I’ve been writing about this for months, but demand in China for physical gold and gold-related investments is growing at an “explosive” pace and its appetite for the yellow metal is poised to remain robust amid inflation concerns, an Industrial and Commercial Bank of China executive said.
ICBC, the world’s largest bank by market value, sold about 7 tonnes of physical gold in January this year, nearly half the 15 tonnes of bullion sold in the whole of 2010, said Zhou Ming, deputy head of the bank’s precious metals department on Wednesday.
“We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation,” Zhou told Reuters.
The Chinese are always willing to take advantage of a situation. They know Silver is in backwardation and that the supply is very limited. Increasing Open Interest is giving the bankers sleepless nights. In the past they were always able to get investors to rollover contracts or accept a large cash premium. Now the Asians are holding for delivery of the physical metal. COMES is slowly running out of alternatives especially in Silver.
To make matters worse, the Chinese have also been investing millions into SLV. They have been requesting physical metal in exchange for their shares. Blackrock, the administrator, has a great reputation and will probably attempt to comply. Another complicating factor is that there are currently 16.12 million shares short on SLV. This is an increase of almost 2 million ounces over the prior reading. In other words BlackRock will also have to make sure that this silver which has been borrowed will be returned.
We have serious backwardation, a supply shortage, short interest growing on SLV and now we have the Chinese waking up to the fact that there is metal in SLV and saying, ‘let’s go get it.’ Let’s not forget the paltry inventories on the Comex. Any short would have to be frightened by that data.
There are two options left for the shorts, one is to naked short the heck out of this market in an attempt to drive the price down. But if they decide take this option it will worsen their position longer-term as the longs take advantage of the lower price and buy even more. The other option is to capitulate and let the price of silver rise in an attempt to let the silver market get into equilibrium. The second option could double Silver’s price in very short order