Silver Sutra

Silver soared to new records high of $49.84 at COMEX and Rs 73600 at MCX on 25 April as the U.S. dollar weakened further, uncertainty swelled ahead of a Federal Reserve policy meeting and traders speculated that China will buy precious metals to diversify its $3 trillion foreign-exchange reserves. It is simply going up on panic buying by investors trying to ride momentum as they always do. 

Reasons behind this Hyperbolic move...
The U.S. dollar has lost 20% of its purchasing power just since 2000 and 30% since 1990. 70% of that decline has been since 1978, when the mandate for the Fed was changed to a dual mandate of both price stability and full employment. Since the Federal Reserve was created in 1913, the USD has lost 95% of its purchasing power. Reason for Dollar weakness is low interest rate scenario and two quantitative easing measures announced by FED.

Since 1980, the above-ground available gold stores have increased 600%, while above-ground available silver stores have been reduced 90% during the same time frame.

Strong retail demand coming in through Silver Exchange Traded Funds.A significant silver mine needs tens of millions of dollars (in some cases hundreds of millions) in capital to just get started, and could take easily about three to five years before any significant production to begin. Most mined silver is not from silver mines but is a by-product of mining for other minerals such as gold, copper, lead and zinc. Therefore it is not the primary focus of new investment in the mining sector. In fact, only 30% of newly mined silver comes from mines devoted primarily to silver. There are not that many places that can sustain primary silver mining.

In 1980, silver briefly traded at $50; in today's equivalent inflation-adjusted prices, that would be at least $130.

Silver has literally hundreds of uses industrially in today's modern economy -- from computers, tablet computers, smart phones, cell phones, DVDs, mirrored glass, solar power, health care, wound care, and water filtration, to being used as a catalyst in many chemical reactions to produce many products, including plastics.

China has now become a large net importer of silver even while being one of the largest producers. It is believed that China is purchasing and storing large quantities of both gold and silver. China's objective is to make its currency the new reserve for the world, so it can diversify out of the consistently declining U.S. dollar.

It is believed that China is purchasing and storing large quantities of both gold and silver. China's objective is to make its currency the new reserve for the world, so it can diversify out of the consistently declining U.S. dollar.

Last week, S&P credit agency sent shockwaves through the global financial system when it issued a warning on U.S. debt and changed its outlook on the U.S. sovereign credit rating from “stable” to “negative.” This sent Dollar Index lower and the prices of commodities such as oil rocketing back above $110 per barrel and both gold and silver to new highs.

Silver began exploding higher literally on the same day that Ben Bernanke gave his Jackson Hole speech confirming the delivery of QE2. Sure, the defense against currency debasement thesis for silver has clear merit in this case. But the notion that the QE2 liquidity injections may also be providing a powerful fuel behind silver rally should not be overlooked, particularly with the end of QE2 now only a few months away on June 30.

What’s next?The parabolic move in silver is making a lot of veteran traders nervous that an already notoriously volatile market could get even more unstable as the gray metal races toward $50 an ounce. Gains like that make veteran traders nervous as healthy markets don’t go up in a straight line, and that’s what silver’s done. It looks like many investors internationally and one or a few private individuals and states are cornering the silver market. However, there are increasingly large numbers of silver buyers who realize the market can be cornered and they are buying in anticipation of this event. At one stage in 1980’s the Hunt Brothers cornering of the market was a “conspiracy theory” – it soon became fact. I call this move in silver “Hyperbolic” and am concerned about how steep and swift a correction could be.

Silver’s volatility has increased and sharp corrections are likely, however the sharp falls seen after the Hunt Brothers manipulation ended are unlikely today given the very strong supply and demand fundamentals. We should be clear: If a correction occurs, this would not mean the rally is over. It would just be a healthy bull market correction and reflect the normal volatility inherent with these types of investments. Investors must anticipate this volatility before participating in these markets. 

That’s not to say the overall fundamental picture has changed. The concerns over fiat currency and hopes of industrial growth continue to underpin the market. However, because silver has risen so far, so fast without a pause several traders are discouraging stepping into the market without having a long-term motivation to do so.

This volatility also brings along opportunity. We believe we’re only halfway through a 20-year bull cycle for commodities and investors can use these pullbacks as an opportunity to “back up the truck” and load up for the long-haul

Reasons for Silver to tumble

Hot Money - Easy Come, Easy GoPhysical buyers, those are not buy and hold investors, and they can go just as quickly as they came. Remember, the futures market is determined by fund flows, and right now there has been a lot of money to be made in a hot commodity market. But markets and especially commodities are very cyclical in nature, and money flows into these instruments during parts of investing cycles, and out during others.

Silver is much more sensitive to economic demandGiven the relatively small size of the market for silver, it's unlikely that any increase in investment demand would compensate for the decline in consumption by manufacturers and silverware makers in the event of another slowdown.

Bubbles don’t sustain for longWhenever prices of any asset go up this high in such a short time span, it is a bubble, and unsustainable. And no, I am not calling for a top in Silver prices, but what I am saying is that the Silver market is in a bubble, and unsustainable unless a couple of doomsday scenarios happen. Which is always a clue for your investing outcomes, if you need a doomsday scenario to have a long term profitable trade that you’re going to hold for five years, then you really are putting on a low probability trade

US is not Greece or JapanThe US has a spending problem, if worse comes to worse the US will just have to cut back on military spending, and with how far we are ahead of every other country in terms of military spending and expertise, there is a lot of budget tightening room to spare in that area and many other areas. When push comes to shove the US will get their fiscal house in order.

-Umesh Shanmugam(My View)