In our previous article, we discussed the how silver could be set to rebound and move higher in the coming months. Today we wanted to take a broader look at the backdrop that has worked against silver since the start of the financial crisis in 2007 and how silver could not only rebound but explode, taking out the 2011 market high of $48.70.
Industrial demand for silver has been steadily increasing for years now. Combine this with competition from growing investment demand. The US reported record sales of silver coins in 2013, whilst India imported nearly 6000 tonnes of physical silver, a 22% increase on the year before. Additionally, in first quarter of 2014 Chinese demand showed a 22% year-on-year increase in silver imports, the largest quarterly gain since the second quarter of 2010. The big picture is clear for silver, the outlook remains bullish for silver well into the future.
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But then why did the price break down so dramatically from high in 2011 to current levels?
As silver investors are likely aware, leading silver analyst Ted Butler, who has specialized in the precious metal markets for the last 4 decades, comments extensively on manipulation and suppression of prices in gold and especially silver, particularly by JP Morgan [and other major banks]. He has written time and time again that the extent to which JP Morgan adds new short contracts on the next silver rally will determine the strength of the rally. Simply put – if JPM doesn’t add new short positions, the manipulation is over.
What is unrecognised by many investors, is how many short contracts have entered the market in the last few years to suppress the price.
In April 2013, when the price of silver was at $32 a troy ounce, the number of short contacts was less than 10,000. Since then the price has steadily fallen $19 a troy ounce today, and the number of short contracts is now near a staggering 40,000.
As much as the bears have pressed their positions down over the past year with a desperate increase in the number of short positions, silver so far has been able to maintain a bid above the lows from last June. It is our opinion that with short positions becoming stretched to breaking point – with increasing total demand exceeding supplies and unlikely to change – someday, JP Morgan [and other banks] won’t and can’t add further to silver short positions and the suppression will come to a climactic end. Now whilst it cannot be proved that JP Morgan as well as the other banks are solely responsible for the huge increase in short contracts, what is undeniable is that the bloated number of contracts has tried and largely failed to significantly supress silver in the face of surging physical demand. An explosive move higher appears more likely here than ever before.
Because we believe this bull-run is far from over, we advise investors to take exposure to silver, at anywhere near today’s prices, while you still can.
Looking back after this bull market has finally run its course, we think silver will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.