As the price of silver backs off from its recent high of $25, it offers investors another amazing opportunity to buy the precious metal. In the past month silver has bounced back to prices not seen since the 1980’s, and even though the price of silver has had a spectacular move since the end of July – surging from $17.50 an ounce to almost $25.50/oz… a move of 45%, the price is still terribly undervalued. As mentioned in my previous newsletter, there have not been any significant changes in any of the known supply/demand dynamics that have caused this run up in the price, but the price is being driven by surging investor demand as investors shy away from paper assets and turn to commodities.
Investors in silver, also known as “poor man’s gold,” have driven the silver price higher for the same reasons they have purchased gold; the prospect of a global “currency war, a hedge against the declining values of the major currencies as well as a general mistrust in the current fiat monetary system. Also, there is speculation in the market that a second round of emergency monetary easing by the Federal Reserve could eventually lead to a sharp jump in inflation.
The increase in demand for silver can be seen in the increased holdings of the silver exchange traded funds (ETF’s) and silver bullion bars and coins. Holdings in silver ETF’s increased by more than 1,500 tons in the past two months alone. That is more than 5 per cent of total annual silver supplies. Sales of silver bullion coins are set to make record sales this year. David Madge, director of bullion sales at the Royal Canadian Mint, says it has already sold in excess of 30 per cent more of its popular silver Maple Leaf coin than last year’s record 10 million ounces. The US Mint has sold 27.5 million ounces of silver American Eagles so far this year. Total sales for last year reached a record of 28.8m ounces.
Recently, in an article published by Bloomberg on Oct. 19, silver exports from China may drop about 40% this year as domestic demand from industry and investors climbs, according to Beijing Antaike Information Development Co. China is the world’s third largest producer after Peru and Mexico. Shipments may decline from about 3,500 metric tons in 2009, said Feng Juncong, chief analyst at the state-owned Antaike. Customs data show exports plunged almost 60 percent to 970 tons in the first eight months. This means that the amount of silver coming to the global marketplace this year will drop by more than 70 million ounces. This represents roughly 8% of total annual global supply from 2009.
“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewellery, investment and fabrication and this has resulted in a physical market shortage in the Far East.” In August 2008 China revoked export rebates for silver in order to curb use of natural resources. “China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said. Feng also mentioned that there is strong demand for silver from Chinese investors. “There are Chinese investors now hoarding silver, along with other resources, amid anticipation of higher inflation,” Feng said. “China is short of resources so these investors believe the metals will be more valuable in the future.”
On September 25, Bart Chilton, a commissioner at the U.S. futures regulator said “”There have been fraudulent efforts to persuade and deviously control that price.” Chilton’s comments were made before a Commodity Futures Trading Commission meeting. Chilton said he could not pre-judge the outcome of the CFTC’s on-going investigation of the silver markets, but said public deserves some answers to their concerns. Chilton’s statement confirms the allegations made over the years by numerous analysts, in particular Ted Butler. In recent days, many of the major newspapers have published articles about this investigation, but we will have to wait and see what action the CFTC is going to take to prevent further price manipulation.
The scenario for silver just keeps on getting better and better. With rising demand, lower supplies and hopefully a stop to price suppression, the price of silver has only one way to go and that is up.
The price of silver has increased by $8 in the move that began towards the end of July. As prices seem to be consolidating at the moment, a Fibonacci retracement of 38.2% would see the price pull-back to S1 at $22.50. This would present another great buying opportunity.
About the author
David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.