iShares Silver Trust 20% One Month Gain (SLV)

Silver is unstoppable, since the Masters recommended the iShares Silver Trust (ETF) (NYSE:SLV) it has increased 22%.

Today the SLV hit a new 52-week high, touching $23.43 a share and you can't help but wonder if silver has come too fast too soon.  We haven't seen the price of silver this high since the 1980's, so what happened back then?

To answer that question we turn to essortment.com -- In 1980 silver prices rose to a height of $48.70/oz from their regular price of $5/oz. What caused this rise?

In 1980 silver prices dectupled—increased ten times their previous levels. Ever since the Great Depression the United States had held two billion ounces of silver in the U.S. Strategic Stockpile. They issued metal loans—loaning silver out at a certain interest rate in return for IOUs stating that the metal would be returned. In this way they kept silver prices low—any time the price escalated the government stepped in and watered the prices down by creating more “paper silver.” In other words, the government loaned out, over time, two billion ounces of silver metal in return for two billion ounces of paper silver (IOUs). Consequently, instead of two billion ounces of silver on the market, nominally there were four billion ounces. Eventually the contracts came due—and nobody had the silver metal. We were left with fewer than two billion ounces of silver when all the books said we had four billion ounces.

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Every year the world produces some 550 million ounces of silver. World demand is on the order of 850 million ounces. The difference in these (300 million ounces) is drawn from existing stockpiles around the world. For instance, if 850 people want 1,000,000 ounces of silver, but only 550 people have the million ounces, prices rise until only 550 people can afford to buy the silver. But if the U.S. has two billion ounces, it might loan out 300,000,000 ounces in order to create enough paper silver to satisfy the demand. The U.S. gives the silver metal to the people who want it, and the U.S. gets pieces of paper in return. If world inventories start to dry up then no one can supply the extra silver to make up the difference between supply and demand and prices will rise accordingly.

Not all silver is in jewelry and bullion. Industrial processes use up (consume) 1/3 of the worlds silver demand, and photography consumes another ¼. This is important because if all silver demand was in the form of jewelry and bullion then a lack of supply would pressure prices higher and when the prices rose sufficiently the profit-seekers who owned the bullion and jewelry would then sell for a profit—essentially serving as warehouses to supply the difference in inventory. But since over half (four hundred million ounces) of the worlds silver demand is consumed per year there are fewer inventories and prices will rise higher and stay low for less time before rising again in the event of a silver shortage.

What 1980 saw was high fuel costs and terrible inflation. People wanted to change their paper money into something solid and real—silver. This started driving prices up as people drew from existing inventories and hoarded it. Then the U.S. government demanded payment in some of its silver loans only to find that the silver had been consumed. All it got back was paper money, but little silver. At the same time the Hunt brothers, oil tycoons, bought two hundred million ounces of silver options and futures. This caused terrible shortages and drove prices sky high. 
 
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SOURCE: http://www.essortment.com/all/silverwhatpric_rgle.htm