Silver is the forgotten metal right now for most people. There is a strong, growing interest in gold and gold stocks. But you don't see as much attention to silver in market commentary. While you find gold commercials on television and radio, silver is kind of that metal that everyone pushes to the side.
Case in point: This weekend I was scouting stores for silver, and asked one of the jewelers why he didn't carry more silver jewelry. His answer: "Because it's too cheap!"
That makes sense from a salesman's perspective, but does it make sense for investors to take the position that silver is not sexy?
I think the fundamentals point out that silver is not an inferior metal. As I wrote recently, silver's upside potential is very stout due to supply and demand factors. We know that silver stockpiles are down 95% from the 1950s.
We know that silver has industrial qualities that are unique and not easy to replace. We know that jewelry demand in silver is strong. And we know that investment demand in silver is also very strong. We use more than we can mine on a yearly basis.
Inflation of Money
Recent articles have pointed out why the prices of commodities, and in particular gold and silver, are rising.
Peter Degraaf, with 50 years experience in commodity and stock trading, notes that inflation had a one year pullback, and then promptly resumed its upward course. This, of course, raises the price on all commodities.
The Money Supply is increasing, according to the Ludwig Von Mises Institute.
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And as the money supply increases, we see an increase in the prices of goods.
Rowena Mason of the Telegraph points out that base metals are becoming more precious because of the weak dollar.
One of the most obvious drivers of the recent surge is the weak dollar, making the metals traded in the greenback cheaper for those trading in stronger currencies.
So, it is just money supply inflation and pricing in of fears of more through Fed QE2?
Inventory
There has been a squeeze on many metals in the market to restock inventories, according to Nick Moore, an analyst at RBS.
"The emergence of deep inventory draining supply shortfalls post 2012 will likely herald the return of acute pricing tension for base metals in the 2013-14 period. Before then, much of the production capacity idled is now comfortably profitable on a cash cost basis and producers - notably nickel - are itching to reactivate."
His comments are backed by the International Monetary Fund, which warned last Wednesday that the squeeze is likely to continue.
The Jensen report noted earlier shows this has been true for silver. Demand outpaces supply, which puts upward force on prices along with other industrial metals.
Short Squeeze?
So then given inflation and demand pressures, I think silver will rise in price. If that were our only price drivers, we may stick a price target in here of say, $27.60 over 12 months such as Goldman had predicted.
However, since that report came out on August 11, silver has already surpassed their 3 month target of $23.40. My Android Metal Quotes app tells me that silver is currently trading at $24.04. So you could say that Goldman's bullish recommendation is correct, but that their target prices are not aggressive enough on silver.
Chris Mack from Tradeplacer notes that the commercial shorts may have lost control of the silver options market.
During the bull market in silver that began in 2001, a pattern of trading similar to the "Martingale Betting Strategy" emerged in which 8 trading institutions sold short increasingly larger amounts of contracts into rallies until their sales volumes overwhelmed the market into a freefall. After the freefall they then repurchased those short positions at a profit and the rally process began again. This process of taking money from precious metals investors has been well documented by analysts such as Ted Butler, David Morgan, and others. The strategy was so successful that some futures traders began to front run the banks on their own using tactics such as the COT report and other sentiment indicators. As a result of their actions it has been argued that these large short positions have suppressed the price of silver by a multiple of itself. This may be proven sooner than many expected.
Here is a chart from Tradingcharts.com on the commercial positions in silver.
Now, however, the commercials are selling their positions at a loss. The longs are buying more which has not recently allowed for the normal pullbacks in silver trading. The commercials, therefore, cannot use their typical strategy outlined above.
Chris Mack notes:
Something has drastically changed in the silver market. The banks that once controlled the price of silver are now closing positions at a loss. The commercial shorts have begun to bleed money - and when blood spills sharks will circle. Hedge funds and traders that never even thought of silver before will begin to squeeze the shorts. If the big banks don't quickly regain control of the silver market they may lose it forever.
Chris Mack goes on to note that if all shorts had to be covered, we may see a minimum price of $117 for silver, for a loss of $15 billion for commercial shorts. But because the markets aren't 'linear', some of the shorts may not be covered at any price. This may lead to a new silver plateau much higher than we have now.
James Turk, Gold Money founder, explains that the big money is coming off the sidelines into gold and silver. This agrees with Chris Mack's expectation of hedge funds buying long positions.
The short squeeze is on and the bears are feeling the pressure. As the price continues to rise, then we will eventually see the shorts capitulate. Hang on with strong hands, accept the volatility, because we are going a lot higher.
Whether or not we are into the squeeze in silver, it is fairly obvious that there is good reason to remain bullish in silver prices. There is no reason to expect a pullback now.
Investing
So my typical advice is to buy the physical. You can do this by visiting your local dealers, or heading online to places such as www.apmex.com or any other number of websites. I believe that because holding physical removes counterparty risk, this is the most desirable position to take.
I do not recommend buying ETF funds because there is some doubt among experienced commodity analysts that ETF funds are fully backed by metal, and therefore redemption in physical bullion may be difficult.
We also have mining stocks. A good place to research is the Mining Company Database that Jeff Nielson and contributors have compiled at Bullion Bulls Canada.
One mining stock that has done very well this year is Fresnillo plc [LON:FRES]. The price is up 60% from the beginning of the year.
Source: Yahoo Finance
Genco Resources (GGCRF.PK) is a small-cap silver producer in Mexico. As Marco G. notes:
Genco has a Ni 43-101 compliant report indicating 50 million ounces of reserves and 150 million ounces of resources in Silver equivalents
Another angle to take is Silver Wheaton (SLW). Wheaton buys silver from producers, at a substantial discount, to help finance their operations. They believe in a strong bullish trend in silver, and using fixed costs contracts, have a near limitless upside on the profit from sales on a product they do not have to produce.
There are countless silver stocks to invest in that will profit in this bull market. Finding profitable ones is not hard.
Disclosure: Long physical silver
