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Intense Physical Silver Demand, But Rising Shorts

Written by From the GoldMoney Dealing Desk

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Silver reached a new 31-year high of $36.76 an ounce on Monday, extending its explosive run of price appreciation. Since last August, white bullion has gained over 94 per cent. Growing inflation concerns coupled with intense physical demand will likely lead to even higher prices; but increasing bank short positions in the metal mean that investors should watch for price volatility.

Last week brought news that the US Mint had again suspended production of its Silver Eagle coins, citing “unprecedented demand” as the reason. In February King World News quoted Dave Madge of Canada’s Royal Mint, who noted that “sourcing silver is becoming very difficult.

silver-bar-handsFurthermore, yesterday the US Mint issued a press release “requesting public comment from all interested persons on factors to be considered in conducting research for alternative metallic coinage materials for the production of all circulating coins.” This is a concerning development for all those interested in long-term purchases of Silver Eagles, and points again to the significant supply problems that government mints are facing.

Despite this demand and persisting backwardation in the futures market, investors should, however, be alert for bearish developments. As reported by Ted Butler on March 5, the latest silver Commitments of Trader report (COT) shows four big banks increasing their net short-silver positions by 3,000 contracts (or 15 million ounces). As Butler points out, this is a notable shift from the trend of the previous three months, which has seen banks reducing their short exposure to the white metal.

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As pointed out last week by Nico Pantelis, despite these reductions in short positions over the last few months, silver remains the most advanced sold commodity in the entire commodity complex. But since last August a short-squeeze has occurred, whereby physical demand has overwhelmed short traders, who have been forced to “cover” or buy back the metal at gradually appreciating prices in order save themselves from potentially even greater losses.

However, if bank short-sellers are once again looking to assert themselves, investors should be alert to the possibility of a price correction.

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