Saturday, April 30, 2011
Silver - the Princess of Precious Metals
Most silver is used in industry and commercially but that seems to have no control over the silver price. Industry uses around 44 percent of the silver produced. Jewellery and silverware about 32 percent. Photography still used 18 percent and the balance, Silver coins 4 percent and investment is a paltry 2 percent. So why does 2 percent control the price for the 98 percent balance of silver usage? The answer is in the silver trading and short selling. Now that the short selling of silver is decreasing and the suppression lifting the silver price is bounding up like a jack in the box.
Since the beginning of the year, silver is up 45 per cent and rising so fast the dollar is barely touching it. Looking back, in the past 12 months, silver has soared 169 per cent in US dollars and is breathing down the magical 50 dollars an ounce. The last time silver was 50 dollars an ounce was when the Hunt brothers cornered the market. This time it will almost certainly surpass the 50 dollar landmark and not because the market is cornered but more likely a combination of factors such as the reduction in value of the dollar and the loosening of the short selling market.
According to one of the leading silver analysts, Theodore Butler, silver has been massively short-sold through futures and options contracts. Short selling is basically selling something you don't have, and which you must buy later to meet the contract. This makes a profit for the short seller but keeps the price down when sufficient short selling occurs to affect the price. Butler was instrumental in bringing two leading banks to trial, still under way in the US, for rigging the silver price by short selling.
However, when short sellers are unable to get their hands on the commodity then a problem arises. This is known as a ''squeeze'' in the trade and the price consequently rockets temporarily.
Butler has estimated that there is a million ounces of silver circulating yet what he calls the ''monstrous'' short position runs into billions of ounces.
''Silver has the largest short position that's ever existed in anything,'' he says.
As well as short-sold futures contracts, the deficiency arises from forward selling, leasing and ''the cumulative issuance of unbacked silver bank certificates''.
Historically, an ounce of gold bought 15 ounces of silver, a ratio of 15:1 - though when they both peaked in real terms in 1980 it was 17:1. It then widened to 40:1 but recently with the exposure and reduction in short selling coupled with the diminishing value of the dollar, the gap has been decreasing and today it's only 33:1. At the current rate it is likely to be back at the 15 to one ratio by the end of the year and silver could shoot up to an estimated 140 dollars an ounce.
This does indeed make silver the princess of the precious metals.