By Melissa Pistilli-Exclusive to Silver Investing News

The price of silver broke the psychological level of $9 this week and reached a high of $10.50 in early morning trading Thursday. “Precious metal sentiment received a much needed boost yesterday as the dollar retreated after the Fed’s rate cut,” said Standard Bank analyst Manqoba Madinane. Both the precious metals have seen gains in the past few days as the dollar fell against the euro after the Fed’s interest rate cut.

Silver’s “next upside price objective”, says RJO Futures analyst Jim Wyckoff “is closing prices above psychological resistance at $11.00/oz.” First resistance is at $10.175 and next at $10.50.

Over the next several weeks, perhaps even months, we can expect a lot of volatility in the silver price as the economic crisis unfolds. I don’t think we’ve even begun to see just what havoc this is going to wreak upon the commodities sector or the financial system in general.

For the serious silver investor, it serves no purpose to watch the COMEX silver price every day biting your nails. The price is going to continue to fluctuate for the short term. Money will move in as some investors look for long-term safe haven assets at bargain prices, and money will flow out as hedge funds and other investors use gains in the precious metals to meet margin calls and get back money they lost in other investments.

However, all is not bleak. There remain strong fundamentals in place that will eventually contribute to a healthy rise in silver prices in the future, but this will take some time to play out.  Patience is not only a virtue but a saving grace for silver investors.

Despite the high demand and low supply seen in the physical market, dips in the paper silver market are sure to continue as the result of forced liquidations. “Hedge funds and high-net-worth investors”, says Roberta C. Yafie of Condé Nast Portfolio.com, “are liquidating highly leveraged precious metals derivatives contracts, options, and gold index notes to raise the capital to meet margin calls on their tanking stock and bond investments.”

Precious metals “give investors a source of liquidity at this time of crisis,” explains Jeffrey Christian, managing director at the CPM Group. Speaking about gold, Christian says “What we’re seeing now is a gigantic run for cash.” But, also there is tremendous demand in the physical market. The same is true for silver.

Silver market analyst Ted Butler recently reported that “some 150 million ounces of silver can easily be documented to have been bought by investors” in the last 10 months. Butler goes on to say that investor demand for silver for the year is already at 25 per cent of world mine production and over 20 per cent of total production. Even more remarkable, Butler asserts, is that the documented demand over the last 10 months “is equal to 15 per cent of the silver bullion equivalent thought to exist!”

A popular place to trade physical silver these days is eBay. Stock Portfolio blogger, Michael Zielinski researched this phenomenon and discover that purchasers on eBay where willing to pay high premiums on 100/oz silver bars ranging from 39.62 per cent to 56.45 per cent over the paper market price. Another of Zielinski’s findings was more evidence that a decline in the paper market price leads to even greater demand for physical silver: when the COMEX price dropped hard on October 15 and 22, the percentage premium on eBay rose in turn.

Another avenue taken by serious silver bugs wishing to acquire physical silver has recently been through the paper market. As I mentioned in a previous article, David Morgan himself reported purchasing silver at the COMEX paper price and taking physical delivery. According to Zielinski, “if these deliveries take place and become a dependable source of purchasing physical silver, premiums for 100 ounce bars and other physical silver would likely begin to subside.”

However, there is some concern that due to the small coverage of physical metal for outstanding contracts on the COMEX, if enough purchasers demand delivery COMEX “will be forced to default and settle in cash.” This could quite possibly cause “soaring market prices for silver and potentially greater premiums as the argument for physical scarcity gains another leg of support,” said Zielinski.

CPM’s Christian has said that precious metals supplies remain satisfactory for now, but when investor demand is combined with the current credit crisis, the supply situation will change quickly. Already financing problems are causing postponements for new mine openings and expansion for mining companies, which will of course lead to further supply shortfalls down the road.

Physical demand for silver will only continue to increase as the economic crisis deepens and it is merely a matter of time before precious metals miners will begin to see their share prices rebound exponentially. Now is the time to look for promising junior miners with strong fundamentals at bargain basement prices.