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Comex silver downed by China sales jitters

NEW YORK: Silver futures tumbled to a three-week low on Wednesday, after an overnight report that China could start selling silver inventories hastened the unravelling of last week's year-end rally to 11-week highs, dealers said.

"We got through Y2K with no disruptions of any magnitude and a lot of people, both individual investors and funds, who went long have started to lighten up their positions," said Michael Clark, managing director at FideliTrade.

"Anything like an announcement about unexpected stocks coming to market is only going to further exacerbate the near-term impact," he continued.

Heavy liquidation by Comex futures holders extended a decline in silver prices overnight and on Tuesday, the first day back from the four-day New Year's weekend.

Benchmark March silver fell 16.5 cents to settle at $5.21 an ounce, having bottomed at $5.16, the lowest print since $5.15 on December 14.

The China Mining News said that the People's Bank of China could sell in the market some of its silver surplus, estimated at 2,900 metric tonnes between 1994 and 1998, because the country's silver production in the the 1990s outpaced demand.

There were no estimates of China's total silver stockpile.

Spot bullion was last quoted at $5.16/19, down from London's $5.285 fix and Tuesday's New York close at $5.33/36.

Silver futures have now erased the 24-cent rise in the last week of 1999, which stopped just short of the psychological $5.50 an ounce level, basis March delivery.

Fears of central bank sales have been a main bearish feature in the global gold market over the last year. But the official sector had not been much of factor for silver, which has traded between about $4.80 and $5.90 for more than a year.

"It's another absolutely brilliant central bank move of announcing potential sales in the future," said one sarcastic bullion dealer.

In contrast to major disposals, silver has recently benefitted from huge private investments from the likes of Warren Buffett, who two years ago accumulated about 130 million ounces, a fifth of the world's above-ground silver stocks.

Analysts said the market may have overreacted to the China news, which seemed recycled from a similar story several months ago. They said strong physical demand will prevent a move below $5 an ounce.

"Last year you saw a lot of silver coming out of China part of it was scrap, some of it was jewelry, semi-refined, and part of it was silver that was recovered from imported base metal concentrates," said Jeffrey Christian, managing director at precious metals consultants CPM Group.

"A lot of that silver was misidentified as coming from central bank stocks. I don't know that the bank of China has massive stocks," he said.

Other, perhaps more important, silver news came this week from China, which recently liberalised its domestic market.

The imposition by the central bank of silver import curbs and its postponement of the opening of the wholesale silver market amid worries about rampant speculation, were just as worthy of attention, said Paul Bateman, director of the Silver Institute in Washington, DC.

Silver's slide kept a lid on other precious metals, which continued post-Y2K slumps of their own. February gold eased $1.60 to $282.10 an ounce, trading between $281.00 and $285. Spot gold closed at $280.75/1.25, compared to the late fix at $280.45 and the previous close at $282.20/2.70.

Nymex April platinum fell $11.80 to $401.90 an ounce and March palladium fell $3.80 to $438.10.-Reutters