Is Rising Demand for Physical Silver Signaling a Rally?

January 15, 2012

BY: Robert Hallberg, Topics: Silver

Silver had two phenomenal years in 2009 and 2010, gaining more than 130%, but last year it closed the year in the red despite a strong rally earlier in the year. It appeared that silver had gone up too quickly and the bulls had become too bullish in too short of a time span.

Silver is currently trading at the $30 level and investor sentiment is down from last year which is common after a correction. So is silver a buying opportunity now?

There are strong reasons to believe that this is the case. First, the fundamental data suggest that silver is in a long term bull market with many year left to run. Of course, it never feels good to buy when the sentiment is down but history has shown that it has been the right thing to do. To our detriment we feel good about buying when prices are rising and we hesitate when the price is down, and many investors experienced this the hard way during the correction of last years. But with the correction behind us and with improving fundamentals we should expect higher silver prices in the near future.

Demand for silver on the Comex is fluctuating up and down but the demand for physical silver is up sharply. During 2011 dealers were frequently out of inventory and delays in shipments, especially among the popular 100 oz silver bars and American silver eagles were common, and many dealers placed large premiums on their products. The chart shows demand for American silver eagles sold by the US Mint.

Demand has really taken off since 2007 and last year was no different. Moreover, the US Mint has already sold more silver eagles in the 15 days of January than what was sold during both November and December of last year. It seems like the investors mind-set is changing and many prefer physical silver over paper silver and derivatives. Many industry veterans expect this trend to continue. The recent incident with MF Global only reinforces the idea that investors need physical silver in their possession as protection against, currency devaluation, theft, and bankruptcy.

Furthermore, the chart for silver is also looking very promising. Silver is making a nice flag formation on the chart, which is a bullish indicator signaling a rally, and we also hit a major trend line at $26. The low investor sentiment also suggests that we may have bottomed out.

Both the technicals and fundamentals are in place for a rally in silver. Whether we will retest the lows one more time still remains to be seen, but with rising demand for physical silver we will eventually see higher prices.

To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.