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March 30, 2006

Worth Its Weight in Silver

Silver put on a spectacular show today, gaining over fifty cents and bringing its 2-day gain to nearly eighty cents. Putting one's mind around what to expect next is a daunting task. We could be witnessing a blow-off top for a run that started at $7.50 back in the fall. On the other hand, this type of move could be what finally draws the masses in and sends silver to the mid-teens.

Traders of mining shares certainly did not put their bets behind the latter scenario today. Pan American Silver, after starting strongly, ended down on the day. One may point out the risks inherit to the coming elections in Peru or the continued rise in energy prices. However, none of that should overpower a 5% move in silver. Gold shares did not seem to have a problem with the yellow metal's new high today, so I'm guessing that traders in the silver market simply don't put much faith in silver holding its latest gains. For now, I'm simply sitting on my base silver position (via futures contracts) and waiting for clearer waters.

So what spurred all this metals buying? For one, the dollar tanked today. The U.S. Dollar index was off a percent... a rather large one-day move. The dollar's weakness also spurred some selling in the bond market, pushing U.S. Treasury yields to near two-year highs. Commodity prices on a unrelenting drive, along with 10-year Treasury yields approaching 5%, may just give Papa Bear a nice, fulfilling breakfast.

Higher rates are certainly not good for companies that are debt-heavy. Hogging the debt-overload spotlight these days, we have GM, and traders priced in a nice dose of risk by sending GM shares down nearly 6%. Fannie Mae and Freddie Mac also got slapped for over a percent each. The GSEs have interest rate risk in addition to the prospect of diminished levels of business as the housing market slows.

All in all, things are not looking cheery for equity bulls. Despite yesterday's run-up, which can easily be attributed to EOQ window dressing, I stand behind Tuesday's claim that the inflection point is upon us.

Disclosure: None


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