claim to Citi ownership. Perhaps the automakers should beat a path to the offices of Messrs. Jobs or Gates. Now, picture an iCar with power Windows...running on lithium-ion batteries. Real progress, not the refuse we've been fed out of Detroit as 'modern transportation.'

The unmitigated disaster that has been silver's freefall during the July-September period (a 46% loss in just a few short weeks) has prompted questions from readers as to its near and medium-term outlook. Earlier this week, we presented you with the latest projections for the platinum-group metals, courtesy of Johnson Matthey. While much depends on the industrial equation here, we can go along with the latest analysis from the research house of GFMS London and its spokesman (and longtime friend) Philip Klapwijk - The latest GFMS outlook on poor man's gold is brought to you by Reuters:

"Total silver fabrication demand will drop as much as 10 percent in 2009 on tumbling photography and industrial uses as the global economy slows, a top official at precious metals research firm GFMS said. Philip Klapwijk, GFMS's executive chairman, said he expected silver to rise to $13 an ounce next year as the metal will benefit from gold because of rising inflationary pressure and a weakening dollar. 

"Silver, like gold, has been facing massive head wind from people deleveraging as they need to raise cash to answer margin calls and to face potential redemptions," Klapwijk told Reuters in an interview prior to his presentation at the Silver Institute's annual dinner in New York.

"We have to be looking at the order of 5 to 10 percent" decline for 2009 fabrication demand, compared with 2008, Klapwijk said. On Thursday, GFMS said in its interim silver market review that silver fabrication demand, which includes industrial, photography, jewelry, silverware, was expected to rise 1 percent year-over-year in 2008 due to increased coin hoarding.

For next year, silver photography use is expected to fall in the double-digit percentage range, and industrial demand might also drop in the low double digits, while jewelry and silverware buying would also decline, Klapwijk said.  Klapwijk also said the price of silver would reach $13 an ounce in 2009 largely because of inflation expectations.

"We think gold will get a second wind, and silver will benefit from that. This will come from some degrees of dollar retracement."

"The real juice will come when investors start to concentrate more on the inflation risks down the path, rather than the current deflationary negative economic outlook," Klapwijk said. Klapwijk said the increase in money supply related to the U.S. government's market rescue plan would lead to "massive inflationary consequences" at some point.

As a result, the outlook for silver and precious metals is positive in the medium term, especially given their low valuations, he said. Spot silver has declined nearly 60 percent after hitting a 2008 high of $21.24 an ounce on March 17 as a global economic slowdown hurt industrial metals. It traded at around $9.50 on Friday.

Klapwijk said silver could also draw some interest as a widely watched gold-to-silver ratio has tilted to silver's favor. On Friday, the ratio -- which shows gold's price in relation to the price of silver -- traded above 80, compared with about 45 back in March. Historically, the price of silver tends to follow gold because of the white metal's monetary characteristics.

"On a ratio basis, silver looks pretty cheap," Klapwijk said."

Parting notes: Mrs. Clinton to be Secretary of State, Mr. Geithner to be Treasury Secretary. The stock market loves that name, apparently. Youthful vigor. Fresh ideas. Change. The new management team is shaping up. One by one. What will 2009 bring? We plan to stay tuned.

Do have a pleasant weekend. Bundle up, where appropriate.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.