Silver lease rates exploded over the last month

Tuesday, May 31, 2005

Something is going on in the silver market. 24hpm, a news site with a focus on precious metals, yesterday alerted readers on an explosion in silver lease rates over the last month.

Lease rates for all maturities from 1 to 12 months effectively doubled and tripled within the last 30 days.

Silver spiked to 7.30 dollars an ounce last Friday after reaching a monthly low at 6.80 dollars on May 3. On Monday it closed at 7.21 dollars.
Silver bugs are attributing the rise in silver lease rates to short-sellers who are getting squeezed by the rising silver cash price.
Precious metals loans have been the cheapest way of financing over the last 4 years.
The trade works like this. Lease gold/silver at rates well below 2 percent, sell the physical silver and invest the proceeds in higher yielding securities. At the end of the lease agreement reverse the trade and pocket the yield differential minus/plus the change in the gold/silver price. Profits are guaranteed as long as the upward risk of the cash price is hedged.
The sudden spike in silver lease rates - gold lease rates stayed more or less flat - points to imbalances in the physical market.
Some fundamentals on silver
According to the Silver Institute the surge of digital photography has less impact on silver use than widely estimated. While demand in the photo industry fell last year from 192.9 to 181 million ounces, overall industry use increased 5 percent, from 350.5 to 367.4 million ounces. Jewellery demand declined 10 percent to 247.5 million ounces, while coin sales increased 15 percent to 41.1 million ounces. Silver investment has become fashionable again too: Silver bar sales surged 389 percent to 42.5 million ounces last year. These figures sum up to a silver demand of 698.2 million ounces or 4 percent more than in 2003.
Mine production rose 4 percent to 634.4 million ounces as well. Mexico is the biggest silver producer followed by Peru. Don't see a silver shortage because of this! Primary silver production accounts for only 30 percent of supply. The far bigger part comes from recycling. The Spaniards once looted so much silver from Latin America that they could have built a bridge spanning the Atlantic ocean.
While silver is dug out of dark mines, a lot of fundamentals remain in the dark too. Central banks worldwide do not state their silver holdings in their balance sheets. A search in the database of the Bank for International Settlements (BIS), the central bank of the central banks brings no useful results . But there must be silver holdings as Gold Fields Mineral Services estimates the amount of leased silver in the region of 275 million ounces. The US, once the biggest hoarder of silver, has sold it all. The US Congress had to pass a law last year that permitted silver purchases on the open market in order to continue its program of silver memorial coins.

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