Silver Rebounding

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"The most pressing issue that looms over the silver market is the perceived lack of liquidity."

Silver has had a tumultuous January after hitting highs in late December of over $31 per ounce; the market has since undergone a correction. The most pressing issue that looms over the silver market is the perceived lack of liquidity.

January set records for silver bar/coin sales at the U.S. Mint, over 5 million coins were sold, shattering the November 2010 record of 4.6 million. While the price of silver has undergone a correction, the demand for the metal is still overwhelmingly strong. Bullion dealers are complaining about the inability to fulfill orders for silver bars. Many have stopped taking orders completely.

"Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the Trust [Sprott's gold trust] highlight the disconnect that exists between the paper and physical markets for silver," stated Eric Sprott, CEO and CIO of Sprott Asset Management.

The unrest in Egypt may also be in the back of traders minds as risks from the political fallout may spread through the oil rich Middle East. "We could see geopolitical contagion and the crisis spreading to the undemocratic oil rich states of United Arab Emirates, Kuwait and Saudi Arabia. If so, this could drive up oil prices, which in turn is inflationary," reported Allen Sykora, for Kitco.

A positive factor for the increased demand for silver going forward is the Chinese government increasing its reserves of gold and silver. Looking to increase the relative value of the Yuan, reports show the desire of China to increase it holdings of precious metals. While the exact figures of China’s silver reserves are hard to come by, reports indicate plans to increase reserves of silver as well.

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