By John Winston Commodity Online
In this world we are faced with an ever changing landscape. Nowhere is it truer as soon as you learn the game, the rules are changed. For instance, we are told that gold is signaling an inflationary future coming for the USA, yet its long term interest rates are below the 4% level and short term rates are basically zero. How can this be? Who would lend money to a nation whose currency depreciates and pays almost no return on its debt?

Nations who depend on consumption from the USA have little choice but to extend credit or face economic contraction in their own economies. And while debt has reached 12% of GDP the foreign support of the dollar and treasuries continues for the United States. But there are changes going on.

Most disconcerting is the fact that China has been rolling over its debt from the long term bond to the short term Treasuries, which basically pay zero. While there has been little fanfare over this development, one has to wonder why China would forgo a 2 – 3% rate of return in favor of a zero rate of return on investment. This much we know. They have moved their seat in the theater very close to the exit door.

When your biggest creditor moves his seat that close to the exit and the movie is not even close to intermission, one gets the impression that the film is not pleasing to them. Now it would be one thing if China were a paying customer viewing the film. But they are not here to pay and watch the film. They are here to lend money to the filmmaker to use the money to distribute the film to the consuming audience. Let us hope they stay for the remainder of the story.

There can only be one reason interest rates are so low at a time when the monetary base is so expansive and that is that the central bank policy is to avoid a depression and attempt to jump start the economy. While the lowering of interest rates was a success during the Reagan era, it came at a time when interest rates had just completed a cycle high and inflation had completed its run up from the consequences of the US Dollar coming off the gold standard.

The most recent bank bailouts can best be described at this. Cash was distributed to the banking sector to shore up their balance sheets. Instead of taking this money and lending it to industry, it took that cash and deposited back with the Feds by buying up the Treasury curve.

And to understand how the stock market can rise at a time like this is simply the consequence of funds and government insured deposits along with Fed liquidity that is channeled from the banks to the hedge funds where the money is put to work in a speculative manner. This “free” money is creating bubbles in Hong Kong real estate and other Far East markets too.

We’ve arrived at a time when the price of many commodities and other financial instruments trade in direct opposite to the US dollar. This brings us to the realization that many markets are invested in as a short position against the US dollar. What else would explain such phenomena?

In 2009, it did not matter where you invested, as long as you stayed away from the US dollar, you’ve done well

By Marc Davis Commodity Online
Silver may yet outshine gold in 2010 as spot prices for the white metal respond to the prospect of a surge in industrial demand. With a little additional help from investment demand, silver may even rally into the $25 an ounce range.

So says Chintan Parikh, a commodity analyst at the CPM Group – a leading New York-based commodities research, consulting, asset management and investment banking organization.

“Prices may spike as high as $25,” he says. At the very least, it should breach its most recent high, which was set at $20.79 in the spring of 2008, he adds.

Parikh says much of this impetus for higher prices is being driven by the fact that traditional industrial end users of silver, such as the ever-burgeoning global electronics industry, have in recent weeks begun to replenish severely depleted inventories.

In fact, silver inventories became so run-down during the financial crisis that it may take up to six months to fully rebuild them to normal levels. Parikh also notes that demand from the industrial sector tends to be quite price inelastic, meaning that buyers have few options other to pay prevailing prices.

Another key driver for 2010 will be the advent of new market places for silver, including pent-up demand for silver-zinc batteries in ‘smart’ automobiles and an array of portable electronic devices, Parikh says.

In fact, the widespread adoption of silver-zinc batteries is going to be “one of the major drivers behind a rise in prices because it may absorb a lot of silver,” he adds. Though this important new application for silver might not necessarily become a major factor in demand for silver as early as next year, it promises to become a very sizeable marketplace, he suggests. And especially for automobiles.

Notably, China is forecast to become a huge adopter of electric cars to curtail its rising dependence on foreign oil and to reduce its air pollution. In fact, electric cars and hybrid plug-ins will account for more than half the auto market in China by 2020, according to Dr. Wolfgang Bernhart, an auto industry expert with the international think tank, Roland Berger.

Furthermore, silver-zinc batteries are destined to generate major market share as they are said to be much safer, more environmentally-friendly and far more energy-efficient than lithium-ion batteries (which currently dominate the markets for smart cars and portable electronics).

Also, the ever-expanding industrial sector for silver now includes LCD/plasma television screens, solar panels, water purification and even medical and superconductivity applications. It is also finding a critical new use in biocides (which use silver in chemical agents to kill dangerous bacteria, including superbugs).

GFMS, a renowned London precious-metals consulting firm, concurs that overall fabrication demand (which also includes the photography, jewelry silverware sectors) is expected to rebound to “normal levels” in 2010. And the emergence of key new markets for silver is sure to help power this recovery, according to Neil Meader, research director at GFMS.

“It is becoming an increasingly industrial metal and novel new uses will also likely assist the recovery in silver’s demand,” he says.

However, the restocking of inventories for more of silver’s traditional uses will likely be the most powerful demand driver in the near-term, Meader suggests. It may even help propel silver prices into new territory to the extent that “a peak (in prices) could occur late this year or early next year.”

The revitalization of industrial demand is an inevitable consequence of silver’s growing importance as a high tech metal. In fact, this has grown year on year since 2001 to the onset of the financial crisis. And it only dipped a meager 1.4% to 447 million ounces in 2008.

This long-term growth trend is set against a backdrop of a multi-year rally in silver prices during this time frame, with gold’s poorer cousin refusing to be upstaged. It actually tripled in value to average US $15 in 2008 (in spite of its short-lived collapse to around $9). And it is continuing to trend higher this year now that supply/demand dynamics are beginning to reflect a return to a normal economy. All of this clearly demonstrates the price inelasticity of industrial demand.

Ironically, investment demand is also mostly shrugging off higher prices. Not only is there strong physical demand for silver bullion coins and bars, but the recent emergence of silver exchange-traded funds like the iShares Silver Trust is also creating strong additional demand.

Parikh notes that silver offers a safe haven in times of economic upheaval, while it also has the potential for significant investment returns.

“Silver is a unique metal that wins whether the economy is going well or is in bad shape,” he says. “In the latter, the investor buys it as a hedge against the downturn in the economy and the markets. And if the economy improves, then the industrial demand increases.”

All of this is music to the ears of silver miners, who are already ramping up production to satisfy newly resurgent industrial demand for silver. One company on the frontlines of this push for greater output is Vancouver-headquartered Great Panther Resources (TSX: GPR), which has been operating its Guanajuato and Topia mines in Mexico since 2006.

Notably, Great Panther is one of only a small handful of companies in the world that are primary silver producers, since the vast majority of this precious metal comes as a by-product of mines that are mostly focused on extracting lead and zinc or copper.

Company President Bob Archer says that he believes that higher silver prices next year will significantly boost the company’s ever-improving bottom line. Great Panther became cash flow positive earlier this year after producing 1.8 million silver equivalent ounces (silver plus by-product metals, including gold, lead and zinc) in 2008.

Archer has now set his company’s sights on generating over US $50 million in revenues by 2012 (based on a projected output of over 2.6 million silver ounces and 12,600 gold ounces, as well as minor base metals credits which translates into 3.8 million silver equivalent ounces).

“Our output is growing steadily. We just had our best quarter ever in the third quarter of this year. And we’re in the process of completing a $10 million equity financing to accelerate our three-year growth strategy to capitalize on higher silver prices.” Archer says.

“In fact, we’re quite bullish on silver prices for 2010. I believe that investment demand will be the biggest driver for higher silver prices next year. That said, I’m sure there will also be an increase in industrial demand going forward.”

Bullish on gold since it carried a $400-per-ounce price tag, Blue Phoenix Chief Investment Strategist John Licata expects the king of metals to ring in the New Year with a $1,200-per-ounce crown. As he told The Gold Report in April, he still considers gold one of the best asset plays in the world. With recovery on the horizon, he’s also high on silver—in part because a pickup in manufacturing will drive up demand. While he says it’s premature to claim economic recovery, he isn’t looking to copper to serve as the traditional harbinger of a return from recession this time. His rationale? Good economic news—while too inconsistent to make recovery imminent—is already baked in to copper’s climb already this year.

The Gold Report: You weren’t too bullish on seeing a recovery in 2009 when we caught up with you in April. We’ve seen some good Q2 reporting from a variety of companies and some encouraging economic data. The government is starting to claim we’re in recovery. What’s your take on this?

John Licata: I do think we’ve seen some better domestic economic data, but it’s premature to think we’re totally out of the woods. In terms of corporate earnings, a lot of company profits might have surprised to the upside, but they’re still down 50% to 70% from quarters before or the prior year.

Many companies have been trying to compare Q1 and Q2. You’re still not seeing dramatic differences to the upside. Quite frankly, some companies are still living within cash flow and I think that’s one of the reasons why we could have a problem with supply and demand imbalances as we come to the end of 2009 and enter 2010.

Unemployment is likely to keep rising. Although the last numbers were much better than anticipated, I don’t think we’ve seen the green light that will cause people to start hiring again. We could hit 10% unemployment by the end of the year, and that’s going to be a precursor to some weaker retail heading into the holiday season. Net-net, you probably could put the word ‘inconsistent’ toward most of the economic data coming out of the U.S.

The industrial numbers that came out of China a couple of weeks ago [August 10] were actually below expectations as well. While everyone wants to be bullish and the data is somewhat better than many expected, it’s still not great. So I think to claim victory right now is definitely premature.

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The top ten largest owners of gold in the world are reported to control a total of 24,258.3 tonnes, or over 855 million ounces. At current spot prices, this gold would be worth approximately $804.35 billion and represents about 15.4% of all the gold ever mined.

612.5 Tonnes The Netherland central bank, De Nederlandsche Bank, oversees all of the the Dutch national finances, including the country’s 612.5 tonnes of gold . The Dutch gold is currently worth over $20 billion .

765.2 Tonnes Japan is ninth largest gold owner in the world, with 765.2 tonnes of gold that accounts for only2.1% of the nation’s total foreign reserves. On the open market, Japan’s gold reserves are worth approximately $25.4 billion and are managed by the Bank of Japan.

1040.1 Tonnes The Swiss National Bank oversees the country’s 1,040.1 tonnes of gold. The gold is believed to be stored in huge underground vaults near the federal Parliament building in Berne, however the Swiss National Bank treats the location of the gold reserves as a secret. Switzerland’s stockpile is worth approximately $34.5 billion in today’s gold market.

1054 Tonnes The world’s most populous country also has the world’s seventh largest gold reserve. With a population of 1,330,440,055 (A rough estimate as of July 2009), the country holds about $26 worth of gold per person, worth a total of almost $35 billion.

1120.6 Tonnes Originally listed on the New York Stock Exchange in 2004, SPDR Gold Shares is one of the fastest growing ETFs in the world. All of the Trust’s gold is held by the Custodian, HSBC Bank, in their London vault.

2450.7 Tonnes The Banque De France is responsible for France’s gold holdings, which have been reported at about 2,450.7 tonnes by the International Monetary Fund. With the fifth largest gold reserve in the world, France’s amount to about $81.3 billion.

2451.8 Tonnes The Italian National Bank, Banca D’Italia, manages the country’s large gold holdings, with approximately 2,451.8 tonnes of gold in reserve, Italy’s holdings are very close to France’s and are also worth approximately $81.3 billion at current prices.

3217.3 Tonnes The International Monetary Fund oversees the global financial system of its 185 member countries and was formed to stabilize international exchange rates and facilitate development, mainly to poorer countries.

3412.6 Tonnes The Deutsche Bundesbank, Germany’s central bank, is one of the most influential member of the European System of Central Banks. With a hefty 3,412.6 tonnes of gold reserves, which are valued at about $113.2 billion at current prices.

8133.5Tonnes The United States holds the largest gold reserve in the world. With 8,133.5 tonnes, the US gold holdings are worth approximately $269.67 billion. This massive gold reserve represents about .9436 an ounce for ever person living in the country. The majority of the American gold is reported to be held in the world famous United States Bullion Depository in Fort Knox, Kentucky, although no audit has been conducted in over 40 years.

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