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                         The Divergent View  February 24, 2011
Is the Silver Rally Over?
Not Until it Hits $135

As the price of silver has soared, market talk has centered on a short squeeze - most of the talk has focused on levered players unwinding their books - this may be true, but it there is more to the silver story. 

Inspired by a video clip of Eric Sprott (Sprott Physical Silver ETF)  talking about a shortage of physical bullion, we conducted our own analysis  in the Reagan tradition of trust but verify.

Starting with the major silver ETF holdings  we found:
Total Amount of Silver in ETFs (Ounces)

iShares Silver Trust (SLV)                  340,001,630.80
Central Fund of Canada                       75,209,103.00
Silver Bullion Trust                                3,143,830.00
ZKB                                                      59,241,000.00
Sprott ETF                                            22,298,540.00
ETF Securities Silver                            25,000,000.00
Claymore Silver                                     2,930,000.00
Goldmoney - Vaults                              23,024,000.00

Total                                                  550,848,103.80
Sources: Company websites as of 2/23/11
According to GFMS the supply of silver is:
GFMS Total Supply of Silver                                    975,395,600.13 ounces

GFMS Silver Demand (less Coins and Investments)   738,883,684.22
Which leaves
Available for Investment and Coins                            236,511,915.91

But we already know that investment demand is:        550,848,103.80

Thus, there is a silver shortage of:                        314,336,187.89 ounces
What is puzzling is that GFMS uses ~250,000,000 ounces as their estimate of investment demand, however, the simple math shows that the number is 550,000,000 ounces.
Historical Precedent
There is not a direct historical precedent for a shortage of this size since the reason for the shortage is the relatively recent invention and popularity of ETFs.  The most direct comparison that can be made is the so-called "Hunt Brothers Episode." From a low of ~$1.30 in the early 1970's, silver climbed to $49.45 by 1980, or an increase of 3700%. The most recent low for silver was in 1993 at $3.56; if silver makes the same move in percentage terms then the target price for this move would be ~$135 per ounce.
The natural question is whether the Hunt Brothers episode is relevant to today's market. At the peak of their silver accumulation the Hunt brothers were estimated to control about 1/3 of the world supply of silver. By our estimates the silver shortage today is about 1/3 of world supply.
The full brunt of the rally was really felt during 1979 when silver rose from $6 to $48 per ounce, or 700%. The most recent silver surge began in 2008 at ~$9 per ounce, at the current price of $31.90 silver has already jumped 250%.  To match the 1979 move, silver would have to rise to $70 per ounce.
Using either pricing method as a guide there is one move the make in silver...buy the dip!! 

Disclosures: Accounts managed by Kanundrum Capital are long SLV.
Kanundrum Capital is a registered investment advisor managing portfolios for high net worth individuals, entrepreneurs, trusts, executives and estates.
For more information on our money management services please call 888.773.1114
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