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What Does Silver's Recent Weakness Mean?


After appearing to have formed a minor bottom, it seems ready to move higher sooner rather than later.


Last week the World Gold Council released its 2009 Gold Demand Trends report and embedded among the statistics were a few tidbits I found interesting.

Overall, investment in gold was 7% higher in 2009 than 2008. This is significant when you take into account that demand in the fourth quarter of 2008, during one of the worst financial meltdowns we've ever known, was so great that there were global shortages of physical metal. Nevertheless, in 2009, at a time when fears of a global financial disaster have abated somewhat, investors still bought more gold than in 2008. In other words, more gold was purchased at higher prices when the markets were less terrifying, than when the prices were lower and fear was at its zenith.

China was the only non-western country to record positive growth in net retail investment during 2009. ETF demand in 2009 was 85% higher than the previous year, while bar hoarding, largely from the non-western markets, experienced a significant decline.

The council believes that regardless of whether the economic recovery gathers steam or stumbles, western investment demand will remain "well supported." If the global economy falters, investors will flock to gold. Conversely, if the recovery gathers momentum, inflation will come into play, and with it a rising gold prices.

So which will it be? Will the economic recovery gather momentum or will it stumble? We don't need a peek at the 2010 Gold Council report, which will come in a year, to know that the trajectory for gold prices is up.

For one thing, western governments haven't stopped the fiat currencies printing presses from working 24/7.

I've recently read something that can elucidate the enormous, almost incomprehensible, size of the US government debt. The numbers are so huge that it's difficult for most people to get a handle them.

If you spent $1 million each day from the time of the establishment of the ancient city of Rome -- about 2,700 years ago -- until today, you would have accumulated about $1 trillion in debt. But hold on. You would have to double that figure to get to the $2 trillion in foreign debt that must be repaid or refinanced each year by the US government, a feat accomplished in only a few short years.

It doesn't take a genius in economics to understand that when you print an ever-increasing supply of fiat currency, it will inevitably lose its value. If so, where will people turn for safety? Gold and silver; and it is the latter that i'd like to describe more deeply in the following part of this essay.

Let's begin with the long-term chart:


Points I've made previously regarding the long-term situation on the silver market are still up-to-date:

(…) the RSI and Stochastic indicators suggest that the price of silver is likely to reverse soon, but these indicators are based on price alone -- they don't take the volume factor into account. This is relevant also today, as the volume during the upswing that we've seen in the past few days isn't really impressive.

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