Commodities Plunge on Concerns of Demand, Fed Comments, and Hedge Fund Rumors

Several elements on Wednesday fueled a plunge in prices of many commodities, as the perfect storm of information resulted in big sell offs.

Among the major concerns was the release of the minutes from the latest meeting of the U.S. Federal Reserve, which hinted at the possibility of it slowing down its latest QE or stimulus program before the hiring numbers it was targeting are even close to being met.

It sounds like a deliberate attempt by the Fed to influence the market, as the chances of it stopping its stimulus any time soon is very unlikely at best. Hiring really hasn't moved at all since the introduction of the latest round of QE, so the idea the central bank is going to just slow down or close up shop is pretty ludicrous.

Nonetheless, a somewhat spooked market over responded by punishing commodities across the board. Gold and silver were hit particularly hard by the news, with gold settling down 2.6 percent and silver 2.7 percent. That brought gold to 7-month lows, while silver experienced its sharpest decline in 2 months.

The other ambiguous news was a rumor a commodity hedge fund had to liquidate positions in oil and metals, putting more downward pressure on commodities. As of this writing there is no proof this has even happened. Most of the sell-off in commodities happened between 10 am and 11 am, the time the rumor of the hedge fund sell off was at its peak.

Some analysts look at it all as speculative trading more than anything else. The fact that the majority of the commodities fell on average about 2 percent points to a blip more than a rush out of the sector.

Finally, what has some potential legs one way or the other for commodities is the demand factor, in that regard there continues to be mixed data and outlook concerning the growth rate of the U.S. and global economy, causing ongoing uncertainty in the commodity markets

There is no doubt though that this was a news-related downward push on commodity prices, and shouldn't continue on until there is more clarity over the issues, which outside of the rumored hedge fund, will take time to reveal itself.

Commodity demand and the presumptions the Fed may end easing sometime soon, are things that won't be known for some time, with the ending of stimulus assuredly not going to happen any time soon. Once that's realized, things will level off again until commodity demand is better understood.

Eric Sprott on Why Silver will Outperform Gold

In this video money manager Eric Sprott talks about the reason he believes the price of gold and silver is being suppressed, showing how the supply and demand data don't line up with the current prices of both precious metals.

"Physical demand for gold is out of line with supply. How can all these new people come into this market when there has been no increase in supply . . . for the last 12 years? I would hate to think what happens when we all find out there is no gold in the Treasury."

In other words, central banks around the world appear to be selling gold specifically in order to make up for the shortfalls so the price does't soar.

He also notes that China's gold imports have soared, while the official data show only a four percent increase in the country.

Sprott also tells the reasons he sees silver outperforming gold going forward.

Go here for  video interview with Greg Hunter

Silver Prices Headed to the Moon?

While there's no doubt we're in the midst of a bull silver market, some comments by silver analyst and bull Israel Freidman on the web site of Ted Butler goes beyond reality (I think), and enters into the realm of fantasy, as he makes the assertion the combination of industrial use and investment value in relationship to silver could push the price of silver beyond gold some day.

Making assertions like that are basically useless, as even if that were to happen, it would take so many years that the idea of someone having made it would have long been forgotten, as will the person making it.

Having said that, the underlying premises for why silver prices will rise are worth looking at, as they are surely part of the silver price picture, and need to be taken into account by silver investors.

It's worth pursuing the matter because a number of commodity experts believe that silver may be the best performing asset class over the next decade.

The major argument for silver prices rising in the view of Freidman, which in general is true, is the growing demand by investors, along with the increased number of industrial uses for silver will end up producing a supply shortage in the not too distant future, which is the impetus behind his belief the price of silver could skyrocket to enormous heights, and potentially surpass gold.

Overall, the problem with that Utopian scenario is once the price of silver were to reach those dizzying price heights, and even before, businesses would seek alternative raw materials or methods to produce products requiring silver as a major component.

That would also be the case for investors, who are now loading up on silver because of it being an effective alternative to gold. Once the prices were to rise too high, the falling demand would bring them closer to reality.

Even so, we should see the ratio between gold and silver improve over what it's been, which means silver prices should rise higher in relationship to gold over the next ten years or so.

As for demand outpacing supply, in the short term that's highly doubtful, and there may even be an abundance of silver in that regard. Over the years though, it could definitely be a possibility that silver supply could come under pressure, and that could move the price of silver up to previously unheard of levels, but not to anywhere near where gold would be, unless the price of gold were to plummet to levels it stood at a little over a decade ago.

The other important factor on the investment side is how long central banks around the world continue to attempt to stimulate their respective economies. If that continues over time, that would result in significant inflation, and in investors moving their money into gold and silver to protect their assets.

This will be especially true as currencies lose their buying power.

At this time investors are still looking to the U.S. dollar as a safe haven, which has helped keep the dollar at levels far above its actual value. That's because other currencies are performing at similar levels, because central bank practices of competing currencies are kept them from being at any significant advantage against the U.S. dollar.

That will change, but that's why some investors continue to be long the U.S. dollar, as they know in this tumultuous economic climate that people and institutions will continue to pour money into the dollar as a perceived safety net. They're wrong, but in the short term that will underpin the dollar.

This will gradually change in regard to silver, and the white metal will continue to rise over time, in spite of those that seem to live to only make money by trying to short the commodity. Over time they'll lose, but those moving in and out of the market, and who know what they're doing, do make a lot of money on the wide prices movements associated with silver, and that will continue even as silver continues to rise in price.

What is good about the boost in industrial usage and demand for silver is it will, over time, place a base under the price of silver as it becomes more predictable as a result.

So the wide movement in prices over the short term may slow in the degree they move, although the relatively small amount of silver in comparison to gold will keep those prices moving much more than its counterpart.

In other words, silver will continue to rise, but the fluctuation in price will continue on unless some unknown hoard of silver is discovered which may change the supply picture over the long term. If not, things will largely remain the same as market factors continue to favor silver and those investing in it.

Copper, Zinc, Nickel, Tin all Drop

Many commodities took a big hit Friday, as copper, zinc, nickel, tin, gold, silver, platinum and palladium were all trending down, with copper, platinum and palladium taking the biggest hits as measured by percentages, and with platinum and palladium, also falling by the most in U.S. dollars.

Copper has been the major story this month regarding commodities, as it plunged to its lowest levels this week in three months, with falling demand for scrap-metal weighed on the base metal. Most of that is from the slowing demand in China, which has been working on slowing down its heated up economy.

For the last three months, discounts for scrap copper plunged by 25 percent. This is a dramatic turn around from September where copper prices got a boost from the implementation of further stimulus in the United States and Europe.

One of the best leading indicators for copper prices is scrap, and demand has been weakening for the last quarter, even with the bump in copper prices for September.

Copper futures fell to about $3.70 a pound on the Comex in New York for December delivery, at just before 1:30 PM EDT. For the week it is down two percent. Copper futures are trading about 40 cents above No. 2 scrap. That's ten cents above the 30 cents discount it traded at against copper in the 3rd quarter.

Credit Suisse (CS) estimates copper production in 2013 to be at 293,000 metric tons, in contrast to the 102,000 ton shortfall in 2012.

On the London Metal Exchange, copper for December delivery was down to $8,130 a ton ($3.69 a pound), a decline of 1.3 percent.

December Gold Drops Over $10 an Ounce

Some commodity prices were under pressure Tuesday after a report from the International Monetary Fund revealed it slashed global economic growth for the year from 3.5 percent to 3.3 percent.
Gold for December delivery dropped $10.70 an ounce to settle at $1,765. December silver was down 3.2 cents an ounce to $33.985. January platinum fell $3.50 to settle at $1,695.30 an ounce.
Unsurprisingly, the IMF confirmed the leading economies of the world are at risk of recession, although the reality is we've really never emerged from latest recession, and there has been no recovery.
Those commodities moving up on the day included energy, palladium and wheat. Soybeans fell a penny to $15.50 a bushel. Palladium climbed to $658.20, up $1.25 an ounce.

Concerns over supply because of a slowdown in production in the North Sea and rising tensions in the Middle East were behind the rise in energy prices. Recent fires at a refinery in the U.S and another in Russia has also added price support in some energy segments.
Benchmark crude oil futures climbed $3.06, or 3.4 percent, to settle at $92.39 a barrel in New York. That is the highest level in over a week. Brent crude closed at $114.50, jumping $2.68, or 2.4 percent.

Heating oil increased by 5.89 cents to $3.2032 a gallon, and wholesale gasoline was up 6.56 cents to $2.9587 a gallon. Natural gas was up by 6.4 cents to $3.467 per 1,000 cubic feet.

The Dow Jones Industrial Average plunged 110 points to close at 13,473, a loss of 0.8 percent. The S&P 500 Index dropped to 1,441, losing 14 points or just under 1 percent.

The ICE dollar index climbed to 80.023, up from Monday's 79.595.

Gold in Largest Two-Day Drop Since August

For the second day in a row Gold prices fell on Monday, resulting in the biggest two-day drop since August.

The strange idea that a bunch of seasonal, part-time hiring in the latest jobs report, which may have pushed the unemployment rate down to a still hefty 7.8 percent, made some investors feel it will pressure the price of gold down because of a possible stronger economic recovery.

It's ludicrous of course, as not long after the end of December the temporary, part-time workers will be let go, and the unemployment numbers will shoot back up, if not before then.

After falling against the euro to a two-week low, the U.S. dollar finally managed to pull itself up, as some believe a stronger recovery than expected, which would push up the price of the U.S. dollar if it were true.

It isn't of course, but that's the faulty assumption being reported in the press; more than likely in hopes of attempting to make Obama look like he's doing better than he really is with the economy.

With weak earnings expected, it's hard to point to anything really positive about the U.S. economy, other than the probability the housing market may have bottomed out. In that case, even if it hasn't bottomed out, it is probably close to it, although that will have very little impact in the near term on the economy either way.

As long as Ben Bernanke and the Federal Reserve continue to create money out of thin air by acquiring $40 billion a month in mortgage-backed securities, the price of gold and silver, along with other hard assets, will continue to go up over time.

It's likely the Fed won't stop stimulating until unemployment drops below six percent, with some hint from some members of the Fed that it may not stop until it reaches 5.5 percent.

The December contract for gold futures in the U.S. settled at $1,775.70 an ounce, down $5.10, or 0.3 percent. It's up by over 13 percent in 2012 so far, the 12th year in a row it'll finish in positive territory.

For silver, it closed at $33.98 an ounce, down 1.4 percent. It has also dropped significantly over the last couple of days, down over 3 percent during that period.

Platinum closed at $1,689 an ounce, falling 0.9 percent. Palladium ended at $653.47 an ounce, a decline of 0.5 percent.

How Long Can Silver Wheaton (NYSE:SLW) Defy Gravity?

Since July 19 when they hit $17.96 a share, Silver Wheaton (NYSE:SLW) has pushed up strongly to close at $22.84 on Friday. Silver prices were just over $19 at 6:00 PM EDT Friday.

The question is how long can they continue upward based on silver demand and the faltering economy.

There are a couple ways of looking at it. Some feel bulls could still take advantage of the momentum Silver Wheaton is enjoying, and after a slight pullback, which could be considered a place to enter, the company has a good chance of moving up even further.

Another viewpoint is silver prices will be moving up and down for the rest of 2010, with an average of $19.20 an ounce to $20 an ounce in through the end of the year.

Based on today's price and assuming the behavior of the share price of Silver Wheaton remains as it has been, it does give some leeway for the share price of the company to move up, confirming the possibility there is more room to increase before pulling back to support levels.

It seems the economic conditions will have to improve before industrial demand for silver grows, so there should be a ceiling in the short term if nothing changes there, although the pure investment side of silver could drive it up outside of demand, which we'll have to wait and see if it moves in unison with gold and is considered a secondary source of safety.

If that's the case, the rules of gravity will be suspended and it could be an interesting ride if it indeed does take off. There's no doubt if silver prices do take off, Silver Wheaton will be taking off with them.

Pan American Silver (Nasdaq:PAAS) Breaking Out?

With silver prices seemingly about to take off, Pan American Silver (Nasdaq:PAAS) could be one of the best deals among silver mining companies, as the price of silver has found support and when silver prices have been strong in the past, Pan American has soared to over $40 a share.

The company seems to have positioned itself nicely for a long run if it comes, and last quarter their performance shined, and they and their shareholders are probably about to be rewarded for it.

For example, silver production for the quarter increased by 13 percent to 5.5 million ounces, while gold production rose by 34 percent. What was most impressive to me though was the way the company cut the cash costs to $4.35 an ounce, leaving them terrific margins and earnings potential.

Even though the share price has been moving up, Pan American Silver is still a bargain, and they have a lot of room to grow before their value is reflected in the share price.

Silver Getting Some Respect

Silver has been performing somewhat like gold mining stocks over the last year or so, as expectations of breaking out were always sitting there, but it wasn't able to break through.

Now that gold has surged beyond resistance points, there are no short-term barriers in its way to stop it from rising at a steady pace.

Silver, along with gold mining companies, has now broken out with gold in its latest move, and could break the $20 an ounce mark sometime soon, and from there will probably find support and start to rise much higher as a result, with some thinking in the months ahead it could break the $25 an ounce barrier.

Once gold shattered all-time records yesterday and today, gold mining companies started responding in similar ways, especially junior and mid-size companies, which had been sitting still for quite some time waiting for the right moment, and that moment is now, as investors pour money into the sector.

For silver, if it starts to act in unison with gold, and investor continue to look for a safe place to put their money, silver could start a huge bull run where it's anybody's guess where it'll end up. We're in for some interesting times ahead, and gold, silver, and gold mining stocks should do very well over the next year, and while ultimately correcting, there is nothing in the near or mid-term future which indicates it will interfere in this process, even if interest rates are raised by the Federal Reserve, which may be for the most part ignored in the light of these extraordinary economic times we live in.

Endeavour Silver (TSE:EDR) Profits Up

Endeavour Silver (TSE:EDR) reported earnings for the first quarter have increased to $1.7 million, or 3 cents a share, improving over the same quarter last year where the company lost $1.7 million or 3 cents a share.

Gold production increased for Endeavour to 3,775 ounces, a 62 percent improvemnent. Silver production was also up, reaching 766,210 ounces, a 34 percent gain.

Overall revenue for the quarter was over double what it was last year, growing to $18.2 million, a 115 percent rise.

Guidance for the company wasn't great, as they stated the company will increase spending on exploration, which will cut into earnings for the second quarter.

Even so, gold producton should increase at the company for the next quarter, and gold prices are expected to continue rising as well.