As shown in the charts below, managed money has yet to join the silver party so additional fireworks can be anticipated.

Regards - VHF

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Managed Money Ready To Join Silver Rally

Lakshmi Capital

April 14, 2011

The past week has placed precious metals in the limelight even more so than before. With gold and silver breaking out to fresh all-time highs, a review of the current health of precious metals markets is in order. Even though the fundamentals of easy monetary policy favor all commodities, we continue to prefer the monetary commodities, precious metals, due to their more direct exposure as an alternative to paper currency.

The following chart shows the price of silver in gray, managed money net longs in green, and producer net shorts in blue.

As can be seen from the chart, the price of silver has risen incredibly. However, what is most interesting is the lack of managed money long participation.

As managed money is comprised of hedge funds, commodity funds, and other large speculators, such a dramatic rise in the price of silver would usually only be accomplished by a large increase in the amount of long speculation, absent a true shortage. However, the chart below shows that the last month and a half has seen managed money net longs decrease by almost 10% while the price of silver has risen 33%!

If futures traders and speculators are not responsible for silver’s incredible rally, then who is? The answer is investors. Physical buyers and buyers of silver ETFs such as SLV and PSLV have caused demand for silver to skyrocket.

The fact that the price of silver continues to increase while Managed Money longs have not reached the high of 48k contracts set on 9/28/10 is hugely bullish for silver. The reason for this is that physical and ETF owners of silver are employing far less leverage than futures traders, if any. This means that even if silver were to drop in price, it would not experience forced liquidation and deleveraging that is usually the hallmark of a “pierced bubble.” If any party to this silver rally can be described as “hot money” (meaning investors who flee quickly with even just a mild correction in price), it is actually futures traders. The fact that Managed Money has refused to participate in the recent silver rally indicates that silver is climbing the proverbial wall of worry.

We continue to advocate outright long positions in silver at least until managed money longs achieve a new high.