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Best outlook for silver since the days of the Hunt brothers

By: Peter J. Cooper

-- Posted 26 September, 2008 | | Discuss This Article - Comments:

By: Peter J. Cooper

Not since the Hunt Brothers tried to corner the silver market in the late 1970s has there been more dramatic news for silver prices than last week’s confirmation from the Commodity Futures Trading Commission enforcement division is investigating the silver market.

This column tipped silver as a strong buy for mid-summer but did not anticipate the depths to which this market would fall in a 50 per cent retracement from the March high. The suspicion among silver bugs around the world has been that market manipulation was to blame for this exaggerated price movement which came at a time when stocks of bullion and especially silver coins ran very low.

Retail investors have recently been big buyers of silver bars and coins, while something fishy has been happening in the futures market with short positions. Silver investors have written hundreds of emails to US federal regulators and the result is a fresh investigation.

‘We take the threat of manipulation in the futures and options markets very seriously and employ a number of measures to prevent, identify and prosecute it,’ says Stephen Obie, acting director of enforcement.

The argument from silver bugs is that a small number of US banks have been holding a large portion of short positions — or bets that silver prices will fall — on the New York Mercantile Exchange. And indeed data shows that two US banks increased their short positions between July and August by 450 per cent and controlled 25 per cent of the market.

This time it is the enforcement rather than oversight division of the CFTC that is tackling the investigation. The oversight division performs overall market surveillance. The enforcement division looks at activities in a specific time period.

It may be that the CFTC enforcement division investigation reveals no wrong doing over the summer. Silver has always been a volatile commodity, and price swings can also be to the upside and benefit investors. But this investigation also puts the spotlight on silver at a very interesting moment in the precious metals bull market.

The American financial crisis bail-out plan looks a highly inflationary package however it is interpreted, with a $700 billion cash injection bringing the total cost of the crisis so far to around $1.5 trillion. More money in the system means more inflation, and this will tend to be skewed into certain asset classes that protect against inflation like gold and silver with their relatively fixed supply.

The bail-out plan is also bad news for the US dollar, and a further bout of dollar devaluation will be part of this attempt to re-flate the US economy. And anybody who has followed the bull market in precious metals will know that gold and silver move in inverse relation to the US dollar, so a weak greenback will benefit precious metals.

Now it has also been a notable feature of this bull market that silver has out performed gold in terms of price increases by a factor of almost two. Hence, the move by regulators to investigate price manipulation in the silver market comes at a point when there are already two powerful drivers behind a silver price advance: the global financial crisis and the gearing of silver to the gold price.

That makes a total of three strong reasons why silver prices will rocket upwards over the next couple of months: a price fixing investigation, a renewal of the bull market for precious metals during a financial crisis and the traditional leverage of silver to the gold price.

To obtain even better performance then you can choose to leverage the silver price advance by buying the so-called ‘pure-play’ silver producers. These are large silver mining companies whose profits will rise by an even greater percentage than the price of silver as the price movements in the metal flow straight to their bottom line.

The names of these silver companies are no secret and well known to global stock market investors. In the past the like of George Soros and Bill Gates have bought into the big names.

Investors who think the silver price is due for a major increase, and at current prices it is cheaper than it was 28 years ago – the only commodity to be in that position – should be buying these companies for maximum price leverage against the rising price of the underlying metal.

How high could silver prices go? Well, just to recover their inflation adjusted average price in 1980 silver would top $125 an ounce, and if markets overshoot then $200 is possible.

When you consider that the price at the time of writing is $13.50 that could prove to be the investment opportunity of the decade, and far more exciting than following Warren Buffet and waiting for the US financial sector to recover. Incidentally he successfully played the silver market a decade ago and doubled his money in a short period, so do not rule out his also getting in on silver again.

Peter J. Cooper

-- Posted 26 September, 2008 | | Discuss This Article - Comments:

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