Silver Above $ 36/Oz Will Take No Prisoners
Andy Hecht (January 25, 2012)
Back in 1995, when I ran the giant precious-metals trading business at the Phibro division of Salomon Brothers, silver wasn't just cheap – it was the Rodney Dangerfield of the commodities market.
Back then, silver "got no respect." It was trading under $5 an ounce, and traders would say: "You can never be short enough silver."
Other traders called silver a "barbarous relic."
But back then, the metal was not regarded as precious and, the fundamentals were weak, thanks to the Hunt brothers, the billionaires who tried and failed to manipulate and corner the world silver market during the late 1970s.
At the same time, the industrial use of silver was in decline – largely because of new technology in photography.
But even then, I saw something positive and interesting going on amid all the weakness and pessimism.
I, along with three other traders at Phibro, took a significant position in silver. We bought a little over $1 billion worth of the metal. We went long 265 million ounces. It's a hell of a story, but one for another day.
Suffice to say, that kind of stash today would cost almost $9 billion!
Fast forward 17 years and the price of silver is almost nine times higher.
When the silver market peaked last year at above $49, the CME and CFTC raised margins on this metal that had by now become "precious" and the price tanked an astonishing 33% in two short weeks!
The silver market then dropped again. By September, it traded down to just above $26, transforming this now precious metal back into an industrial metal.
Silver Exploded and Plummeted in 2011
Before silver tanked, it ran up from $28 at the start of 2011 to more than $49 in March. When the CME raised margins, they forced many long positions to exit the market as the cost of holding a position became prohibitive.
There has since been a sharp correction in the silver price, and the once-precious metal has behaved in a way normally associated with"industrial" commodities.
Ever since silver tanked, its close relationship with gold has all but disappeared.
Silver fundamentals are great but, as an industrial metal, the price ain't cheap…
Since 2000, photographic demand for the metal has dropped by 65%, but its application in technology – such as the use of silver in cell phones and computers – has increased by 40%.
At the same, however, investment demand has increased by 480% – thanks to growing global deficits and the declining value of paper money.
The demand for silver has exploded since I bought that monster position back in 1995.
What Will Get Silver Going Again?
Silver has taken a breather since last April. The price has now corrected and many "weak"holders of the commodity have sold their holdings. Open interest (the total number of long and short positions in silver futures contracts) has dropped by 50% since April of last year.
Unfortunately, silver will not go back down to the cheap level where I was able to buy boatloads of it in 1995. But, the time is coming close when we will be able to jump back onto the band wagon.
Silver will soon change back into a precious metal. When it does, the prices will make the next leg up in the multi-year bull market and the tarnish of the second part of last year will disappear quickly.
Last year's sharp decline chased many investors away from the market.
But just as silver began to glimmer in my eyes in 1995, it has begun to look very shiny to me again today.
A Silver Bonanza in 2012
I believe silver will climb higher in 2012. And the drivers will be massive deficits, weaker paper currencies and the demand for hard assets.
I would not be surprised to see silver trade up to $75 over the course of the next year.
But before its ascent begins, the price must erase the technical damage done last year.
Long-term resistance for silver stands at $36 an ounce. Once prices break above this level and hold, the sky is the limit and silver will once again act and trade like the precious metal that it is.
That's when silver will once again become gold's little brother.
How to Play the Market
There are many ways to participate in the next leg up in this exciting and volatile market. Be prepared to buy silver on a break above $36.
Silver options and futures are traded on the COMEX division of the CME. And there are silver stocks, such as Silver Wheaton (SLW), as well as silver coins and bars, which are available from reputable coins dealers and banks such as EverBank.
Silver promises to shine once again in 2012. Keep your eye on this precious metal because once it gets going it will not take any prisoners!
Happy trade hunting…
FROM FRIEND
AAYESHATECH
