July 25th, 2011
Money Morning Investing Article of the Week
by Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
Dollar-denominated Chinese silver futures were scheduled to begin trading on the Hong Kong Mercantile Exchange early today (Friday). This development will grant Asian investors direct access to the metal, and will blunt the U.S. dominance in silver-bullion trading.
It's also highly bullish for long-term silver prices. Let me explain ...
A New Catalyst for Silver Prices
The Hong Kong Merc's entry into the silver-futures market is a game-changer - for a number of reasons. For one thing, the emergence of a new market player will effectively neuter U.S. elitists like those at the Chicago Mercantile Exchange (CME).
I specifically mention the CME because that exchange unilaterally raised margin requirements on silver by nearly 100% in a mere eight days this spring - after silver prices had risen roughly 150% between late August and the end of April. The CME action helped cause silver prices to plunge by 30% from its recent highs.
It hasn't recovered. [ Silver was still trading in the $39-an-ounce range as of last week (Thursday), according to Bloomberg LLC .]
Longer-term - and probably even more significantly - this move will help investors in China and India buy into bullion. In fact, this will be the first time Chinese (and many Asians in the surrounding markets) can purchase silver-futures contracts and, by implication, take delivery. Historically, investors in those markets had to purchase CME-based contracts that are standardized and traded through the Hong Kong Futures Exchange - in accordance with the Chicago-based CME.
In case you aren't familiar with them, futures contracts require the buyers to be prepared to take ownership and delivery when the contract comes due. Like any other "contract," futures are legally binding agreements for delivery of the underlying asset (in this case silver) at an agreed-upon future date and at an agreed-upon price. Further, they are standardized by futures exchanges with regard to quantity, quality, time and the place of delivery.
Only the price changes, which is why futures contracts can offer more financial flexibility, leverage and financial integrity than trading the underlying physical assets themselves.
Asia is already becoming a bigger factor in the silver market. From 2008 to 2010, silver demand soared 17% globally - including 67% in China alone (reaching 7,495 metric tons), according to the Hong Kong Merc. In fact, China accounted for nearly 23% of global silver consumption last year ...
That makes the new futures contracts an even bigger deal than most investors have yet to realize. As the U.S. dollar weakens further - and as China's financial power grows - you can bet that country and its individual investors will escalate their purchases of hard assets. This escalating demand will translate into higher prices for silver.
More than 20 of the Asian region's most respected and well established financial institutions and brokerage houses are already members of the Hong Kong Mercantile Exchange. And that list will grow as trading volumes expand.
I am expecting volume to grow rapidly. And I believe the Hong Kong Merc has the same expectation. Indeed, the exchange's own advertising conveys this ambition: The ads talk about the "new force in global-commodity trading" and refer to the allure of "Chinese access, Asian pricing and global risk management."
The new HKMEx silver-futures contract provides for 1,000 troy ounces (30 kilos), with delivery at specified depository facilities in Hong Kong. This makes it considerably smaller than the 5,000-troy-ounce contract traded on the CME, meaning it could be quite a bit more liquid - which was absolutely the intent.
"The new contract will enable buyers and sellers in China to trade effectively with their counterparts across the world," said HKMEx President Albert Helmig, "while at the same time, allowing investors to gain exposure to silver-price movements and broaden their investment portfolio."
The Outlook for Long-Term Silver Prices - And Gold, Too
This is the latest illustration of China's steadily advancing influence in the world's capital markets, a trend I've been telling you about for several years, now.
And it's easy to see why today's development is going to be highly bullish for long-term silver prices. China's muscle isn't to be underestimated. It has a staggering $3.2 trillion in currency reserves, and it has to put that money somewhere; investing even 0. 1% of those reserves ($3.2 billion) in silver would move it well beyond current prices and would help propel the "other precious metal" up past the $60-per-ounce target that I've forecast. The same is true for gold, which I have noted may reach $2,500 an ounce or more in the next few years.
That's not all, either.
The Hong Kong Merc plans to introduce yuan-based gold, silver and even agricultural-based futures contracts shortly as a backdrop for the Chinese yuan's newfound strength. This will allow still more crossover between the dollar-based contracts and the yuan itself, further weakening the stranglehold on precious-metals pricing long enjoyed by the Chicago and New York Mercantile Exchanges. It will also give China more influence on the overall world prices of natural resources products, and will help nurture the yuan's transition into a legitimate global-reserve currency.
Incidentally, other institutional investors are beginning to see what I've known for years - just how important Asia in general, and China in particular, will be to long-term commodity prices. Just this week, in fact, when Newedge USA LLC predicted that gold prices would surge to $1,800 by the end of this year, and that silver would zoom to $70 an ounce by March, the New York-based futures-commission merchant said that climbing physical demand in Asia would be one of the key factors.
And that's just a start: The outlook for long-term silver prices is even better.
I believe this could help send silver prices up past the $60-an-ounce price target that I've talked about - which is more than 50% above silver's current price in the $39-an-ounce range. Over time, gold, too, will benefit.
So how do you play this important development?
Gold Long-term Uptrend Remains Healthy by Erik McCurdy