Why Silver Has Us In Two Minds

July 22, 2011 | By | Reply More

Silver has certainly lived up to its reputation for volatility this week. Climbing to a high of just off $41.00 an oz to a low of $38.35 an oz in just three days has left this writer in more than two minds.

The announcement yesterday of the latest disaster delaying fudge up tactic by Europeans hit the price of both silver and gold by the Comex close and followed through in Asian trading. However in early morning European trading it looked as if reality had at last taken over and the silver price had climbed back to $39.40.

Good Long Term Fundamentals

Herein lies the problem. The long term fundamentals for silver are straight forward.

  • Demand is outstripping supply from mining sources and has been for some time.
  • The shortfall has been made up from scrap and recycling but this source is gradually diminishing.

At the same time as demand from industry has been rising with the advent of new applications so to has investment demand with the proliferation of bullion backed ETFs a significant driver.

Taking into account the close association that the silver price has with that of gold and the long term outlook for the yellow metal being strongly bullish, if for no other reason than the acknowledgement that it is the most likely vehicle for wealth protection, then the most obvious and logical conclusion is that silver is a long term buy and hold.

One Small Concern

The only concern is that a fall off in industrial demand that would occur if, or when, the western industrial nations, maybe together with China, fall back into recession.

This would be an emotional response rather than one of logic, as the lowering of demand would likely be more than offset by increased investment demand as the printing presses would be continually churning out paper money in an attempt to save the politicians and bankers from the ever increasing consequences of their failure to face up to present realities by leaving future generations in deep mire.

What of the short term?

Well this is the season when, historically, precious metals have tended to consolidate before launching upwards in September. Despite the unseasonable volatility exhibited so far this summer, the August holiday shut down is still a week away so one scenario is that silver will consolidate in a band between $38 and $40 for four to six weeks following the pattern of previous years.

Technicals not Promising

Another is that the chartists will have the last say with a body of opinion believing that it is possible that silver will break down through $37.80 and if so, it will not stop until it has fallen to around $34 maybe even lower.

The US will Avoid a Default

Yet another short term situation to see us through the summer is on the cards. It is simply that the European and US economic situation seems to be deteriorating day by day. The US still has to come up with a way out from defaulting by early August – which no doubt it will! Even the most optimistic economist surely cannot see any long lasting relief from the ails that are tormenting, or should be, President Obama and his cohorts of economic advisers, (better known as ..ankers).

So we can expect another fudged up delaying tactic to be presented to us, the gullible public. Precious metal investors and particularly the speculators will hopefully see through this and take the logical step of going long the metals. You would have to be a spectacularly lucky contrarian to profit from going short either silver or gold with the nervousness and uncertainty currently surrounding the markets.

Upon reflection if, as is more than likely, another round of stimulus packages is on the agenda the immediate beneficiary would be stocks and shares in general, if the present Dow and S&P 500 indexes are not already reflecting that likelihood.

Is There More Bad News To Come This Summer?

And finally, this summer is without doubt, has become a season of unwelcome economic news. Not only is the US and Europe in financial turmoil but now reports out of China are certainly not encouraging. Tales of vast new but as yet uninhabited cities, increasing inflation, even civil unrest in one province are making the headlines.

It all reminds us of a house of cards that could collapse at any moment. If there is a trigger pulled then all markets will suffer the initial fallout, thereafter silver, gold and, to a lesser extent PGMs, will be the only game in town.

Patience and Cash Needed

That leaves us with relief that we were able to cash out for a profit the option insurance plays we talked about recently. The two decisions we now have to make is whether to top up our silver ETF (SLV) or top up our gold bullion holdings now or wait and see how the market develops through August.

At this moment in time, with uncertainty rampant, we are opting for the later course – wait and see and keep our cash handy.

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