While the yellow metal has captivated our attention in recent weeks, the “poor man’s gold” has also been quietly reaping big gains.
Silver is up 56% this year, hitting a record of $17.92 a troy ounce on October 8, according to Bloomberg data. Silver’s annual average price, in 2008, was $14.99.
After the recent run-up, commodity strategists think the metal might be due for a pullback. However, investment pros expect silver to remain a strong performer looking ahead, benefiting from two broad trends: First, analysts expect better-than-expected supply-and-demand conditions to benefit silver. Second, the market will continue to see silver, like gold, as ultimate money.
Why has silver rebounded so dramatically?
There are some strategists who view silver as a bet on economic recovery.
As the financial crisis erupted in 2008, demand for silver took a hit as sales by major end users -- like producers of big-ticket consumer goods such as household appliances and cars -- slumped and residential construction fell.
The use of silver in industrial applications fell to 447.2 million ounces in 2008, down from 453.5 million ounces the year before, according to The Silver Institute, a nonprofit industry group.
GFMS, a London precious-metals consulting firm, says that fabrication demand was even weaker in 2009, but it’s forecasting a rebound in 2010.
“In the beginning of 2009, in all stages of the production process, people ran down stocks because they didn’t know what was happening,” says Neil Meader, research director at GFMS. “Now, we are getting back to the stage when demand should be normal in a sense.”
Meader adds, “We will still have the negative of final consumption being slack, but we’ll have the positive of the supply pipeline refilling.”
Its industrial uses have had an impact on silver prices, but investor activity has also played a critical role in the metal’s rally in recent years, say industry experts.
This year, investors have already put $750 million to work into the iShares Silver Trust
(SLV), according to Morningstar. In all of 2008, investors sunk $829 million into that vehicle.
The exchange-traded fund is up 43% in the past six months.
The stocks of some mining-related companies have also enjoyed nice runs. Over the last six months, Canada-based Silver Wheaton
(SLW) is up 78%; Pan American Silver
(PAAS) has surged 68%.
For his part, William Fleckenstein, president of Seattle-based Fleckenstein Capital, doesn’t think silver’s move has anything to do with a bet on economic recovery kick-starting industrial demand. Rather, he says, investors have moved hard into silver for the same reason they've committed capital to precious metals in general: They have no faith in the purchasing power of the paper in their wallets. “People want to own precious metals because they lack confidence in paper money,” says Fleckenstein, who also serves as a director for Pan American Silver. “They buy them because they have no confidence in the purchasing power of the currency.”
Treasury Secretary Tim Geithner said recently that it is “very important” for the US to have a strong dollar and promised to preserve its role as world currency. Of course, Tiny Tim reports to Team Obama and it’s hard to imagine the crew at 1600 Pennsylvania Avenue working overtime to restore King Dollar.
Quite the opposite, in fact: the greenback will be allowed to depreciate in coming quarters as Obama’s crew does whatever it can to goose GDP growth ahead of the critical mid-term elections, say economists.
Fleckenstein, for one, has little use for the sloganeering of Geithner.
“Who cares what he says? It’s like Ben Bernanke saying he is going to tighten some day. So what? Let’s see what they do, not what they say. Talk is cheap.”
Where does silver go from here?
Charles Nedoss, senior account manager and metals analyst with Peak Trading Group, says he thinks we could see profit-taking in the near term.
“I think we could see this thing pulling back $0.90,” he tells Minyanville. “We have basically gone straight up from $16 to $18 so I wouldn’t be surprised to see us test the $17 area over the course of next week.”
Nedoss adds, “Now, I am still bullish. I think we will come up and test at least the $20 area on the back of a weak dollar.”
Bart Melek, global commodity strategist at BMO Capital Markets, thinks there could be a correction in the near term. “We are in fact calling that for gold as well,” he says.
Still, Melek says he expects gold to be a strong performer for at least the next three years, with silver following suit.
“The supply is relatively tight,” he says. “Historically, silver outperforms gold in an up cycle for precious metals. We suspect this will be the case for silver this time as well.”
Says Fleckenstein: “Silver is going higher. Now, is silver going to make you money without testing your patience i.e. dipping first? Probably not, because it just had a big run. But should I sell my silver and run for the hills? I don’t think so.”
The hedge fund manager concludes: “The green piece of paper we call the dollar is a basket-case. And so are the other colored pieces of paper, for the most part. So I see no alternative but to own precious metals.”
No positions in stocks mentioned.
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