-- Posted 3 December, 2010 | | Discuss This Article - Comments:

For years we have heard of the coming silver shortage but somehow price was always contained and was a wild swinging commodity.   But that changed last spring when allegations of silver manipulation made it to mainstream internet sites and became a focal point of testimony by Bill Murphy of GATA to the CFTC in early spring.  

Since last August the silver market has been on a tear to the upside and the physical market is now again facing reported shortages.  The demand for coin is at its highest levels in 25 years as reported by coin dealers. 

Once silver broke above $20 dollars there was a triple demand factor that came into play. 

The first is the industry that uses silver. It’s made a mad dash to the buy line to secure supplies.  No user in his right mind is going to stick around and wait for the shortage to become acute and hold up production.  That is a show stopper and industrial use is the largest demand factor in the fabrication of silver.  I was informed by a person who was building a database for a company in late October that the company she was doing business for was in panic mode buying up to a year’s worth of silver so as to hedge for future price increases. She did not even work there and was providing a service for the business.  She said that the talk was rampant among the executives.

Consider what Ted Butler, http://www.butlerresearch.com/ who was way ahead of the curve wrote in 2006 

 World silver inventories are at the lowest point in 200 years. Industry requires over 900 million ounces each year. Silver is the best conductor of electricity. Every computer, server, monitor, cell phone and switch must have silver. Lasers, satellites, high-tech weaponry and robotics, all require silver. Digital technology and telecommunications need silver. Around the house there's silver in every TV, washing machine, wall switch and refrigerator. Conductors, switches, contracts and fuses use silver because it does not corrode or cause overheating and fires. Silver is used heavily in photography and in prints. Meanwhile, new and exotic uses for silver are expanding.

A new double layer of silver on glass is sweeping the window market, as it reflects away almost 95% of the hot rays of the sun. A new electronic application for "smart tags" that are replacing bar codes could use significant quantities of silver.

Silver achieves the most brilliant polish of any metal and is the best reflector of light, allowing it to be used in mirrors and in coatings for glass, cellophane or metals. Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world's chemical industry for the production of plastics.

Batteries are now manufactured with silver alloys. Lead-free silver solder is used heavily for joining materials and producing leak-tight joints. Silver is also widely used in silk-screened circuit paths, membrane switches, electrically heated automobile windows, and adhesives. Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment. Catheters impregnated with silver eliminate bacteria. Silver is increasingly being tapped for its bactericidal properties and water purification. In the face of all these industrial uses there is less silver available.

Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal.

The second factor that is coming into play is the loss of confidence in paper money and the realization by many that silver is not only an industrial metal but was a monetary metal.

Silver has been around for just as long -- if not longer --- than gold. It was currency in the past --- and who is to say it will not be currency in the future? Indeed -- gold bugs who favor a return to the gold standard -- would stand a better chance if they were pushing a bimetallic system of both gold and silver. At least there would be more "currency" to go around. As nations that look to establish the former glory -- it might not be beyond the realm of China to go that route.

Silver Sycee in one form or another was a means of exchange in China for over 1000 years. In fact -- a quick history of money is simply -- barter -- livestock/Crops -- cowry shells (tools) -- silver -- leather banknotes (deer skin) -- paper currency (first introduced by China 9th to 15th Century) -- potlatch -& wampum (north American Indians)--- gold standard -- paper currency. So if we exit paper currency --- there are only two choices on the above list --- silver and gold. And silver has been used more times and more places than gold has.

Silver certificates we're re-issued by the Kennedy Administration in USA and were in fact redeemable in silver until June of 1968. So the thinking that silver can't come back as a monetary instrument is not impossible. In fact -- what will be the alternative to gold and silver? Nothing. Black market or not -- gold and silver will always have their place.

The second factor influencing silver is the loss of confidence in paper currency and the public awareness that is fast becoming a major factor in PHYSICAL DEMAND.  Consider the following from http://news.coinupdate.com/us-mint-bullion-sales-silver-eagles-achieve-new-record-0557/

Finally the third factor that comes into play is the massive amount of short positions that have been sold forward by the manipulators of silver.  According to the latest statistics there are 154 days of silver production that is currently sold short.  As prices rise the shorts have only two choices.  Sell more contracts short – or cover the positions.  Each drop in silver since the summer has not been met with new short positions.  It has been met with short covering.  This triple whammy is turning the supply side equation and demand into a runaway freight train.

Silver price points

The chart below uses the silver ETF (SLV) and currently trades about 60 cents below the price of spot silver.  The current price point in silver is reaching the major resistance line that was touched during the first week of November.  After a $4 dollar correction to $25, silver has rebounded once again to the $29 dollar area.  This line is certainly important resistance on the price charts and from a technical perspective certainly should be respected. But the short positions remain very high and the demand is increasing.  If investor demand for physical continues and price moves above the 30-31 dollar area it could produce another bout of panic buying.  If that were to occur the next target for silver will be the pre shortage panic line in the $35 dollar range. 

There are many technical indicators that can be employed in analysis.  The use of channel lines is perhaps the least arbitrary for the simple reason that the markets outer symmetry of price action dictates where the channel lines get employed.   Granted humans still draw the channel lines but when done correctly, they provide a great tool for where price resistance comes in.  Notice how well the lines have established price points of resistance during this bull market. 

What next?

Why do I call the line of resistance on the above chart the Pre-shortage panic line?

Let’s take a look at another silver chart.   In this view using the world silver index we can see that the resistance line that was hit in November is by far the most important resistance line for the simple fact that it has contained all silver spikes during this bull market.  The 2004, 2006, 2008 and now the 2010 high have one thing in common, the blue resistance line.  

This slope represents the markets own maximum growth pattern.  Each past high was curtailed by this slope.  If there is a shortage then there is a possible buy panic that will exceed this long term resistance line and suppliers will have to bid price up to the silver to deliver what they have committed to and the short positions will have to eventually buy back in to cover their short position.

There is no doubt that this area certainly could provide the area where a price peak could once again come into play.  However, the difference this time is that suppression schemes have been brought to the open and if the shorts can’t stop the demand coming in – they will have no choice but to try and cover their positions.  It is this potential that could propel price higher.  Just as there was a mad rush into silver when the breakout line on the chart was exceeded, a move above this blue line could provoke even more buying by those who follow technical price patterns.

Channel lines can be used on all time frames.  The Rally from August is displayed below on a daily chart. 

It seems the long term fundamental factors have finally combined to produce a dramatic rally in silver.  If these trends continue the price channels will be an excellent guide as to the standard deviation that occurs in price parameters and where important price turns might occur.  Many have stated that technical indicators don’t work in a bull market.  I can’t disagree.  But I still think that price channels do for the simple reason that they are the markets own symmetry of price parameters.

We are now at the next juncture in the 21^st Century Silver Bull market. Do you know where your trend line and potential price turn points are?

 At our website, we monitor the silver price pattern on an hourly, daily, weekly and monthly chart basis. And we offer commentary on what we think it all means for price, along with support and resistance levels for each day. We also follow the gold market extensively and are just as passionate about it.

If you would like to join us for a month and follow along with a free pass, send us an email at Goldtrends@gmail.com  .  May you all prosper.

Bill Downey

December 2010

Bill Downey is an independent investor/ trader involved with the study of the Gold and Silver markets since the mid 1980’s. He writes articles for public internet distribution as well as his own web site at: http://www.goldtrends.net  He has written articles published in Futures Magazine as well.

Email:  Goldtrends@gmail.com 

© Copyright Bill Downey 2010

Disclaimer - The opinion expressed in this report is the opinion of the author. The information provided was researched carefully, but we cannot guarantee its total accuracy. The report is published for general information and does not address or have purpose or regard to advise specific investments to anyone in the general public. It does not recommend any specific investment advice to anyone.