The silver market appears to be setting up for a big move.

After spending this spring stair-stepping lower in a narrowing range, silver prices have formed a falling wedge pattern. That pattern usually resolves in a powerful directional breakout. The good news for bulls is that falling wedges usually break out to the upside.

Commercial hedgers and bullion banks (i.e., “smart money”) in the silver futures market have significantly trimmed their short positions over the past couple weeks – a bullish development. While their net positioning isn’t yet at an extreme, it is more favorable than not for a price rally to commence in the near future.

Of course, neither futures traders nor chart patterns are 100% reliable. Nor do they have any particular implications for where prices may be headed years from now.

Long-term investors can benefit from identifying opportune entry points on the charts. But if a big multi-year bull market is to come, it will be driven by fundamentals – supply, demand, relative valuations, inflation rates, and investor sentiment.

Let’s therefore drill down into silver’s fundamentals.

The Silver Institute is widely considered to be an authoritative source. The Institute released its annual World Silver Survey in April, which showed global silver demand rose by 4% in 2018 to more than 1 billion ounces. At the same time, supply from mine production fell 2% last year to 855.7 million ounces.

At first glance, these numbers present a compelling case for higher silver prices. Demand appears to be outstripping supply.

However, there is no actual physical shortage. The mining supply deficit is (for now) being made up by scrap recycling and other secondary above-ground sources of physical silver.

There ultimately will be a physical shortage if demand continues to rise while mining production falls. The market’s way of averting such a shortage is through higher prices to incentivize more output and encourage thrifting by industrial users.

Silver is a difficult market to forecast in part because there are few primary silver miners in existence. Most silver production comes from gold and base metals mining operations.

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