Saturday, October 2, 2010

Sliver Slingshot

By David Levenstein:

It was only a little more than a week ago when analysts were wondering if the price of silver was going to break above $20 an ounce. Not only did it blast through this level of resistance, it continued upwards through $21 an ounce, and now it is testing the $22 level.

Like gold, silver is a monetary metal and can be traded around the world. And, like gold, silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty. While it is a lot more volatile than gold, it is the one precious metal that I believe will ultimately yield the greatest return compared to gold, platinum and palladium. Even though the price has touched a 30 year high, it is still way below its all time high. If adjusted for inflation and using the previous high of $50 an ounce achieved in 1980, the price of silver today should be around $130 an ounce.

During the last 25 years the gold/silver ratio has been around 46. If we use this figure and apply it to the current price of gold we get a price for silver around $28 an ounce. While I do not see the ratio falling to this level any time soon, it has come off it recent highs when it was trading close to 70. It is now a fraction below 60.

Recently, a client asked if this move in silver was prompted by the unwinding of the open shot positions on Comex currently held by the bullion banks. Actually, up and until last week these "super traders" were adding to their short positions. According the latest COT reports the current open short position held by these bullion banks increased only marginally. Since the price of silver has traded above the $20/oz level I estimate that the "paper" loss incurred by the 4 or less bullion banks must be over $500 million. This of course does not include losses they must have sustained when the price was below $20 an ounce.

Like I have mentioned, I believe that this price movement was long overdue and have been writing and talking about it for months. I believe that is driven by prudent investors who have seen the potential of this metal and who have also seen how undervalued it has been. I did hear some rumours about some large company based in Germany coming onto the market to buy a large quantity of physical silver, but I have not had this story confirmed. In the meantime, silver still remains way undervalued and should be included in investment portfolios.

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