Is Silver Ready to Ratchet Up Gains?

August 15, 2011 | By | Reply More

The last month the spot silver price has seen a high of $42.00 an oz. and a low of $37.00 an oz. For the majority of the time the price has remained within the $38-$40 zone illustrating that yet again July and August months have followed the pattern of previous years, that is the market has been flat. Not so with gold.

On the contrary the market has seen an exciting rise from $1490.00 an oz. at the beginning of July to an all time high of $1800.00 an oz and back to$1740 an oz. at the August mid point. At the present time we are not making any predictions where the gold price is going for the next three/four weeks or a little longer.

There are some pointers to suggest that gold will move back to attack and breach the $1800.00 earlier high, among which buying for the Indian wedding gift season is the most obvious together with the ongoing fears surrounding fiat currencies.

Meanwhile see-sawing stock markets, a strengthening of the signs that we may be heading back into a recession (if we ever emerged from it)Europe’s failing economies may mean a run to liquidity will take place. This has not been helped by the increase in margin requirements for gold futures so the temptation to cash in profits on the metal to have cash in hand to pay off losses occurring in other market sectors will have a strong appeal.

Our attention is now centred on silver

A lot of hot money has departed the metal since it hit its $50 high at the end of April. Margin requirements were repeatedly raised in the aftermath driving away much of the highly speculative trading. We like to think that those presently in silver represent a backbone of investors committed to the metal.

We understand that there is a shortage of the metal at several of the mints resulting in extended waiting periods for silver coin which is at the present time much in demand. We even hear that a problem would result if forward contracts, instead of being traded, were to be settled in physical metal on expiration. This sort of rumour may well have no foundation but “there is no smoke without fire” so who knows?

What is a fact is that not enough metal is being dug out of the ground to meet both rising industrial demand as well as investment demand.

At the same time scrap recovery that has made up the shortfall in the past is on the decline.

Because of the disparity in price, it is easier for those of us with limited means to trade silver via bullion or a silver backed ETF (SLV:NYSE) than the gold equivalents. Also in the normal course of events, the silver market is more volatile than that of gold, giving investors and traders more of a run for their buck.

One of our theories yet to be played out is that the huge precious metal markets of Asia will turn in some part to silver as gold becomes too expensive for all but the wealthy to purchase for the present giving season.

In the meantime silver today looks cheap with plenty of upside still to come before reaching that $50.00 high again.
Despite the political fall out over the summer the metal has retained its price parameters, illustrating its underlying strength.
Even its well known volatility has remained in the shade compared to that of gold. We believe that any flight to liquidity will bypass silver while at the same time it will retain its status just below gold as a safe haven asset.

By the end of the month when traders return from their holidays, maybe even before, a recognition that silver is cheap will kick start the next rise. The traders mantra of “buy the dips, sell the peaks” with anything under $40.00 an oz. being a dip is coming into play.

If you have doubts think about this. The SLV, Jan 12 $50 call has over 100,000 takers with today price @ $1.33, the at the money ($38.00) Jan12 call will cost you $4.60.

That tells you how much confidence is out there!

Our speculative pick for the short term is the SLVSept $41.00call@ $0.93. $93.00 a contract isn’t going to break the bank and could show a very tidy short term profit if we have read the next three/four weeks correctly. Worth a punt.

Lets not forget the miners

These have taken quite a hit over recent months although it stands to reason that the majors must have been reaping the benefits of the rise in both gold and silver. OK, so costs have risen, political problems, both real and potential, workers unrest etc., but that does not gainsay the doldrums that miners have been in.

We turn your attention to Kinross Gold, (KGC:NYSE) just announced a substantial dividend increase, Market Vectors Gold (GDX:NYSE) a mining ETF., Stillwater Mining (SWC:NYSE) and our favourite play in the precious metal mining sector Silver Wheaton (SLW:NYSE). This last not a mining company but buys up silver at pre-agreed prices from miners.

Despite our reticence concerning gold there seems to us a lot to play for in the near term in the silver and mining sectors.

In the long term both metals seem set to record on going highs until the calamitous state of the US and European markets are sorted out – how or when we haven’t a clue.

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