Last week we ran an issue titled, “The Silver Conspiracy.“
The response from our readers was shocking. Within hours, hundreds of suggestions poured in with readers asking us to take a look at different silver juniors.
This past week, we spent our days reviewing, speaking to, and meeting with the management teams of a number of silver juniors.
Although many had great stories to tell, there were a certain few that immediately caught our attention and made us think twice before we pulled the trigger on our next featured silver company (currently scheduled for May 9, 2010).
A handful of silver juniors have been on a surge over the last few months and are continuing to catch momentum.
Some of these juniors have shown over 50% returns in less than 6 months – including our last featured silver junior, which climbed from $0.32 (at the time of our first report), up to a high of 61 cents just a few months later. That’s over 90% returns.
There’s no doubt that the silver market has gone from sizzling to hot. As of right now, the price of silver has already shot back up past $18/oz.
The only question remains:
Which silver juniors are in a position take advantage of this boom?
Despite the large short positions by banks such as JP Morgan and HSBC on the Comex, silver has been showing signs of strength. An increasing number of hedge funds and retail investors are beginning to demand physical delivery of silver.
So far in April, 453 silver contracts equalling 2.3 million ounces have been delivered on the Comex. The iShares Silver Trust (NYSE:SLV), one of the largest physical silver-backed ETF’s, had 3,431,792 ounces of silver taken out.
That’s two full days of world silver production
Since the end of February, nearly 15 million ounces of silver have been physically withdrawn from the SLV fund by the ‘authorized participants.’
You just can’t find that amount of silver anywhere else
Last week, we talked about the possibility of manipulation of both gold and silver (see The Silver Conspiracy) and how Jeffrey Christian of the CPM Group said that the LBMA banks have approximately 100 times more gold deposits than actual gold bullion.
Given this insane leverage used by the banks that are apparently naked shorting silver with paper contracts, speculation has increased that a group of wealthy investors, including Asian traders and hedge funds, may look to exploit this “easy-to-exploit” market.
Two-thirds of total, official “inventories” of silver supposedly belong to the unit-holders of silver ETF`s.
What does that mean?
When funds and traders with access to significant amounts of capital begin to shift into a physical silvers market that is overly leveraged by naked shorts, the potential for an explosive short squeeze increases significantly.
Simply put, when the shorts are covered, it will drive the price of silver up – and fast.
Imagine these traders demanded, all at once, a large amount of physical silver. It will force the naked shorts to come up with the metal that is already known to be in short supply.
When you have a market that is so thinly traded, this scenario can easily happen. If this happens, we should see silver reach new highs.
We already mentioned last week that the historic ratio of silver to gold is 16:1 but is sitting at an insane 60:1 right now. When you adjust for inflation since 1980, silver should be trading at roughly $128/oz – it’s a mere $18/oz right now.
Of course, we don’t see silver heading that far ahead. But silver at $25/oz could happen. In fact, there are a significant number of reasons why silver should easily be above $20/oz.
A Major Decline in Inventories
According to the guys over at CPM, 12 billion ounces of silver existed in 1900. By 2008, this number has fallen to about 690 million ounces.
That’s a 95% fall over the last century in above ground supply.
Silver is the also one of the most-versatile metals, with new silver patents exceeding those for any other metal, leading to new industrial uses every year, and ever-increasing demand. Meanwhile this same industrial demand is stengthened by the biggest surge in investor demand for silver in several decades.
The trace-uses of silver result in vast quantities of silver being “consumed” every year, permanently reducing the amount of available silver in the world – unlike gold, where all quantities ever mined are available or recoverable.
The Tip of the Iceberg
All signs point to a crisis in the silver market. Silver production for 2010 is expected to be minimal, while real inventories of silver are still being dramatically exhausted through industrial use and ETF demand.
This creates a great investment opportunity to own silver juniors that have a near term impact tied to the price of silver. We will not only be looking for companies with great assets and management teams, but also looking for companies that expect to be in production within the next year.
As we have said before, the best time to own juniors is right before a discovery or right before production.
We’ll have our next silver feature soon enough…
Until next week,
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