Tuesday, April 17, 2012

Silver Supply At Historic Low

A clear understanding of the silver market seems to elude even the most seasoned market participants.  We have made every effort to properly characterize the fundamental makeup of this market.  Our efforts are rooted in the singular mission of helping you develop an ability to think objectively.  Through an objective lens, dislocated markets become visible opening a profit window.

Silver currently exhibits a very intriguing set of market conditions.  From a technical perspective, few charts are able to develop the pressurized conditions now visible in silver.  Exactly one year ago, silver began a violent three phase consolidation.  We now suspect that this consolidation is nearing completion.  What we would like readers to see is the disciplined behavior of the metal throughout this period.  As frequently discussed here, pennant formations of this size typically create explosive directional breakouts once completed.
Also note that an MACD reading of nearly 0.00 for almost a month now further confirms our suspicion that we have reached the tip of the pennant.  Simply put, there is no more runway available and the pilots must pull back and lift off or ditch the plane in the river.

We have focused on technical indicators to this point, but what about the underlying metal?  Referenced in our February piece on silver fundamentals, annual mine production is reported at roughly 700mil ounces.  In order to meet annual demand of 1bil ounces, scrap supply and government sales have been required.

This is far from a pure supply and demand equation though.  The silver market is heavily influenced by futures contract pricing at the COMEX.  During the most violent sell-offs of this consolidation, we saw days where more than one year of mine production changed hands in a single trading session.  The controlling entities at the COMEX have maintained a firm grip on the price discovery process up to this point.

We would like to direct reader's attention to the registered inventory held for deliver in COMEX vaults.  Currently, there is less than 4% of annual mine supply available for delivery.  In our view this is further evidence that we have reached the technical end of the runway.  Simply put, prices must rise in order to attract more physical silver into the delivery pool.
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The pennant formation in our first chart allows for another 6 weeks of consolidation.  The breakout will confirm the direction of the move which will remain in place as a trend during the next cycle.  Time sensitive investments are discouraged as the market will dictate the rules and being tied to a desired result in your time is not a smart strategy.

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