Can the Bull Run in Silver be Sustained?

April 24, 2011 | By | Reply More

Whether Silver is in a bubble is a more complicated issue to resolve than the same question concerning gold  which we addressed in our previous article. Historically, or at least until the advent of sophisticated stock markets in the nineteenth, twentieth and so far twenty first centuries, silver has mainly stayed in lock step with gold.

In other words when one moves either up or down then the other follows suit. If we go out on a limb we would expect that silver has been the junior partner and does what it is told by gold! Maybe that is changing.

That could be the reason why so many analysts are expressing their doubts that the bull run in silver can be sustained. Silver in a bubble is the cry of a considerable number for whom we have respect. A diversity of opinion is healthy, profit opportunities diminish when all agree, it is breaking ranks that allows profits to be taken by those on the right side of the trade.

To set the scene, gold is a tiny investment market compared to that of stocks, bonds, most other commodities, not to mention forex. Silver is even smaller, compared to gold by about a third. It is a  fact that, due to its size, it is about the easiest market to manipulate.

Witness the Hunts attempts in 1980 and the more recent ongoing efforts by the Fed and US friendly central banks. Because of its close association with gold, it has become a highly influential but not substantive, driver in dollar valuations against other currencies. We are not saying that it is a prime influence, just one of several in the Feds’ manipulative armoury.

Mainly because of its very small market, its moves tend to be in the order of 2-4 times as much, percentage wise, as that of gold over the same time frame. It is absolutely important to realize, and be clear in your mind, that this can work both ways. Because of its volatility silver can equally fall 2-4 times faster than gold, often over a shorter time scale.

What is happening now, we think, is that a lot of investors, speculators, Texas University funds, et al, are getting in on the back of the recent jump in price. Much of this will be due to the lower price of silver than gold to enter the market at ETF level, with its easy trading options. Nor should we forget that this is still such an infinitesimal market in the great scheme of things.

We have to ask ourselves these question, bearing in mind that we are, ourselves, large holders of silver ETFs and miners.

  • Does the demand for silver outweigh the supply?
  • Will silver retain its correlation with gold so that it remains an alternate source to gold as a hedge against inflation?
  • Will, if it occurs, a second leg down in this present recession, make a negative impact on silvers’ significant industrial demand?

There are more questions but we think these are the significant ones. If you disagree please let us know. Your participation will be much valued.

Our followers will have read our recent ramblings on the gold /silver ratio. We suggested that the ratio was now at a level that made sense to swap silver for gold. We followed our own advice and sold a third of our holdings circa $44.50 in our favored ETF iShares Silver Trust (SLV:NYSE) earlier last week and put the money into SPDR Gold Trust (GLD:NYSE) It is our intention to sell a further third hopefully at circa $ 48.00 and again reinvest the proceeds in GLD.

What does this tell you? Does it mean we think that silver is in a bubble? The way it has spiked up particularly in the last week has made us twitchy. The gold/silver ratio is sending out signals that it would be unwise to ignore.

  • Is silver still a reliable indicator with gold that monetary inflation is getting out of control?
  • Can it power up to $100 or more without a correction of bubble proportions before it does?

We will leave that remaining third in silver and let it ride the roller coaster. We have had a huge run with silver, not only have our longer term investments outperformed gold by a very significant margin, but thanks to SLV we have had some spectacular option plays but on balance we now think that for the immediate future silver has become a greater risk for the long term investment of such a large proportion of our precious metal cash allocation and that there just may be a bubble here that could burst.

Lets be clear about this we do not think that it is yet on the cards, we think that the odds are in favor of a continuation of silvers’ bull run but our confidence is not as high as in the past. We will leave a third of our previous holdings in silver. Who knows this could be immensely profitable, recent history would bear this out but with close attention we guess that there may be some highly profitable short term option plays yet to come. We will keep you in the picture.

Our conclusion is that a see saw market will develop possibly when silver bounces down off resistance at $50.00 an oz.  Or soon after. As, or if, its close correlation with gold breaks down it is possible that a silver bubble will burst as those big profits made by speculators are cashed in.

If the price really takes off in the next few weeks we will go along with the bubble theorists. After that then we suspect silver will back off into the doldrums.

However our commitment is not that cast in stone that we really do not expect the silver price to go back down to July 2010 prices when they were under 17.00 an oz. This metal is still a much valued industrial and medical resource and its cost of extraction will continue to grow.

Because of the big spike in the silver price in the last fortnight it would  be naive not to suspect that profit taking by our short term trading amigos will not take a its toll and good luck to them when they decide to strike.

Nevertheless there must have been great temptations to cash in last week when successive highs took place every day. However the daily charts indicated that any spells of profit taking were seen off by the end of the day with progressively higher lows supporting the rally.

This does send out signals that there is more behind silvers’ astronomical rise than just short term speculative activity with longer term players seemingly taking the high ground. This really has become a market that is difficult to put into perspective. There is substantial profit potential waiting to be realized, both on the long and on the short side.

It is that this small volume and highly volatile market exposes such possible danger over a short time span that we must caution our followers to be very, very, careful.

On a final note concerning whether the metals are in a bubble, we have yet to be informed by any supporters of this theory that any viable alternatives to both gold and silver that would be accepted universally as a store of value and wealth protection, exists.

Until a such an alternative becomes apparent and while fiat currencies degrade then the bubble scenario seems to us somewhat removed from present day reality, leading us to believe that gold, together with its acolyte, silver, will continue its long term bullish trend for a good while yet.

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