Silver Seems Ready To Take-Off – Are You Ready For The Flight?

The Commitment of Traders report shows Commercials have yet again reduced their Net Short position in silver, which is now close to the low of 2003, at the beginning of the Bull Market. Commercials are generally seen as the “smart money," so if they reduce their Net Short Position, they expect prices to rise (or at least not drop substantially during periodic corrections). The reason why Commercials are the “Smart Money”, is that – unlike the millions of small investors who burn their hands by buying high and selling low – they tend to “buy” low (reduce short positions as price declines) and “sell” high (increase short positions as price rises).

We are currently in a similar position, as there is resistance at $34. The 50 EMA is now at the same level as this red resistance line, and both the MACD and RSI look set to brake out above their red resistance lines. Combine that with the severely depressed sentiment in silver and the low Net Short Positions of Commercials, and we have the ideal cocktail for a nice rally in Silver Prices. As I wrote in an article on 28 Dec 2012, silver has till now always followed gold, a trend which will soon break, with going their own ways. The time to witness this amazing occurrence seems pretty close by.

Debt Ceiling Bill passed is Silver & Stock Market Bullish
House Democrat Steny Hoyer of Maryland called the measure a “political gimmick” that puts off the debt-limit issue for three months so House Republicans “can continue to roil the Congress, roil our people and roil our country” with fiscal uncertainty. The Treasury Department has said it expects to run out of emergency measures to prevent a breach of the current debt limit between mid-February and early March. House Speaker John Boehner warned immediately after Wednesday’s vote that Republicans would take the next opportunity – automatic budget cuts set for March – to demand “reforms” from Obama. The automatic cuts, which were temporarily set aside earlier this month in a fiscal deal between the White House and Congress, are “going to go into effect” unless Obama makes concessions, Boehner said. The Debt Ceiling extension has provided the markets with a huge relief and the illusion of the improviing US economy may be carried on for some more time. Though this relief is temporary in nature, there can be some more upside bouts in the Stock Markets. A survey showed China’s manufacturing growing at the fastest pace in two years, which is bullish for base metals. While Global Markets are on a Risk-On mode, money flows into riskier assets like equities, raw commodities, base metals, etc and away from gold. This also carries the perpetual risk of higher inflation.

The need for a safe haven hedge against Inflation
Gold has always been the sole safe haven option during times of crisis, with silver as a follower, as seen since the crisis of 2008. But now the scenario is way different – or the economy is rather projected to appear on a path to healthy recovery. There is a major diversion of funds into risk assets leaving little for safe haven hedging. Also, with rising taxes, there is even lesser left for safe investment. All this points towards silver demand, a cheaper and yet highly effective alternate Investment option to gold, having all the positives of gold along with value addition of a huge industrial demand. The time for silver investment has surely come. Silver may decline on the recent developments for the short term close to $29, but sharp recoveries are surely expected soon enough.

Are you ready for the heady flight? Market Analysts Expect Gold to Rally
Gold Futures have dropped in Asian trade Thursday after the Debt Limit bill was passed by the US House yesterday and as a positive outlook on global economic scenario dented its safe haven appeal. The Comex Gold February contract eased Wednesday after hitting its strongest settlement since mid-December on Tuesday at $1,693.20. A key upcoming event for the market will be options expiration for the February Gold Futures contract on Monday. However Morgan Stanley analysts are of the opinion that gold will rally this year and climb further into 2014 as US Federal Reserve policy makers will probably maintain asset purchases for two more years to buttress the recovery. Gold Prices, which advanced for a 12th year in 2012, may average $1,830 an ounce in the final quarter from $1,715 in the first, $1,745 in the second and $1,800 in the third, analysts Peter Richardson and Joel Crane said in a report today. Prices will be supported by investment and central-bank buying, they wrote. Gold had the biggest quarterly drop since 2008 in the final three months of last year as data showed the recovery in the largest economy gaining traction, boosting concern the Fed may withdraw stimulus.

Minutes from the Federal Open Market Committee’s December meeting released on Jan. 3 said asset purchases will probably end this year. Each month the Fed has committed to buying $85 billion of Treasuries and mortgage debt. “We are skeptical that dissenters within the FOMC on current monetary policy will succeed in overturning the current policy settings before the end of 2014,” the analysts wrote, citing elevated unemployment and so-called tail risks to growth. There would be an “ongoing commitment to QE3,” they said, using initials for the third round of Quantitative Easing. Gold and Silver Markets now await the US Federal Reserve – FOMC policy meeting next week, which could shed light on the future of its ultra-loose monetary policy, which has been the main driver of higher Gold Prices in the past two years. Physical gold and silver demand remains reportedly very strong ahead of Chinese New Year celebrations next month and even India’s gold demand is understood to be solid despite the hikes on import duty.

The Great Silver Rush
Strong silver Investment demand will not only support but also help silver achieve lofty levels this year irrespective of any developments in paper silver. Most major silver mining companies are reported increase in production but excessive demand forced them to work hard for more output. Pan American Silver recently reported that it produced a record 6.9 million ounces of silver in the fourth quarter of 2012, a year-over-year increase of 30%. The company has seven operating mines in Mexico, Peru, Argentina and Bolivia, including the recently acquired Dolores Gold / Silver mine in Chihuahua, Mexico. Silver Wheaton, the largest silver streaming company in the world reported record attributable silver equivalent production of 7.7 million ounces in the fourth quarter, a year-over-year increase of 26%. Its annual attributable production is anticipated to increase significantly to approximately 48 million silver equivalent ounces, including 100,000 ounces of gold by 2016. There is a severe global shortage in silver even on increased output. Silver ETP investment is at a record of 19,114 tons globally, which is approximately nine months of mine output.