The latest round of risk reduction by global hedge funds bashed silver (SLV), knocking $2.50 off of the $19.50 high seen in the heady days of May.
Today we have made it back to $18.67, indicating that the white metal is holding up far better than it has in past sell offs.
Silver has always been an odd duck in the precious metals world, with half of the demand coming from industrial applications, and the other half coming from monetary demand.
The recent strength suggests this balance is now shifting in favor of the latter, and could have much farther to run. At 67 times, silver is at the bottom end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1.
Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon's mine, to Nazi gold bars in Swiss bank vaults, and would fill two and a half Olympic sized swimming pools.
But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties.
Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference for the jewelry, as in Latin America.
That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle, if another monetary crisis doesn't get us there first.
Since silver can trade with double the volatility of gold, this forecast could prove conservative.
You can buy the September futures contract at $19.07, where a 5,000 ounce contract worth $95,350 on the COMEX carries a margin requirement of only $6,750. And if you had any doubt about the long term monetary value of silver, look at the chart below of the silver content of a Roman denarius over 200 years showing a 94% decline.
Courtesy: Mad Hedge Fund Trader