What next for the silver price?
30.04.2008
Image of Dominic Frisby
by Dominic Frisby
I have had a lot of enquiries this week about silver. What’s gone wrong? What’s next?
When silver was trading at $13 an ounce late last year, I said we’d see $22-25 by the Spring. We got to $21. Not a bad call. I was hoping for higher. But how typical of silver to frustrate.
Silver is known as gold’s little sister. She’s worse than that. She’s errant, irascible, moody and unpredictable.
But you can’t help loving her...
You never know what silver’s is going to do next. Gold moves up a lot; logic says silver should follow. But does she? No. She sits there with her arms folded and refuses to budge. Gold continues rising. Silver continues to sulk. Eventually, you throw your hands up in despair and ‘move on’. You turn back around and silver’s spiked up 40%. You humph and huff, perhaps - worse still - you buy in; silver throws a wobbly and goes down 35%.
Silver is a wildly difficult metal to trade. So much so that I’ve all but given up attempting to.
Silver is frustrating – but it’s still a great investment
If gold bugs are cranky and eccentric, silver bugs, of which I am one, are, well, positively loopy.
I am hugely bullish on the metal in the long-term.
People are finding more and more uses for silver. It’s highly conductive, which means it is being used more and more in electronics and computing. Its reflectivity sees it used in mirrors, optics and, though less so now, in photography.
It has germicidal and antibacterial qualities too, which see it used in medication, indeed throughout the medical industry and beyond – now in clothes, washing machines and fridges. There is even a new line of lavatory seat that has silver ions embedded to kill germs. There is talk of silver replacing platinum and palladium in catalytic converters. And, of course, its preciousness in these inflationary times mean it’s used as a store of wealth. (The French word ‘argent’ means both silver and money, ditto the Spanish ‘plata’).
With gold, platinum, copper, zinc, nickel, lead and you-name-it all having hit record highs in this bull market, silver is the only metal that hasn’t. It would have to triple from here to reach its 1980 high of $50. If you adjust that high for inflation, you have a target of $250. With silver currently at around $17, you’re looking a potential fifteen-bagger. David Bensimon, who uses complex mathematical formulae to develop price targets, is more bullish on silver than any commodity or index. He sees silver going somewhere between the sky and the moon. Look at this chart of silver adjusted for inflation and you see what’s possible. The problem is negotiating what goes on in between.
SS cpi adjusted silver price graph
Of course, just because it went there before doesn’t mean it will again. And that 1980 high is a slightly illusory figure. There was a sudden, but massive supply squeeze as the Hunt brothers attempted to corner the market.
Why silver is widely shorted
Nevertheless, you see the potential – and many commentators believe the same supply squeeze could happen again. Rumours abound of manipulation in the silver futures exchanges and, on a proportional basis, more traders are reputedly short silver than any other commodity. It’s been noted that the short position sometimes amounts to more than above-ground supply.
But silver is a tiny market. When you get a sudden surge in demand, perhaps if silver hits the mainstream news as it does every so often, retail investors pile in, there is a temporary lack of physical supply, rumours abound of physical shortage, the shorts run and cover, and the price suddenly and dramatically spikes.
One reason, by the way, that silver is so shorted on the exchanges is that many mining companies produce silver as a bi-product of mining for other metals, particularly zinc and gold. Not being primary silver producers, companies tend to ‘lock’ in prices, which translates into a short by a futures trader.
Silver’s movements tend to occur later in gold’s run – and often signal that the end of the run is at hand. We saw dramatic underperformance by silver of gold from August to December. Then, in less than three months, silver went from about $13.70 to over $21 – a 55% move. Two weeks later and it had given over half that move back.
How far could silver fall?
So if you’re going to trade this metal, you need to be nimble, patient, thick-skinned and have nerves of, well, silver-plated steel. If you’re doing it via a spreadbet or a CFD, good luck to you. Alternatively, you could just buy a load of physical and leave sell orders in way above the market and let the price come to you, as it will one day.
For what it’s worth, I see strong support at $15 (and for gold at $850). I would be surprised to see silver go below $15, unless we get another one of those awful days when three banks implode and the world panics. But I would expect to see the $15 mark tested within the not too distant future. If it gets there, back up the truck. On the upside, there is now resistance at $21, but I have $25, $50 and even $100 as targets over the next few years.
If you think owning silver is frustrating, you should try owning silver stocks. Nevertheless there are some great silver juniors out there. First Majestic (CA:FR), a proper mining company – and not really a junior any more - is one of my favourites. It’s a buy down here below $4. If silver re-tests $15 over the next week or four, you should be able to pick it up even cheaper. Also look at Great Panther (CA:GPR), Excellon (CA:EXN), and Hochschild (LSE:HOC). They’re all looking cheap. Though that’s not to say they won’t get cheaper…
Turning to the wider markets… |
