Silver Soars, but how much Higher?

After spiking to $34.328 in early Tuesday morning trading, the price of silver has pulled back substantially to a low of $32.40 per ounce on profit-taking in Asia. As of 10:45 a.m. in London trading, the silver price has rebounded to $32.80.

Following Thursday’s breakout of the previously-set intraday high on Jan.3 of $31.21, traders speculate as to the next top in the white metal.

Speaking to CNBC’s Sharon Epperson, Friday, Tom Pawlicki looks to $36.50 as the next significant resistance level—a 20% move from prices achieved during Valentine’s Day trading.

In the short term, some headwinds exist for the silver price, however. Anything north of $29-30 has prompted the mining sector to sell into the future. Locking in thirty-year price highs could be too tempting to an industry that’s struggled with low metal prices for more than a generation.

Traders arbitraging the trade buy longer-term contracts and sell the shorter-term maturities.

“There’s been some gossip in recent days that producers may lock in some of the recent price gains with forward sales,” commented Jeffery Nichols, managing director of American Precious Metals Advisors.

“News of actual forward sales could weigh silver down or trigger a correction,” added Nichols.

But miners are making a big mistake, writes the Godfather of newsletter writers, Richard Russell.  The man behind the longest-running newsletter, Dow Theory Letters, stated in a recent missive that mining executives may receive angry letters from stockholders who seek to leverage silver’s massive bull market potential.

“I wrote before that the silver miners have re-started their hedge books for silver at around 29-30 dollar silver, stated Russell. “This means that they thought silver was ‘high enough,’ and they were selling their silver forward, because they thought that silver was as high as it was going to go.”

“In effect, the mines were shorting their own product. As for the mines — big mistake. Rising silver is either wiping out their profits or actually costing them,” added Russell.

John Hathaway, senior managing director of the Tocqueville Gold Fund agrees with Russell on the point of silver’s potential for much higher prices, and adds that a disconnect between the paper market in New York and the physical market points to evidence of Hathaway’s assumption—which is, the bull market in silver is driven by demand for physical silver and not merely as a speculative paper trade on Middle East unrest.

“What I strongly believe is that the amount of paper we are seeing traded in both gold and silver on the Comex and in the derivatives market is nonsense,” Hathaway told King world News.

“It has to be something in the order of 100 to 1. The fact that the market is moving today when the Comex is closed tells me it is not New York that is doing this, it is physical demand.”

As further evidence of his point, Hathaway notes the low number of speculative longs within the data of the latest Commitment of Traders (COT) report. The COT report has long been viewed as a valuable resource to traders who use sentiment data in addition to other technicals as factors influencing their trading decisions.

Net commercial (professional) and net speculative (trading public) longs in the precious metals market should be near opposite extremes at market bottoms and tops, so the theory goes. An abundance of net speculative longs suggests the probability of a short-term top is imminent, with a track record of the trading public left holding expensive contracts sold to them by commercial sellers during a bull move a nearly consistent one.

As highly correlated to one another, as gold goes, silver follows.

“When you look at the COT, the spec gold longs are below their norm for the last year,” Tocqueville’s Hathaway said.  “Their net long in gold is only 126,000 contracts, which is in the 30th percentile of the last 52 weeks.”

(Source: http://www.beaconequity.com/silver-soars-but-how-much-higher-2011-02-22/)