Reasons Silver Prices Increases

Silver prices hit a new 30-year high, settling at $31.57 an ounce. This was the bullish signal many traders were waiting for and they are now looking at its previous 2010 high of $31.27 as support. Price targets now range from $35 to $45 for 2011. Voracious investment demand has been pivotal to silver’s pop as well as its 80% rally in 2010, but doesn’t tell the whole story.

So why does Silver Prices increase?

Silver prices have a reputation of being manipulated, volatile and less liquid. Silver has in the past hit a record high of $50 an ounce in 1980 after the famous (or infamous) Hunt brothers bought the metal aggressively for 7 straight years; accummulating more than 200 million ounces of silver.

Along with gold, silver are at the mercy of investment demand, safe-haven buying, inflation fears, momentum trading and price manipulation. The one thing that silver have going for them that gold doesn’t is that gold are hoarded but silver is consumed. They are in high demand in the industrial sector, from iPads to laptops to to cars to solar panels, silver is the perfect metal for those wanting a hedge against currency debasement as well as exposure to a global economic recovery.

Silver is also at the mercy of stocks. When equities plummet, investors are often forced to sell silver for cash, but any significant dip can trigger a wave of buying as investors purchase silver at “cheaper” prices, resulting in a strong tug of war. Because fewer people own silver than gold, the market is smaller, which results in violent price action.

David Morgan, founder of Silver-Investor.com, says he could see silver prices as high as $45 in 2011 “and if things get really crazy we could go beyond that.”

First of all, investors are paying almost three times as much for an ounce of silver than they did in the beginning of 2009, so the “easy” money has already been made. The monster rally might scare off those who haven’t bought the metal yet.

Silver prices are also very volatile. Because the market is thinner, a big buyer or hoarder can really affect prices. Silver’s industrial component can also leave it vulnerable to signs of an economic slowdown especially in emerging market countries.

There is also a lot of pressure on investor demand to support high silver prices. The above ground supply of silver is increasing annually. According to Randall Warren, new mines in Mexico coming on stream could trigger a silver rush in 2012.

Although industrial demand and new products are sopping up some supply, “heavier lifting is called for this year from the investor community just to keep the game alive,” says Klapwijk. He estimates that several billion dollars of investment inflows are needed.

According to the World Silver Survey, net investment demand grew by $1.3 billion in 2009, the year with the most recent data available, to $2.6 billion. These calculations factor in an average price target of $14.67, which was considerably higher in 2010.

Billions of dollars of new investment inflows at recent record prices isn’t impossible just daunting and puts a heavy burden on investors and traders to keep silver prices afloat.

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