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Lear Capital: SILVER! Surviving or Sinking?

Just a couple weeks ago, silver prices were soaring, so were gold prices albeit, not so fast! For months, leading up to the rapid rise, stories of a short supply of silver were pervasive. The U.S. Mint was experiencing record sales and ran out of the ever popular American Silver Eagle Coin. In addition, 100 oz. bars were reported, by some, as unavailable for months out.

In January of 2011, Jason Hamlin released a report that summarized well, the story of a growing silver shortage. Investor demand is rising as is industrial demand. Just as Gold has taken on the role of reserve currency so has silver. And, in the world of nanotechnology, silver is being used more and more every day in a manner that prohibits reclamation. Once nano silver is used it is gone! ( learn more )

On February 9, 2011, a Financial Times article reported that silver on the Comex was "in a nearly-complete state of backwardation - that curious situation where the price for future delivery of the metal is lower than for immediate delivery." In other words, you can buy silver today for less than the current spot price. It is widely believed the Comex, in a run on demand for physical delivery, could not come close to meeting demand. Hence, more upward pressure on the price of silver.

Indeed, the formula for rising silver prices was brewing despite claims today, that there were no fundamentals supporting the pre-crash rise. I guess supply and demand don't count.

In addition to supply and demand fundamentals, we also had a declining dollar index. As recently as January 2011, the dollar index reached a four year high of 81.35. While gold and silver prices were peaking, the dollar index had dropped to as low as 72.72, just a whisker away from falling below an all-time low reached in March of 2008. I guess that doesn't matter either.

Agreed! The last $5 of silver's move higher, was peculiar. In fact it occurred over the long Easter holiday weekend. The Thursday prior to Easter Sunday, silver traded at $46 an ounce or so. Over the long weekend it reached just pennies short of $50 an ounce. The same thing happened the next weekend. By Monday, bubble warnings were flying everywhere as a selling rally was induced.

Obviously, this sparked a serious round of profit-taking, which should be expected after such dramatic rises. The media spun it in a more spectacular fashion. Silver demand and gold demand had peaked and now the bubble had burst and the long ride down to nowhere had begun. The geniuses all had perfect explanations for the decline, although it's hard for me to recall any who made the call higher as silver began to take its place as a highly-demanded currency alternative and industrial phenom.

A series of peculiar news events contributed to the sell-off. Comex increased margin levels on silver futures contracts, a source close to George Soros conveniently leaked news that Soros was selling and news of lingering European debt problems - which have really never gone away - resurfaced at just the right time to create a selling hysteria.

The dollar index climbed briefly above the 75 mark today. We will see how long the dollar can stay strong as the entire world seems to be competing to make their currency the weakest. Silver currently trades above $37 an ounce and gold is once again perched well above the $1500 mark.

For the moment, silver seems to be surviving the selling hysteria and here we are, back to a level where we once again look to the fundamantals that do not exist. If supplies are indeed short, then those who were accumulating pre-crash silver will take advantage of the opportunity to resume buying and accumulating. If dollar strength is short-lived, then that could once again be a key driver to higher gold and silver prices as well.

For more breaking news, real-time prices and custom chart tools, visit LearCapital.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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