On that one day of the year when it seems every auto retailer in the country thinks you should be out buying a brand new car, some folks around the globe were clearly very busy buying up silver.

For our nation's founding fathers -- who must already be rolling in their graves at the present state of the U.S. dollar -- silver's powerful move to a fresh 30-year high above $34 while U.S. markets paused for Presidents' Day seems a wholly appropriate homage.

In a remarkable reflection of persistently acute tightness in the physical silver supply, the metal has shrugged-off a minor (and short-lived) correction in very bullish fashion, and etched an abrupt 25% surge from the late-January low beneath $27 per ounce. Even after giving back much of that epic holiday surge, silver remains above its strong Friday close, and firmly entrenched in a bullish up-trend. The dynamic I discussed here, whereby silver appeared poised to continue holding the precious-metal reins through yet another upside surge, is playing out before our Foolish eyes.

Accordingly, Silver Wheaton (NYSE: SLW) shares opened Tuesday with a 5% pop beyond $41, and achieved a brisk 40% recovery from a late-January low beneath $30. Great Panther Silver (AMEX: GPL), which only recently gained further accessibility with a U.S. listing on the AMEX, jumped nearly 10% Tuesday morning to score an 80% explosion from its January 25 close of $1.84. Major producers Coeur d'Alene Mines (NYSE: CDE) and Hecla Mining (NYSE: HL) began the session solidly ahead, before backing off in volatile intraday trading.

I encourage Fools to pay very special attention to the present circumstances of the silver market. The metal's pricing strength might be 'business as usual', but I submit that these market conditions are anything but normal.

The golden perspective for silver
Asian demand for both gold and silver continues to rocket higher, with the Industrial and Commercial Bank of China reporting January gold sales at 7 tons ... or fully 50% of the entire volume sold by the bank in all of 2010. The bank's silver sales in January reached 13 tons, for 39% of total volume sold for all of 2010. China has shifted from a net exporter to a net importer of the metal, with 2010 imports quadrupling over 2009 levels to reach 112 million ounces.

That sort of rapidly expanding off take of physical metal, particularly in a market dominated by leveraged paper trading many times the scale of existing global supply, is capable of triggering sudden and dramatic squeezes of short-side speculators.

Before we mine any deeper for silver insight, permit me to lay the groundwork with two important points:

  • Futures contracts are routinely settled for cash, as opposed to resulting in an actual physical exchange of the underlying product. If you are long hog futures, for example, you don't need to build yourself a sty. Technically, the option of demanding physical delivery upon settlement is part of the contract, though in practice that is a relative rarity.
  • Silver futures have entered a very severe form of a rare condition known as "backwardation." Simply stated, backwardation occurs when spot prices represent a premium over prices for long-dated futures contracts, and in commodity markets significant backwardation generally underscores a state of undersupply in the market. After humble but poignant beginnings, this silver backwardation has intensified in recent days, to the point where traders are willing to pay $1.25 more to hold an ounce of physical silver today than they are to hold it in the form of a December 2015 futures contract.

When a futures market enters severe backwardation as silver has done, the incentive for long-side market participants to stand for physical delivery rises (partly because those with access to the metal can execute profitable arbitrage plays against that inverted futures curve). Already standing at a four-year low at just over 100 million ounces, silver stockpiles at the COMEX futures exchange appear set for an imminent drawdown.

As one Tokyo-based trader explains: "The market is clearly very tight judging by the backwardation in the forward curve. In addition, COMEX silver inventories have been falling and many people are expecting more drawdowns this month, so there is a feeling the market is being squeezed."

Silver market expert James Turk prepared investors for additional strength in silver prices after bringing attention to silver's emerging backwardation earlier this month, advising: "Look for a short squeeze in silver already under way as evidenced by the backwardation to intensify as we move toward silver option expiry at the end of this month, and silver delivery on March futures contracts in early March. In a short squeeze, what matters is ownership, not price."

What this all means for investors
When I toss all of this market's observable clues into a tasty silver salad, the current pricing strength begins to resemble merely an appetizer for a potential feeding frenzy that could propel silver higher, and faster, than many onlookers may deem possible. The key ingredients for this bullish outlook include: exploding Asian demand for physical silver, an unprecedented degree of backwardation in futures, the huge disparity between scant physical supply and massive trade volume in paper proxies, the potential for short-side speculators to find themselves unable to secure adequate physical supply in a short squeeze scenario, and the silver market's small overall scale relative to that of gold.

If present market pressures continue unabated, the world may soon discover just how small the available silver supply truly is in relation to the scale of total contractual obligations written against it. My long-standing $50 price target has never felt more easily attainable, nor conservative. I consider a confirmational breakout by gold above its prior high of $1,432 as the final key ingredient needed for silver to retain momentum, since the lowest gold-to-silver ratio of this entire bull market is already stretching the silver slingshot. Conversely, I would view any failure by gold to retake that level in fairly short order as a potential threat to silver's near-term strength.

For investors considering fresh exposure to silver, I stand by my prior $100 share-price prediction for Silver Wheaton, as well as my call for the Global X Silver Miners ETF (NYSE: SIL) to outperform the S&P 500 by 200%. I have documented many of the noteworthy achievements by two of the silver industry's more promising small cap growth opportunities -- Endeavour Silver (AMEX: EXK) and Alexco Resource (AMEX: AXU) -- and the addition of my top-10 pick Great Panther Silver rounds out a powerful trio for Fools to examine.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.