Strong investor demand points to silver's resurgence as a store of value

After being trapped in a trading range between $17.50/oz and $18.50/oz, silver has broken out to the upside and in less than 3 weeks the price has moved close to 14%.

Author: David Levenstein
Posted: Thursday , 16 Sep 2010

JOHANNESBURG -

Many analysts believe both demand from investors and industrial uses has helped to bolster silver prices this year, which have increased by 20%, compared to gold's 15%, since the start of 2010. Industrial demand has increased especially demand from the electrical industry which has ballooned by nearly 25% in the past year alone.

Holdings in global silver exchange-traded products, which are tracked by Barclays Capital, hit a fresh record last Tuesday. They climbed 10 metric tons to 13,124, Barclays reports.

Last week the price for spot silver traded above $20/oz and the bullion banks increased their net short position to an almighty 61,798 contracts, or 309.0 million ounces of silver. The '4 or less' traders are short 256.0 million ounces. That means that for every ten cent increase in the silver price they incur a "paper loss" of $25,600,000! (Silver is now trading around $20.50).

This surge in investor demand for silver signifies a resurgence of the importance of silver as a store of value. Silver was recognized as more precious than gold when bartering in ancient Egypt. Silver's use as money in coin form began around 2600 years ago. The Lydian (present day Turkey) Trite is considered by many experts to be one of the first coins used as money. It was made of "Electrum", a silver and gold mixture. Egyptian silver in coin form began appearing around 300BC.

Silver and gold have stood the test of time, as a medium of exchange, a store of value and a safe haven in times of turmoil while the history of fiat money has always been one of failure. Every fiat currency since the Romans started diluting the silver content of their Denarius has ended in devaluation and eventual collapse of both the currency and of that particular economy.

For the very first time in our history, all money, all currencies, are now fiat. The Federal Reserve first issued its debt based paper money in 1913. Since then the US dollar has lost 95% of its value.

While India is traditionally viewed as the center of the world as far as physical gold demand is concerned, it is quickly becoming recognized for its strong role in the silver market as well. Rising gold prices are good for silver in this region of the world as would-be purchasers of gold jewelry and bullion turn to the grey metal as a cheaper alternative during the festival and wedding season. Of the 4,000 tons that India used to import annually, around 2,600 tons was used to make jewellery and ornaments.

More than 60% of India's silver demand comes from farmers, who store their savings in silver bangles and coins. Due to one of the worst monsoon seasons in more than forty years, the demand for silver last year fell dramatically. But this year, thanks to a good rainy season the situation has changed completely. India's demand for silver has also been boosted because gold has become more expensive at current prices. According to official data, India's silver imports in the first six months of 2010 are up 579%, at $1.69 billion.

Traders maintain that the import of silver is poised to recover and may hit a fresh record next month, given the good monsoon and the resultant increase in rural incomes.

The laws of supply and demand indicate that the price of silver remains extremely undervalued and the recent move above $20/oz signifies that a major shift is occurring in this market. I believe that the price of silver will soon trade above $21/oz but ultimately, we will see much higher levels. While the market will undergo consolidations and corrections, I expect to see the price trade towards $25 before the end of the year.

TECHNICAL ANALYSIS

After being trapped in a trading range between $17.50/oz and $18.50/oz, silver has broken out to the upside and in less than 3 weeks the price has moved close to 14%. I believe that silver will soon test $21/oz. But one thing for sure, the momentum in silver is upward and in spite of any corrections, will remain positive in the coming months.

About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. For more information go to: www.lakeshoretrading.co.za