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Silver Busting Loose

As I type this, silver is surging over $31.40 towards 30 year highs…this move has happened quickly since the $26.50ish bottoming in late Jan. Backwardation in futures contracts started around 10 trading days ago and has only worsened, with the 2015 futures contract at a 40 cent discount to spot – totally out of the norm when you consider buying spot entails delivery and storage charges. People are worried about how much physical silver will be available in the futre, so don’t mind paying a premium for the real thing, right now. 

Of course, at 44 times cheaper than gold, silver’s fundamental undervaluation continues, validating the bullish price action. Silver is estimated to be 17 times more plentiful in the ground, and there are less ounces of silver bullion than gold bullion available for purchase, due to silver’s huge use in industry. So knowing this, why would you pay 44 times more for gold – less practical, and more plentiful in ready-to-buy bullion form?

With silver at $31.35, you can buy 1 year’s production (assuming 720m oz) plus all the above ground bullion and coins (est at 1.5b oz) for just under $70 billion. Now consider that from Jan 1, 2009 through Oct 2010, bond market funds recieved $642b of new flows. When it was under $27 a few weeks ago, you could take less than 10% of those new flows, direct them to the physical silver market, and corner a year’s supply plus all existing bullion!!!! Just 10%! Of course it wouldn’t be practical logistically at that price, but the point is clear – silver is still far too cheap.

And what is happening in the big picture surrounding silver? Inflation is now talked about every day on CNBC – cotton prices have exploded over 150% in less than a year, foodstuffs have jumped dramatically, and Brent Crude has been over $100 for a little while now (sorry WTI, nobody loves you at $85…what a bizzare price discrepancy, over $18, between those two).

Silver is rising in an environment of monetary inflation though QE programs and the resultant price inflation of tangible, necessary goods. Because of its myriad uses in industry, silver is definitely one of those necessary goods…And do we want to talk about political struggles in the Middle East? Suez Canal activity? American friendly governments coming under fire for decades of poor governace . You couldn’t ask for a better recipe for a silver/gold/platinum/palladium breakout.

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