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Silver: Solving the mystery of this rally

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Getting to the point , Look at the chart below and it gives a compelling chart observation, something which is frightening and something which at first sight is just unbelievable.

Just check the Mirror line, and the subsequent points such as (A,a) : (B,b) : (C,c) : (D,d?)

The steep rally we are seeing currently is similar to the ones we saw in late 70’s and early 80’s.

Another observation indicates that the chart has a tendency to be extremely volatile, with almost a V-shaped price trends of strong rallies and subsequent thrashing of prices.

Chart below shows the 4 trend lines which are almost parallel in nature, and joining the key points for Silver, comparing its current phase/points with the historical data points.

Quick Fundamentals on Silver:

In 1900 there were 12 billion oz of silver in the world. By 1990, estimates say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to less than 1 billion ounces in above ground refined silver. It is estimated more than 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defence and electronic industries.

On current supply/demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Industrial demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. Few in the investment world are aware of this important fact.

Silver production has been flat in recent years while demand has been increasing. This hasn’t resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.

However, today the U.S. government’s stockpile is all but gone, and sales from other official sources, such as China, Russia and India, are declining, too. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 300 million ounces today means that silver stocks are near an all time low.

Silver is unusual as its supply is inelastic.

This means that silver production will not ramp up significantly if the silver price goes up.  Supply didn’t increase significantly in the 1970’s when silver rose more than 35 fold in price – from $1.40/oz in 1971 to a high of nearly $50/oz in 1980. Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production. In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.

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Written by Kunal Bothra

April 18, 2011 at 12:18 pm

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