Silver: Even With Contract Highs, It Does Not Look Over Yet

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Despite forging a pattern of new contract highs recently, the upside track for silver doesn’t appear to have run its course just yet. With gold prices persistently posting new all time highs and the gold market typically dominating the headline coverage in the precious metals complex, we think that silver has yet find a level that will diminish demand and increase supply. In fact, the recent pattern of daily silver exchange stocks has continued to show a tightening of supply, and that would suggest to us that investors are still piling into silver and that high prices haven’t enticed physical holders into liquidating. Recent news that Indian officials think that 2011/12 will see a 50% increase in silver imports to as much as 1,200 tons is probably justification for a continued move back toward the all time highs, just above $50.00 an ounce. With at least three global mints seeing demand for silver coins outrun their capacity to deliver, it is clear that even smaller investors are getting involved.

Some players might suggest that having small investors move into silver is a sign of that the market is putting in a top, but in this instance the ongoing involvement of investors from India, China and other developing countries suggests that the interest in silver is likely to carry on longer than would have been the case in the “old world”.

With both the US and Euro zone potentially locked in a death struggle over debt issues and the uncertainty from that situation dramatically undermining some safe haven instruments, it wasn’t surprising to see both silver and gold range up sharply in the wake of the S&P credit rating warning to the US. Relatively speaking, the amount of investment money dedicated to silver ETF’s is still only 1/10 of the amount of capital invested in Exxon.

We think that traders need to be on the lookout for a decline in silver exchange warehouse stocks below the 100 million ounce level, as that could spark the next wave up in prices to the $45.00 to $49.00 level. In short, until the high level of uncertainty toward global debt is tamped down and the threat of inflation has been moderated, we suspect that silver prices will be poised to march even higher. However, with such high historical prices, those looking to enter silver should be prepared to weather and overcome extreme volatility.

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