Any pullback in silver prices should be used as a buying opportunity
Now that silver has backed off a bit after blasting through the $30 level, I expect to be hearing comments such as "it is overbought, asset bubble, major pullback etc." While it is normal to see corrections, the fundamentals for silver remain extremely bullish and anyone predicting a major correction has, in my opinion, little understanding of what is going on in this market.
This time last year the price of silver was trading at $15 an ounce. The year-on-year gains we have seen with silver have been spectacular, and even at the current levels I urge investors to add some physical silver to their investment portfolios. From April to the end of August we saw the price suppression of silver continue at around the $18.50 level as the bullion banks, especially JP Morgan continued with their strategy of price manipulation. But, when the prices finally broke through this level of resistance, and as the allegations of price manipulation were taken seriously by the CFTC after more than a decade of being in denial, the playing fields began to change.
It is now widely known that J.P. Morgan holds a massive short position in silver. Furthermore, some observers are accusing the bank of acting as an agent for the Federal Reserve in the market – as the price of silver edges higher it undermines the confidence in the U.S. Dollar. A lower silver price helps keep the relative appeal of the U.S. dollar and other fiat currencies high.
By using the futures contracts offered on Comex, JP Morgan has been able to suppress the price of the precious metal by selling massive amounts of paper silver in the futures market It is believed that these short positions are naked (i.e. they are not backed by any physical silver). While the COT reports indicate that the net short position in silver has been around 300 million ounces of which JP Morgan probably hold around 80% new reports indicate that JPM is short more paper silver than physically exists in the world.
In an article by Max Keiser which appeared in the Guardian on December 2, 2010 claims that the size of the short position is 3.3 billion ounces of silver!! As I have no idea of how he has calculated this position, I cannot say if this figure is correct or not. But, to me it looks grossly overstated. But, if Keiser is correct, the implications of this for silver are going to be very disturbing for JP Morgan, but highly rewarding for investors on the long side of the market. Recently, there have been rumours circulating around the world that this huge short position held by JP Morgan has the potential to cause a major short squeeze and potential COMEX default as large traders demand physical delivery of silver that COMEX does not have in their vaults. But, even if we disregard the potential of a short squeeze in the market, the demand/supply dynamics for silver are looking incredibly bullish.
It now appears that significant physical silver shortages are developing in the marketplace and the metal is being sold well over spot where it is available. And, as I have mentioned on numerous occassions, silver has many industrial applications which will underpin demand. And, if you add the increasing demand from investors around the world, it is logical to assume that the price has huge upside potential. In fact, I think silver is going to continue to be one of the best performing assets during the next 5 fives.
Silver's latest push through the $30 level has exceeded my expectations for the year. While we may see a slight pull-back this market is on fire and any pullback should be used as a buying opportunity. It seems as if silver may remain in a range between $25 and $30 but still remains in an upward bias.
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.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.