Silver: Fundamentals Asserting Themselves or Investment Demand?
By Stephen Clayson
03 Aug 2006 at 03:06 PM EDT
resourceinvestor.com
LONDON (ResourceInvestor.com) -- With silver recently back above $12 an ounce, it seems a good time to ask what has rejuvenated the market. Is it safe haven seekers running scared of events in the Middle East and mindful of global economic imbalances? Is it speculators running amok? Or is the effect to be ascribed to the continuing strength of industrial demand? To an extent, all three are true. But the first two factors seem to be more important right now.
There is no denying that silver is a profoundly useful industrial metal. Its superior conductivity and consequent use in the fabrication of electronic devices is the best example, and there are many more. The growth of the electronics industry is plain for all to see, meaning that a great deal of silver will continue to find a home in the circuitry of various tools and gadgets.
It therefore seems reasonable to say that industrial demand has helped to underpin the rising silver price of the last few years, despite the oft cited decline in the usage of silver in traditional photography as digital imaging technology takes hold and assumes near total dominance.
But silver also has a historical role as a quasi currency every bit as significant as gold’s. So, when investors of a certain mindset see a deteriorating geopolitical situation or a worsening global macroeconomic scenario, they are inclined towards holding silver, as well as or even instead of gold, as an insurance policy. A fine illustration of this is provided by the correlation between movements in the gold and silver prices.
A third element has to be speculation; in other words, investors with less regard for the fundamentals of a given market than for the relatively short term opportunities created by the buying and selling of those with a more studied outlook. The tremendous weight of speculative money that is around nowadays, a development somewhat connected with the rise of the hedge fund sector, means that much of the time, the speculators set the day-to-day pattern of the market.
Speculators may not be able to affect the underlying trends, but they can have a significant overlaying impact. Again, an examination of the obvious correlation between the short term movements of the gold and silver prices is instructive. What this tells us is that exactly the same forces are at work on the respective markets, at least in the short term.
Speculators, along with investors whose holdings are variable over the short term according to short term factors, control the silver market’s movements from day to day. Industrial users tend to try and emplace longer term contracts and when possible avoid dabbling in the open market for their silver, so have a lesser day-to-day impact on the markets.
So what does all this really tell us? Essentially, although the price may again drop below $12 an ounce again, maybe for a prolonged period, all the points made in this article will hold true. Herein is described today’s market. For explanations of silver’s fluctuations, investors need to watch geopolitical events and consider the opportunistic trading strategies of the speculators. |
