-- Posted 22 March, 2006 | |
March 21, 2006
Today we received some big news in the silver market. The SEC has approved Barclay’s iShares Silver Trust Exchange Traded Fund to be listed on the American Stock Exchange. The anticipation of this ruling has been one of the major factors pushing silver to recent high prices. The Silver ETF should take 130 Million ounces of silver out of available world inventory and put it into vaults in London to back the shares that are issued. In the intermediate and long term, this is extremely bullish for silver. There is increasing demand for silver chasing dwindling above ground available silver and making 130 Million ounces of silver unavailable to industrial users will only intensify the problem. Only much higher silver prices will bring the supply and demand numbers back into balance. I anticipate that we will see silver hit $15 sometime this year and should close the year above $13.
However, in the short term, silver is very overbought and it is highly likely that traders will “sell the news” as they have been “buying the rumor” about the Silver ETF for the past few months. I have been expecting a correction in the price of silver for months, due to the high level of COMEX Commercial Traders’ (commercials) net short trading position. The rumor of the pending approval of the ETF has kept the price of silver high. The market has been looking for a catalyst to start the silver sell off and the news of the ETF approval could start the price decline.
Look at the graph below to see what the commercials have been up to through 3/14/06. They’ve decreased by 10,000 contracts the number of ounces sold short from the high levels seen in early December. However, they still have 73,000 contracts sold short. We have only seen them short at these levels three times since the end of 2003 and each time resulted in a sell off in silver. The sell offs were quick and severe in April 2004 and December 2004 and short in June 2005. I have long felt that the next correction would be similar to April 2004 and I am anxiously waiting to see how it unfolds in the next month.
While the commercials have covered some of their short position in the last two months, they are still sitting on large losses on paper. They need a sharp price correction to cover some of these shorts. Historically, the commercials have always been able to cover their short positions on price declines and I doubt that it will be different this time. I am looking for the next great buying opportunity for silver when the commercials get closer to 40,000-45,000 contracts net short. There were six times in the past two years when we saw the commercials at those low levels and you would not have gone wrong buying silver at any of those times.
I can’t be sure what price we will have when the commercials’ net short position is back down. We’ll have to wait and see what price the market gives us. There is a lot of new investor interest in the silver market, but I still think that we could correct into the low to mid $8 range as some of the newer investors get scared out of the market.
Bottom line - Silver is challenging the $10.50 to $11 range now and may go higher in the next few days as more investors and speculators digest the news about the Silver ETF. However, once the initial excitement of the news wears off, expect to see a sell off. I will be carefully watching the commercials net short position and the silver charts to identify the next great low risk buying point. It may be the last time we’ll be able to buy silver under $9.
Timothy Silvers is an independent analyst who has been following the silver market since the late 1990’s. Yes, Silvers is his real last name, so it only makes sense that he follows the silver market. If you are interested in more of his analysis, please visit his website at www.silverbrothers.com
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.
-- Posted 22 March, 2006 | |