Is This The Start Of Silver-Mania 2?

Anyone who has spent any amount of time trading the futures markets has seen some breath taking moves in commodity prices. Some of the most thrilling moves occur in the grains when crops are drastically reduced by droughts. The 50% rally in wheat this summer as Russia's crop was fried is a perfect example of this type of volatility. This doesn't even compare to the price bubble that happened in the late 70's as the Hunt brothers tried to manipulate the silver market and the public joined in buying like madmen. Before silver went into the blow off phase of the rally it had already rallied from $1.50 in 1971 to over $9 in 1979 but that was nothing compared to the price exploding to $48 an ounce. This shows the point that investment demand, not only industrial usage rules the day in the silver market. When the tide turns though, it's often just as wild on the down side. The Fed raised interest rates dramatically, the Hunts were prosecuted and the price of silver crashed back to $10 just as fast as it had risen. Over then next 20 years it made it all the way down to a measly $3.50 per ounce.

The precious metals have been rallying for nearly a decade with gold leading the way. When we enter this stage of the bull market silver prices tend to move much more quickly than gold in both directions. The rally in silver since the late August break out has been nearly 3 times as powerful as that of gold. The markets have been bid up on the prospects of QE2 and the fact that the fed is dedicating all it's firepower to avoiding deflation at all cost. Today we don't have the Hunt brothers in the ring but we have hedge funds and even pension funds who want to protect their buying power and can buy silver directly using a Silver ETF

We also have a couple large commercial banks that have been carrying a large net short position in the silver futures (as high as 165,000,000 ounces). It appears they have been trying to exit this position the past month (it dropped by 15,000,000 ounces from Sept 5 to Oct 5th). Traders are buying into the market on dips knowing that these large banks are also trying to buy on weakness. That is one large "trapped" short, it could get very interesting.

In addition to silver, gold, palladium and platinum are all higher on the year as well with gold reaching new record highs on a regular basis. Palladium has has also had a spectacular year just like silver as industrial users have switched over from platinum. This has caused platinum to be the laggard up to this point, but that can change at any moment.

With all the pressure on the US Dollar and a fed that's happy to print new money to buy assets, who knows where this rally will end! The only thing that is certain at this point is that gold and silver rally is most likely not over yet but in another 15 years we will look back and see it was just another commodity bubble.