Collapse of Shanghai Index Pushing Price of Silver Higher?

Collapse of Shanghai Index Pushing Price of Silver HigherPrecious metals markets are witnessing a slight pullback, but their long-term outlook remains positive as far as I’m concerned. Pullbacks in the prices of the precious metals are simply buying opportunities for me.

My two favorite precious metals—gold and silver—have marginally declined in price over the past few days as the U.S. dollar has been increasing in value against other world currencies.

In these pages, I have rigorously said that gold will keep climbing, but other precious metals, especially silver, may outperform it. Central banks can print more money and manipulate their currencies, but they can’t make more gold and silver.

According to Beijing Antaike Information Development Co., silver demand for China will increase 10% next year. (Source: Business Week, October 25, 2012.) The reason: Chinese investors are buying silver because their economy is slowing down and their wealth is declining. Key stock indices in China have relentlessly declined since 2011.

Below is the chart of Shanghai Stock Exchange Composite Index, which should give you a very good idea of what’s going on right now.

ssec stock market chart

Chart courtesy of

Together with increased demand from investors in China, silver holdings in exchange-traded funds (ETFs) have increased 6.5% this year alone to 592 ounces. The world’s largest silver ETF, iShares Silver Trust (NYSE/SLV), holds 9,918.67 tonnes of silver and reported an increase of 30.12 tonnes in its holdings on October 24, 2012. (Source: FXEmpire, October 25, 2012.)

Why are investors starting to prefer silver over gold?

Gold has become expensive for an average investor to own in physical form. But for big players like central banks, it’s still the only way to protect their reserves. On the other hand, silver is still fairly cheap compared to gold and an average investor can still afford to buy it in physical form.

This all leads to a simple conclusion: investors will drive the price of silver higher and central banks will keep purchasing gold. As I have been harping on in these pages, these precious metals have a long way to go (up) in respect to their prices. We are already seeing demand increased by central banks and investors for both gold and silver. More demand will follow. World economies are not improving and fiat currencies are losing their value as more paper money comes into circulation. Precious metals will be the outperformers.

Michael’s Personal Notes:

The U.S. housing market is still in poor condition; don’t for a second believe a recovery is going on in the housing market. For the U.S. economy’s housing market to improve, there have to be reasons. Yes, there has been good housing market data flow from some parts, but overall the U.S. economy’s housing market is still beaten to the ground.

Would you call it a robust recovery if the price of a stock goes down 75% one day and then next day increases five percent? This is exactly what’s happening in the housing market in the U.S. economy—home prices may have increased a little, but the overall market is still in trouble.

In order for there to be a healthy improvement for the U.S. housing market, we need to see an increase in mortgage lending (or more people being willing to borrow to buy homes), an increase in first-time homebuyers, an improvement in existing home sales, a decrease in distressed home sales, and people paying for their mortgages on time. These factors are missing in the current so-called “housing recovery.”

According to Mortgage Bankers Association (MBA) the total number of mortgage applications filed in the U.S. fell 12% for the week ending October 19 compared to the week earlier. (Source: Mortgage Bankers Association, October 24, 2012.) The appetite for borrowing is just not there.

In September, according to Freddie Mac, the 30-year fixed mortgage rate in the U.S. fell to the record low of 3.47%, compared to 3.60% in August. (Source: National Association of Realtors.) But the growth in buyers for homes has not been from homeowners; it has come from investors. To have a healthy housing market, the people who actually buy the homes need to live in them. However, record-low interest rates are not luring would-be homeowners back into the housing market.

Look at these facts:

At the end of second quarter, the percentage of people delinquent on their mortgage payments was still 7.58% of all outstanding loans—an increase of 0.18% from the first quarter.

The combined percentage of loans in foreclosure and mortgage payments past due at least a month was 11.62% in the second quarter! Millions of Americans are still living in homes with negative equity.

Existing home sales dropped 1.7% in September compared to August and distressed homes sales still accounted for 24% of all sales!

In September, first-time home buyers only accounted for 32% of sales in the housing market—similar to September 2011!

With all this, it can’t be clearer that the U.S. housing market is still on the edge. A housing market recovery is crucial to an economic recovery for America, but it has to be a real recovery; not investors buying houses to rent them out to tenants.