Silver prices supported investment demand

Since, Bart Chilton, the Commissioner at the CFTC, acknowledged that there has been price manipulation in the silver market, the price of silver has held relatively firm above the $25 an ounce level. However, I believe that the current price action, has little to do to with the commissioner's statement, and is merely reacting to current market conditions. And, as far as I am concerned, the main driving force for the rising prices of silver is due to increased investor demand.

Global investment, including coins, is set to rise to record levels this year, with the net value reaching roughly $4 billion. According to the US Mint, sales of US silver Eagles in November are already a whopping 3,775,000 ounces, bringing the total of silver eagles sold this year to 32,405,500 silver eagles. The total number of silver eagles sold last year was 28,766,500. The Royal Canadian Mint recently said that silver-coin sales will jump more than 50 percent this year. The Perth Mint may match that gain, according to Ron Currie the sales and marketing director. "There seems to be more upside with silver than gold right now," said Currie. According to the Perth Mint Silver-coin sales will climb as investors seek to protect their wealth from weakening currencies.

Even though it is sometimes referred to as "the poor man's gold," I believe that, over the next few years, silver will make more money than gold for people prudent enough to own some.

Of all the silver mined over the past 5,000 years, more than 90% of it has been used up. It's gone forever. For many years, the U.S. government maintained a stockpile of silver. It held hundreds of millions of ounces in its inventory as one time silver was used to back up the US currency. Now they don't have one ounce and the number of silver eagles minted this year is approaching the level of all the silver produced in the USA. And, unlike gold, silver has a myriad of industrial applications.

Simple demand/supply dynamics of this market suggest that the price of silver should go much higher. Recently, world renowned silver expert, David Morgan in an interview with James Turk said. "We are so tight in the silver supply right now, almost every commercial bar that exists is held for one reason and for one reason only and that is investment purposes, not commercial use." According to Morgan any new demand for silver for commercial use, could really force prices higher due to the shortage of silver. "So any commercial use that comes on top of the investment purposes that already exist, is going to force the price not only higher, but it is going to force it higher now, because it is required for industry."

Recently, we have seen the gold/silver ratio drop from 68:1 in August this year to 52:1 by the beginning of November. As you know I have often referred to this ratio and while it is not a set formula we have seen it drop to more reasonable levels. However, I believe that we will soon see this ratio trade at 45:1. James Turk whose long-term view is that by 2013 to 2015 gold is going to be$ 8,000 an ounce and that the ratio is going to fall and go below 20. This would put the price of silver at $400 an ounce!

Personally, at this time, I have a more conservative outlook towards the silver price, but based on historic ratios, silver could easily triple from here and still be undervalued compared to gold. And, if silver simply matched its previous highs in inflation-adjusted dollars, it would be over $130 an ounce now.

I have long advocated accumulating physical gold and physical silver, because that's where you really want to be. You have exposure to the price and you also have money that hasn't got any counterparty risk, so you're not reliant on some promise of a bank, a central bank or something of that nature. But, do not be beguiled into believing that limited edition medallions offer better investment potential than bullion.

TECHNICAL ANALYSIS

I believe that the price of silver is consolidating between $25/oz and $29/oz., and that the upward momentum will continue.


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. www.lakeshoretrading.co.za

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.