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Friday, March 05, 2010

Silver to Outpace Gold

Silver looks set to outpace gold in the coming months with the current shortage becoming more and more pronounced.

Silver should be trading at 128 dollars an ounce, adjusted for inflation since 1980 and probably would be except for the manipulation of the silver price by four major banks, including J.P. Morgan. This despite enormous investment demand from exchange traded funds (ETFs) and booming coin sales.

Silver production is not expected to grow in 2010 and the supply side of the coin is expected to remain bullish.

According to the consultancy firm, CPM, 12 billion ounces of silver existed back in 1900. Since then, that figure has plunged to only 680.9 million ounces in 2008, according to the Silver Institute (latest figures available). So over the last 110 years we've seen a massive 94% drop in above-ground supply. That's an enormous figure.

In 2008, global silver mine production grew by a paltry 2.5% representing the 6th year of consecutive output growth and 77% of total supply for that calendar year. Peru once again ranked as the largest silver-producing nation in 2008 followed by Mexico, China, Australia and Chile, according to the Silver Institute. Peru produced a total of 118.3 million ounce of silver in 2008 or 17.4% of total world production.

The net supply of silver from above ground stocks actually fell by 14% in 2008 to 151.7 million ounces, mainly due to lower net government sales and a drop in scrap supply. Russia, China and India reduced their disposals resulting in a 27% fall in government sales in 2008 to 30.9 million ounces.

Regarded as the poor man’s gold, silver is now at the cusp of a major rally the like of which has not been seen for many a year. It is fully expected that silver will outperform gold when the next leg of the bull market in 2010-2011.

The major obstacle holding back the true price of silver appears to be four big banks, including J.P. Morgan. Some sort of financial conspiracy to suppress the silver price are now circulating around investment circles whereby silver-bugs assert that J.P. Morgan is aggressively shorting silver.

The largest U.S. bank, which acts as custodian for SLV, or the iShares Silver Trust on the NYSE, is also rumored to hold a massive silver short position of 200 million ounces. That statistic alone, more than any other variable and worth more than the entire production of Peruvian silver in 2008, is casting a shadow on major resistance at $20 an ounce – at least for now.

But, like any elastic stretched too far, the forces of supply and demand will inevitably snap back and overwhelm the short sellers resulting in silver breaking the $20.78 an ounce prior ceiling and possibly even reaching those dizzy heights of $49.45 per ounce as they did in 1980 when the Hunt brothers tried to corner the market.

So, for those having a few bars of silver stacked away, the future looks bright as demand increases, supply reduces and the short sellers get caught, eventually, with their silver pants down.