By David Levenstein:
In 1980, the price of silver exploded upwards and traded above $50 an ounce. I recall this very clearly because I was trading silver through the London Metals Exchange (LME). In those days, the contract offered by the LME was 10,000 ounces, and the price was quoted in pounds, shillings and pence! While it takes more than a few words to explain why the prices went parabolic in 1980, suffice to mention that many investors had no idea what was going on or how they could participate in the silver explosion. I mention this, because the scenario we see with silver now reminds me of what we saw 30 years ago. I do not mean that the driving forces behind the prices now are the same as those in 1980. Absolutely not; but, once again many investors have no idea about silver, what is going on in the market and how they can participate.
Silver is an amazing metal as it is both a monetary as well as an industrial precious metal. And, the demand for silver in industrial applications is extremely price inelastic. Despite the fact that there is a large open short position which is held by the 4 or less large commercials trading via Comex, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold. Barclays Capital recently reported that the holdings of global silver exchange traded products it tracks has topped 14,000 metric tons for the first time. "Indeed, inflows in October have already hit 311 (metric tons), surpassing total inflows for the whole of August and almost half of September's 702 (metric tons)," Barclays says.
In 1980 individuals in South Africa were not allowed to hold offshore funds, and they were prohibited from owning any bullion. Now, even that these draconian laws have been amended, the number of investors in South Africa and probably worldwide who own any silver is minuscule. Yet, silver has been one of the best performing assets over the last few years, and I believe that it will continue to out-perform most other asset classes over the next 5 years.
Unlike gold, platinum and palladium, silver still remains well below its all-time high in spite of a developing shortage of supply. One of the reasons for this is been the alleged price manipulation by large traders such as the bullion banks that have sold massive amounts of silver on the futures markets to keep prices down. Currently, the open short position held by these banks is equivalent to approximately the annual global mining supply of silver.
Now US regulators have been urged to reveal the results of a two-year-long investigation into silver and gold price manipulation allegations. Recently, Bart Chilton, a commissioner at the US Commodities Futures Trading Commission (CFTC) which is investigating the claims, said: 'I think the public deserves some answers in the very near future.' He also added. "I expect the CFTC to say something on our silver investigation within weeks. I can't pre-judge what that will be. I can't even guarantee that the agency will speak. That said, if the agency remain silent for much longer, I intend to speak out on the matter in an appropriate fashion."
No matter the results of the investigation, the prices of silver still remain much undervalued and should be added to one's investment portfolio, especially as this time around there are many instruments available to investors unlike 1980. But, I would recommend that investors accumulate the physical metal in the form of silver bullion before investing in the other silver or silver related investment instruments.
TECHNICAL ANALYSIS
The price of silver has moved from (A) $17.50/oz at the end of July to (B) $23.35/oz last week. This price move of more than 33% has put silver into a new into a new range of trading. While the 40 degree angle of ascent is not parabolic it is at an angle that suggests that it may run into some resistance. I suspect this to be between $23 and $25 an ounce.
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