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.
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.