Silver Gains on Inflation Concerns and Tight Supply

By Michael Montgomery—Exclusive to Silver Investing News

The price of silver has been running strong this last week, closing over the $30 per ounce range four times. Lingering concerns over debt and instability are still weighing on investors minds, making safe haven assets like silver and gold more attractive. The white metal finished the day in New York up $0.18, to $30.78 per ounce.

Many analysts see 2011 as an incredibly strong year for silver, and believe prices willl outpace those of gold over the course of the year. “Last week, the gold to silver ratio fell to just above 45:1,” said Wayne Atwell, Managing Director of Casimir Capital, in an interview with Silver Investing News reporter Damon van der Linde. The historical long term ratio is 15:1, silver has been gaining on this historical average. If it caught up to current gold price, the silver price would be at $91 per ounce. Silver still has a long way to go.

Inflation numbers from Europe to China are a main driver of silver futures. In the U.K., the CPI was reported as rising to 4 percent in January, up from 3.6 per cent in December. Much of the same in China as “inflation readings of 4.9%, higher that 4.6% for December but lower than the expected 5.4%… A strong reading in China will also perpetuate negative real interest rates in the country, which is currently negative 1.9%,” reported Alix Steel, for The Street. The inflation data in China was not as high as expected, which could stop the People’s Bank of China from raising interest rates, which it has done multiple times since October.

The US Dollar index slipped 0.01 percent after slipping 0.1 percent on Feb. 14. This factor, as well as the release of the US budget which forecast a $1.6 trillion dollar deficit in the coming year has all played into the week long run up for silver. Concerns over the long term debt issues in America and Europe are enticing investors to run to silver as a long term store of wealth. All of the money that was poured into banks after the collapse has been used to balance the books of the banks, and has not yet spawned inflation in the US.

“As the banks begin to gain confidence in an economic recovery and start to lend money again, all that cash that the Fed created out of thin air during the financial crisis will begin to make its way into the economy. Then, we will finally see true inflation as measured in the CPI and felt in the streets,” stated Ananthan Thangavel, founder and managing director of Lakshmi Capital. The real possibility of this scenario playing out will cause inflation in the US market, driving more investors to silver and gold.

The supply/demand market conditions for silver are strong as well. Mining firms have not been able to increase production enough to meet demand. As a result backwardation, where long term futures contacts are less than short term contracts, are a reality for the first time since 1997 after Warren Buffet bought a staggering 130 million ounces of silver.

“”The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product,” bullion dealer GoldCore said in a note on Friday.

This supply issue is good for silver going forward. Many analysts expect silver to have significant gains this year ranging from $35-$50 forecasts. The political instability that Egypt, Yemen and other countries are experiencing may also spook investors into precious metals in the coming weeks.