Silver Investing: Get Ready For The Next Move Higher…
The past few months have been, um… let’s say… “interesting” for silver. I’m sure you ‘silver bugs’ know exactly what I’m talking about.
After surging to nearly $50, the silver market was turned on its ear in late April.
That’s when the Chicago Mercantile Exchange (CME) came down with an all-out blitzkrieg on silver speculation. Within a two-week span, the upfront capital needed to buy a silver futures contract went up a mind boggling 84%.
The move sent the silver market into a downward spiral in early May…
Latecomers to the silver mega-rally suddenly realized they had been left holding the bag. And it wasn’t long before they were scrambling to get out. By May 5th, silver had dropped 30%.
Since then, silver has been trading in a range between $34 and $38.
Why did the CME do such a thing?
Silver speculation was out of control…
The notoriously volatile metal was a blazing inferno of speculation. The precious metal shot up 70% in the final four months of 2010. And after a brief slowdown in January 2011, silver went on another rampage. It surged an additional 70% within a matter of months.
Clearly, investors were clamoring for silver…
But the insatiable demand was making the silver market incredibly volatile. And that was cause for concern at the CME. They had to do something to reign in excessive speculation.
I can’t say I blame them…
If volatility gets crazy in commodity markets, it makes it tough for producers to hedge their operations. By driving margins higher, the CME essentially forced smaller speculators to close their positions.
Of course, ‘silver bugs’ were furious. They say the CME’s move was nothing but a manipulative “takedown” of silver.
Jeez you guys, chill out…
The supply/demand fundamentals for silver haven’t changed one bit. And just because the CME clamped down on speculation, doesn’t mean silver’s upward potential is forever thwarted.
Why?
Dwindling above-ground silver inventories and surging industrial demand will continue putting upward pressure on silver prices. Solar panels, electronics, and emerging uses in the medical field are gobbling up huge quantities of the precious metal.
In fact, the Silver Institute reports total 2010 industrial silver demand came in at 487 million ounces… a 20% jump over 2009’s levels.
All said, total global silver demand came in at a record 1.05 billion ounces in 2010… a 14% jump over 2009’s total demand. Clearly, the modern world needs large quantities of this precious metal.
Of course, that means silver mining companies are sitting on some very valuable resources…
As silver demand (and prices) push higher, mining profit margins will expand. But as many silver mining investors are well aware, most miners didn’t really participate in silver’s recent surge to $50.
In fact, when silver was surging in April, miners were barely moving at all. Some even lost value as silver surged.
Why?
I think mining investors were actually in disbelief over silver’s epic run higher. They knew the market was getting too hot. And that kept them from driving shares of silver miners higher in April.
But now that’s changing…
Over the past few days, the miners have been outperforming the metal. Silver Standard Resources (SSRI), Pan American Silver (PAAS), and Silvercorp Metals (SVM) are all up decisively in recent trading.
Why?
Much of the excessive speculation has been knocked out of the silver market. And that means investors may be more willing to bid up shares of mining companies.
Is there an easy way to invest in silver miners?
You bet! One way you can gain exposure to the industry is through the Global X Silver Miners ETF (SIL). SIL is a portfolio of silver mining stocks with exposure to upside in silver prices. In fact, it’s the only ETF focusing specifically on silver miners.
The bottom line is this…
As long as silver demand remains robust, silver miners have substantial upside potential. Use the recent pullback as a buying opportunity!
Category: Commodities
