Bullion Banks Losing Millions, When Silver Rises

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Last week the price for spot silver traded above $20/oz and the bullion banks increased their net short position to an almighty 61,798 contracts, or 309.0 million ounces of silver.  The '4 or less' traders are short 256.0 million ounces. That means that for every ten cent increase in the silver price they incur a “paper loss” of $25,600,000! (Silver is now trading around $20.50).

For the very first time in our history, all money, all currencies, are now fiat. The Federal Reserve first issued its debt based paper money in 1913. Since then the US dollar has lost 95% of its value.

While India is traditionally viewed as the center of the world as far as physical gold demand is concerned, it is quickly becoming recognized for its strong role in the silver market as well. Rising gold prices are good for silver in this region of the world as would-be purchasers of gold jewelry and bullion turn to the grey metal as a cheaper alternative during the festival and wedding season. Of the 4,000 tons that India used to import annually, around 2,600 tons was used to make jewelery and ornaments.

More than 60% of India's silver demand comes from farmers, who store their savings in silver bangles and coins. Due to one of the worst monsoon seasons in more than forty years, the demand for silver last year fell dramatically. But this year, thanks to a good rainy season the situation has changed completely. India’s demand for silver has also been boosted because gold has become more expensive at current prices. According to official data, India's silver imports in the first six months of 2010 are up 579%, at $1.69 billion.

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Last week the price for spot silver traded above $20/oz and the bullion banks increased their net short position to an almighty 61,798 contracts, or 309.0 million ounces of silver. The '4 or less' traders are short 256.0 million ounces. That means that for every ten cent increase in the silver price they incur a “paper loss” of $25,600,000! (Silver is now trading around $20.50).

Traders maintain that the import of silver is poised to recover and may hit a fresh record next month, given the good monsoon and the resultant increase in rural incomes.

The laws of supply and demand indicate that the price of silver remains extremely undervalued and the recent move above $20/oz signifies that a major shift is occurring in this market. I believe that the price of silver will soon trade above $21/oz but ultimately, we will see much higher levels. While the market will undergo consolidations and corrections, I expect to see the price trade towards $25 before the end of the year.

As silver offers investors huge potential, I advocate that every investor should include some silver in their investment portfolio. And, as I have mentioned many times in the past, the first step to take is to build a core of holding of the physical metal. This can be done by buying silver bullion and silver bullion coins.

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