by: Brian Kelly
May 02, 2011
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The 10% + plunge in silver has some asking if the rally is over while others are claiming the bubble has popped - neither view is accurate. Let's examine what really happened.
The most important piece of news on the silver market has been missed by many ... that is the decision by Bolivia NOT to nationalize its mines. While margin increases by the CME (CME), MF Global (MF), and Think or Swim likely exacerbated the sell-off, it was not the cause of the decline.
Since the strike at the San Cristobal mine (third largest silver mine in the world) and the subsequent threat by Bolivian President Morales to nationalize the mining industry, silver has climbed over 30%. To put this in perspective, at this pace silver would reach $100 /oz. by the end of the year. There are not many certainties in investing, but one thing is for sure ... trees do not grow to the sky!
In any bull market a little pullback is welcome -more importantly, a large pullback and subsequent rebound is a gift. Over the weekend, Bolivia announced that it would not fully nationalize mines, but may require increased royalty payments. This news will likely be a major positive for Coeur de'Adlene (CDE). The surprise announcement was the perfect excuse for traders to punch a few sell tickets. However, nothing has changed fundamentally in the silver market.
Using the Silver Institute Data, as of December 31, 2010 the silver market was supplied by 1.056 billion ounces while industrial demand was 878 million ounces. This leaves 178 million ounces available for investment demand and this is where the bullish case for silver remains intact.
As of April 29, 2011 the iShares Silver Trust (SLV) held 354 million ounces of silver or 2x the amount of silver "left over" for investment. The Sprott Physical Silver Trust holds ~22 million ounces and the ETF Securities Physical Silver ETF holds 49,000 ounces for a total of all three of ~377 million ounces. This total does NOT include private investor holdings of silver in warehouses, safe deposit boxes and mattresses.
The bottom line: the fundamentals of the silver market are unchanged by Bolivia and margin calls, there is still a shortage of physical silver. We remain long SLV, SLV options and silver futures for our clients. In our view, the silver "crash" was a buying opportunity akin to the opportunity that arose in the U.S. stock market after the 1987 crash. Our near term target for silver in now $62.
Disclosures: Long SLV, SLV options and silver futures.
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