Silver Outlook Continues to be Extremely Bullish

Includes: GDX, GGN, GLD, SLV
by: Peter Degraaf

The fundamental outlook for silver continues to be extremely bullish.

In 2003 I remember reading an article by Douglas Kanarowski titled: “70 forces for higher silver prices”. (To find the article, visit Google and type in his name - the link is at the top of page one). If Mr. Kanarowski were to re-write the article today, he could add several more reasons.

Silver is being utilized more and more in nanotechnology applications. According to a recent report from NanoMarkets, a leading industry analyst firm based in California, the market for silver conductive inks is expected to rise from the current 176 million dollars per annum to 1.2 billion dollars during next 7 years. This is a seven-fold increase!

In addition, silver is the material of choice for RFID antennas, and the printing of RFID tags to be used on an ever-increasing number of items, including food packages. Key findings from the report can be found on their NanoMarkets website.

When I first became interested in silver during the late 1950’s, the U.S. government had a stockpile of 2.5 billion ounces of silver. The amazing fact is that all of this silver has long since been sold. Most of it is gone forever! The majority of uses for silver does not allow for recovery, since only small portions are being used in each application. Computers, cell phones, T.V.’s, fridges, batteries, weapons, and now ink and RFID applications, each use a tiny amount. However, multiplied by large quantities, this ever increasing use is causing a constant drain on the remaining silver stocks.

I realize there are people who think that the large silver stockpile of the 1960’s still exists somewhere, but if you talk to some of the CEO’s of large coin dealerships who have been in business for a decade or more, they will tell you that investment demand for silver is a very recent factor. The vast majority of investors have been unaware of the potential that exists in silver investments, until recently. For some reason, most investors do not ‘board the train' until it is well underway.

EOD Silver Index

This is the daily bar chart for silver. The main trend is clearly defined. The blue arrows point to the upside break-out, in price and in the supporting indicators. The green arrows are the likely targets for this move. The 50DMA (solid blue line), and the 200DMA (solid red line), are in positive alignment, and both are in ‘up-mode.’

Silver and Gold Index

This is the index that compares the POS to the POG. One of the most reliable indicators to determine whether silver and gold are in bullish mode is to look at this index. When it is rising, the PMs are bullish, when it is falling the PM’s are in a corrective phase. The green arrows point to an upside breakout in the index, supported by the other indicators. This index closed above the 50DMA (blue line) once again, for the first time in three months, and when this chart was updated on Saturday evening(at a reading of 0.0241), it showed a close above the 200DMA as well. This is another positive development for the metals.

XAU Gold & Silver Index

This is the XAU index of mining stocks. The green arrow points to an impressive upside breakout through the red two month old resistance line. The blue arrows point to ‘upside reversals,’ sometimes called ‘climaxes.’ It is quite obvious, by observing past performance after one of these URs that odds are very good we will see at a minimum, two weeks of positive action.

The XAU index has moved back up above the 200DMA (red line on chart), while the 50DMA is in positive alignment to the 200DMA. All of this is bullish action.

Most analysts look for an ‘up-trend’ in the mining stocks before they become bullish on the metals, and here is the first such signal in the past two months.

Whenever bullish fundamentals harmonize with positive chart patterns, the trading traffic becomes ‘one way’. In gold trading, the net commercial short position as of May 29th shows 119,000 net short positions, compared to 173,000 three weeks earlier.

Such a large drawdown is a positive factor for the metals.