What’s Driving Silver Prices?

The virtues of gold (GLD: 152.37 +2.55 +1.70%) and silver (SLV: 46.88 -0.38 -0.80%) are being addressed far and wide. My readers know the steady drumbeat of praise that is reaching a crescendo for the white metal scares the hell out of me. The driving forces behind silver’s price come from investors, industrial demands and a global shortage. The world simply is using more silver than the mines produce and new silver discoveries are becoming difficult to find. These factors are becoming truisms for public consumption.

A parabolic rise has formed in silver as gold advances on to our measured target of $1600. Please note that at these times of extreme optimism volatile pullbacks become more prevalent. Parabolic rises must be approached with caution. Silver has rallied moving exponentially while gold is still moving linear.This metric of $1600 gold is important to us as it may signal a profit taking opportunity for precious metals. Silver is in a roaring uptrend and has now exceeded my late January target of $40. We believe that high quality silver mining shares like SIL will catch up to silver bullion even as the silver bullion price may stall or consolidate. There will be unavoidable pullbacks in silver’s secular uptrend and it would not be wise initiating long positions at these extremely overbought levels. Silver has a very high probability of shaking out investors as pullbacks follow overbought conditions.

Investors have been scrambling to own silver and gold. What a difference a few weeks make. In July of 2010 and January of 2011, we saw two major buying opportunities for precious metals investors to position themselves at discount prices. Now gold and silver prices are selling at a premium. Silver is reaching extremely risky levels, yet miners are still poised to breakout. Remember that I am recommending partial profits if your winnings enable you to play with the house’s money and you are still holding silver from our August Buy Signal.

Other readers who have not been able to build a position can wait for the inevitable pullback as additional buying opportunities. From my experience it is prudent to wait for technical corrections before getting aggressive with any commodity. We firmly believe that any corrections on the way up will represent more reasonable entry points on this uptrend. Always remember that parabolic rises can encounter severe downturns particularly in silver which tends to be volatile. Let’s wait for long term support and a shakeout to reinitiate our short term positions.

One of the reasons for such volatile action in the white metal is the large short position in silver taken by major financial institutions such as JP Morgan (JPM: 45.63 -0.22 -0.48%) and HSBC (HBC: 54.47 -0.23 -0.42%), which are the subject of a new lawsuit that charges them with price manipulation of the silver market. I believe these short sellers have been wrong all the way up and Monday’s record volume may have been capitulation by the silver shorts. I believe the accumulation of gold and silver is a form of savings in sound money, but I am not adding to positions when the precious metals market is reaching these extremely overbought levels.

There are six banks that now control the London-based precious metals storage market. Interpretation: there is not enough silver to cover the trades being made which partly accounts for silver’s record rise of 144% over the past 12 months and up 22% this past month alone. There is one additional consideration: global hedge funds own one half of one percent (.005) of their overall portfolios in precious metals. Should these funds increase their holdings to one percent (.01) this would result in a large increase in demand.

I feel a pullback may be in order as the recycling of scrap increases. I don’t expect it to last very long. Above all do not even think of shorting silver. I reiterate: buy on dips as the price of silver is capable of doubling in the next twenty four months. I do not expect the silver to gold ratio to drop below 30:1 in the short term.

Is this a secular long term top in gold and silver? I do not believe so. We are witnessing a powerful up move in gold and especially silver, where a healthy correction would be normal. There is a flight to quality away from fiat currency namely U.S. dollars. If the dollar continues to lose value, your holdings of precious metals and mining stocks such asGDX will prove to be a prudent decision.

It must be noted that Evo Morales from Bolivia threw a shock into major silver miners especially Pan American Silver (PAAS: 36.12 -0.18 -0.50%) and Coeur D’Alene Mines (CDE: 31.71 +0.01 +0.03%) by saying he would use force majeure to take over the mining industry. This caused an immediate drop in the prices of these stocks. On Friday, he backed off by saying he did not mean it. Nevertheless, the markets don’t trust socialists such as Hugo Chavez of Venezuela and Morales of Bolivia.

Witness the sad story of Crystallex (KRY: 0.135 0.00 0.00%) which has spent ten years and was shovel ready to begin mining on Las Cristinas when Hugo decided to hand the permits over to his Russian friends at Rusoro Mining, a Canadian-based Russian Company.( do some DD Dude) Such geopolitical uncertainty can only limit supply in an already tight market. Silver is such a small market that it doesn’t take much to start a stampede. If you sell your silver you are stuck with paper money. I would rather look to high quality and overlooked natural resource stocks in geopolitically friendly jurisdictions with great relative strength to the sector.