Why Silver Is About to Bounce Back

Silver prices today remain discounted due to last week's drop, creating a perfect window of opportunity for investors to buy the commodity before it heads higher.

Last week saw a 3.71% decline in silver prices, which ended January down 4%.

That followed a rough 2013, when the precious metal started out the year at $31 and ended at $19.50 for a 36.3% drop.

But today silver prices inched forward, opening at $18.62 per ounce, up 1.06% since Friday.

It's just the beginning for what's about to happen to the precious metal in the weeks ahead...

Silver Prices in 2014

The first strong indicator silver is about to pop requires a look back to early December.

Silver-futures short positions of all speculators (in the Commitment of Traders COT report from the US Commodity Futures Trading Commission) hit a current bull-market high of 54,000 contracts.

"This kind of extreme often signals a strong performance in the silver price over the next 1 to 3 months," Money Morning Resource Specialist Peter Krauth said.

Another good sign for silver prices in the weeks ahead is the more recent COT reports.

"They show speculators have already pared back their short bets considerably, so this reversing trend is playing out in textbook fashion," Krauth said. "We saw this happen in each of the past three years, and conditions look ripe for a repeat."

But perhaps the biggest indicator silver prices are about to pop is that exchange-traded fund (ETF) managers are drastically increasing their holdings.

"Their physical holdings bifurcated during 2013, saying a lot about investors' mindset," Krauth said.

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The two flagship physically backed precious metals ETFs are iShares Silver Trust (ETF) (NYSE ARCA: SLV) and SPDR Gold Trust (ETF) (NYSE ARCA: GLD). GLD investors sold right out of the gate as 2013 started. From record-high inventories, GLD saw its level of gold bars rapidly decline more than 40% by year's end.

When the gold price panic hit in April, GLD lost 15% of its holdings within just a month and a half.

But SLV investors decided to hold onto their shares despite silver's plummeting price.

In fact, during both the early and late parts of 2013, SLV's silver holdings were actually up from their average 2012 levels.

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"The lower silver prices clearly didn't scare investors away from the major silver ETF," Krauth said.

Finally, this chart shows four more reasons why silver's ready to pop:

The Relative Strength Index (RSI) is a momentum indicator that attempts to determine whether an asset is over- or undervalued. If the RSI indicator hits 70 or higher, it's considered to be overbought. Here, the RSI is safely below the threshold. Silver has strong support at the $19.75 level and will likely break out of its wedge pattern (represented by the converging arrows in the middle graph) soon, Krauth expects to the upside. Target prices: Initial level is $23, if that's taken out, silver could rally to $25. The Moving Average Convergence Divergence (MACD) momentum indicator shows a healthy positive divergence (long-term and short-term prices moving together), pointing to a rally.

Krauth also gave investors the best company to invest in to play this silver move...