If you’re still bearish on long-term silver prices, you’d better reconsider your stance.
Dollar-denominated Chinese silver futures were scheduled to begin trading on the Hong Kong Mercantile Exchange early today. This development will grant Asian investors direct access to the metal and will blunt the U.S. dominance in silver-bullion trading.
It’s also highly bullish for long-term silver prices.
Let me explain …
A New Catalyst for Silver Prices
The Hong Kong Merc’s entry into the silver-futures market is a game-changer — for a number of reasons. For one thing, the emergence of a new market player will effectively neuter U.S. elitists like those at the Chicago Mercantile Exchange (NASDAQ:CME).
I specifically mention the CME because that exchange unilaterally raised margin requirements on silver by nearly 100% in a mere eight days this spring — after silver prices had roughly 150% between late August and the end of April. The CME action helped cause silver prices to plunge by 30% from its recent highs.
It hasn’t recovered. [Silver was still trading in the $39-an-ounce range as of yesterday, according to Bloomberg LLC.]
Longer-term — and probably even more significantly — this move will help investors in China and India buy into bullion. In fact, this will be the first time Chinese (and many Asians in the surrounding markets) can purchase silver-futures contracts and, by implication, take delivery. Historically, investors in those markets had to purchase CME-based contracts that are standardized and traded through the Hong Kong Futures Exchange — in accordance with the Chicago-based CME.
In case you aren’t familiar with them, futures contracts require the buyers to be prepared to take ownership and delivery when the contract comes due. Like any other “contract,” futures are legally binding agreements for delivery of the underlying asset (in this case silver) at an agreed-upon future date and at an agreed-upon price. Further, they are standardized by futures exchanges with regard to quantity, quality, time and place of delivery.
Only the price changes, which is why futures contracts can offer more financial flexibility, leverage and financial integrity than trading the underlying physical assets themselves.
Asia is already becoming a bigger factor in the silver market. From 2008 to 2010, silver demand soared 17% globally — including 67% in China alone (reaching 7,495 metric tons), according to the Hong Kong Merc. In fact, China accounted for nearly 23% of global silver consumption last year…
That makes the new futures contracts an even bigger deal than most investors have yet to realize.