Editorial: Silver leads commodities rout

Commodities investors felt the pain during the first week of May, as the killing of Osama bin Laden by U.S. Navy SEALs set off heavy selling in a wide spectrum of hard assets from precious and base metals to oil and gasoline.

• Investors who, in the first four months of the year, basked in the expansive side of silver’s famous volatility were shaken by a sharp price contraction in May. A 31-year, record-high London fix of US$48.70 per oz. achieved on the last trading day of April turned into US$34.20 just a week later, for a 30% drop.

Silver investors’ woes were compounded by a triple whammy of terrible technical indicators, tightened margin requirements and heavy selling by large hedge funds. Speculators trading silver futures on the COMEX have seen margin requirements raised five times since April 25. Regulators seemed intent on cooling things off, after silver futures had soared an astounding 28% in April compared to 8% for gold, and had risen 57% in the year to April 29, compared to 9% for gold.

But, for a sense of perspective, we’re back to the silver prices seen in March 2011, and 12% above the silver price at the end of 2010.

• Copper also got a lot cheaper, with 3-month futures prices on the London Metal Exchange retreating to US$8,820 per tonne from US$9,320 per tonne a week earlier, or a 5.4% drop. Adding to the overall bearish mood was continued growth in worldwide copper inventories and a tightening of liquidity in China as the government there tries to rein in inflation.

More downward pressure on copper came from the International Copper Study Group’s mid-April forecast that global copper mine production should surge this year by 4.6% to 16.8 million tonnes and 6.4% in 2012 to 17.9 million tonnes. Most of the growth comes from copper mining operations that had been curtailed in the wake of the 2008 financial crisis rather than new mines. The ICSG is factoring in an expected copper-usage rise of 4% in 2011 to 20.1 million tonnes and 4.3% in 2012 to 21 million tonnes.

• Central banks of emerging countries keep warming to gold: the International Monetary Fund revealed that Banco de Mexico had bought 93.3 tonnes of gold bullion (or 3 million oz.) in February and March, worth about US$4 billion at the time. Previously, it held 6.9 tonnes, or 221.842 oz. gold. Mexico’s foreign reserves have swelled to US$126 billion from US$73 billion in mid-2009.

Over the last quarter, the central banks of Russia and Thailand also added 18.8 tonnes and 6.9 tonnes, respectively, to their gold holdings.

Meanwhile, speculation grows in some quarters that Portugal’s central bank will need to sell gold to help relieve the country’s sovereign debt crisis.

• During an analysts’ call to review its first quarter, Cameco spoke about the global uranium market, which has been thrown into confusion since the Fukushima nuclear reactor meltdown in Japan.

Cameco says the accident will have only a minor effect on global uranium demand over the next decade, with perhaps 10 fewer new nuclear reactors being built than envisaged earlier this year before the tsunami. That translates into a net gain of 91 nuclear reactors globally by 2020.

“Very little has changed in the way we see the world,” said Cameco CEO Gerald Grandey in his final call before he retires next month. “Our strategy of doubling uranium production by 2018 continues to make sense.”

• There were two significant infrastructure decisions by governments in Canada.

The federal government gave its environmental approval for the building of the Northwest Transmission Line in northwestern B.C., which will open up the development of many large, remote copper and gold deposits. 

The NTL is a $404-million, 335-km power line that will be built along provincial highway 37 from the Skeena substation near Terrace to a new substation to be built near Bob Quinn Lake. Construction is set to begin this spring, with the federal government contributing $130 million, Alta Gas spending $180 million and BC Hydro kicking in $94 million.

In Quebec City, the provincial government gave more details of its Plan Nord, first announced in last month’s budget, which will open up the province’s far north to more resource development, including new gold, diamond and uranium mines in the Otish Mountains.