What’s next for silver?

It’s very easy to get sucked into the silver story. It’s very seductive.

Indeed, a recent Thunder Road report by analyst Paul Mylchreest described silver as “(probably) the best asset in the world”.

Is he right? Should we all be piling into silver?

The bull case for silver

Let me start by outlining what is seen by many as the irresistible, slam-dunk case for investing in silver.

Like gold, silver is – or was – a monetary metal. So its attraction is clear in these times of monetary intervention and currency debasement. (In some 90 or more different languages the words silver and money are interchange-able: argent in French, plata in Spanish, shekel in Hebrew, for example. The pound once meant a pound weight of sterling silver.)

Also, unlike gold, silver has many industrial uses. It has good electrical and thermal conductivity, it is sensitive to light and reflects it well, and it can endure extreme ranges of temperature.

That makes it useful in products from computers and phones to batteries and plastics (as a catalyst). It’s used in industries ranging from jewellery manufacturing to nanotechnology, and even in medicine, because of its anti-bacterial properties.

In 2010, according to the Silver Institute, 487.4 million ounces of silver were used in industry, 167 million ounces in jewellery, and 101.3 million ounces in coins and medals. Unlike gold, however, which gets hoarded, most of the silver used by industry is consumed.

From an investment point of view, the hope is that this means more will need to be mined. Given that existing mine supply doesn’t meet demand, this should drive prices higher.

In 2011, world silver production stood at 23,688 tonnes. Demand, however, stood at 32,366 tonnes – meaning there was a deficit of 8,678 tonnes. This deficit is about average for the last 20 years. Currently it is met by existing stock. Below, courtesy of Nick Laird of sharelynx.com, we see production, demand and deficit since 1950.

Global silver production  

(Click on the chart for a larger version)

The fact that demand always seems to exceed production gets silver bulls very excited. So much so that when the price doesn’t rise, many cry foul.

And I have to admit that every time I look at the supply and demand numbers for silver, and at the increasing range of fabulous technologies it is getting used in, I just want to go out and buy as much as possible.

Silver’s key turning points

Beware. It’s very easy to get sucked into the silver story. And it has a habit of promising but not delivering.

For all of the volatility that comes with silver, over the long-term it has a surprisingly well-behaved chart. There are several key price levels, as you can see on the chart below, which shows silver since 1980.

At various points in silver’s history these key levels have acted either as support or resistance.

 Silver - key price levels

(Click on the chart for a larger version)

At the bottom of the range we have numbers which will probably never concern us again. $3.50 is the all-time low, reached in 1991 and again in 1993. $3.50 for an ounce of silver! Amazing.

It actually touched $4 as recently as 2001. It then meandered around the $5-$6 mark for many years. Then, in late 2003, things got exciting.

The next key area is $8. It acted as resistance from 2004 to 2006, and then as a last line of support during the capitulation of 2008. $10 is my next line, and then, more importantly, $15. Like $8, it was a barrier for two years (2006-08). $15 is a number we may well see again in the event of some kind of capitulation or deflationary scare.

The next line in the sand is $22 and then $26, which is particularly important now, in my view. This has marked the bottom of silver’s range – strong support – since silver’s run to $50 ended so painfully. It has been re-tested numerous times and held on every occasion.

I’m watching that number closely now as it may well be that silver gets there again on this correction. If it does, one trade to consider is to buy around $26 with a stop 5-10% below.

Finally, there is the big one: $50. This is the all-time high, touched in 1980 and retested unsuccessfully 31 years later in 2011.

Trading off these levels – be it on the long or the short side – has been productive over the years.

So what might happen next?

On this next chart, which shows the last three years of silver, you can see the importance of that $26 area which I have drawn in red. Silver has been range-bound between $26 and $35 for over a year now and, sooner or later, it is going to make a break one way or the other.

That’s why I’m so concerned about $26. As long as that holds, we can keep thinking: “the bigger the base, the higher in space”, as the saying goes.

 Silver price chart

(Click on the chart for a larger version)

There are many lines of resistance and support within this $26-$35 range. I’ve identified them with red dotted lines. Perhaps $30 will hold on this current downdraught. Another trade to consider is going long silver with a stop just below the $30 mark.

For now we are stuck in the middle of the range, and the trend is down. But I wouldn’t recommend shorting silver – not yet, at least.

It’s going to take a lot of buying to get back to the $50 mark of 2011. But if silver can get above $50, which I’m hoping it will in the next year or three, then it could really fly. I always keep some silver bullion to make sure I’m exposed when it finally does.

How to buy silver

You can play silver in several different ways. You can buy the physical metal, though it is subject to VAT. I know one chap who gets round this by buying antique tea sets at below the value of their silver weight.

Another way to avoid VAT is to buy metal through online dealers such as BullionVault, Goldmoney and Goldcore, and not take delivery. There are also exchange-traded funds that track the silver price (LSE:PHAG is one).

If you’re interested in the miners, the largest silver producer is BHP Billiton – hardly a pure play. Yet the large cap pure plays – Pan American Silver and Fresnillo – have underperformed the metal in recent years. So why bother taking on the individual company risk?

However, some of the smaller producers have excelled. In particular, I like First Majestic (NYSE:AG; TSX:FR), which I tipped in my silver report a few years back. Its president, Keith Neumeyer, has taken the company from below $1 in late 2008 to $25 at one stage. It’s now at $18. Neumeyer is growing the company all the time, more and more mines are coming into production, while further acquisitions are being made. Neumeyer has a proven record on delivery.

If you want to consider other smaller producers, or companies with near-term production potential, I would take a look at Impact Silver (TSX:IPT) and Santa Cruz (TSX:SCZ), both of which trade on the Venture exchange in Canada.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Wurzel

    While I enjoyed the article, the statement that Fresnillo has underperformed silver bullion in recent years in incorrect. I have just visited the Hargreaves Lansdown site and produced a chart of Fresnillo versus PHAG over the last three years. Fresnillo has been ahead for all of the three years with the exception of a three month period round April 2011 when silver prices flirted with $50 a troy ounce.

    Dominic, send me your email address and I’ll send you the chart!

    Best regards from Somerset


  • Drums

    I wonder if this analysis on silver will be more accurate than your one on gold.

  • Silver Bug

    Interesting article – but it didn’t mention the manipulation of the silver market that’s going on by the big banks – JP Morgan et al. Until this is sorted – or something else really dramatic happens in the financial markets – then I think that the price will only increase slowly.

  • Andy

    I agree with Silver Bug. “Free Market” in some cases is an oximoron. I believe the Silver Market, being so small, is intentionally manipulated, especially by the shorts, which is why its price is depressed and remains so. Where are the regulators? We’ve had libor, now it’s time for silver! Stay away from this commodity, and probably gold too, unless you’re a JP Mortgan trader.

  • David

    Interesting article although I do feel that it plays down the potential size of the prize here. Many pundits are predicting that silver should hit $100 an oz or more in the coming years, particularly if the electronics, medical and solar industries continue to grow alongside an ever increasing demand for investment silver. Further economic woes could however see some downside but I doubt it will ever get below $20 again.
    Eric Sprott estimates that they are selling as much silver in monetary terms as they are gold for investment – that equates to 50 times more silver in volume terms. That trend cannot continue without much higher prices.
    I would be interested in your views on some of the up and coming explorers such as Arian silver (AGQ), Minco (MIO) and Herencia (HER). All have been in the doldrums and had issues for some time but I hear the market is about ready to turn as investors are starting to embrace more risk.
    Any thoughts?

  • Porkydawky

    I have got to say this article ignores some very real fundamental issues whilst concentrating on short term charting techniques in the casino. (Try and actually buy any physical at today’s market paper price, check out the premiums you have to pay to BUY the PHYSICAL METAL).

    In general terms for both gold & silver the quality of the ore being mined is reducing over time whilst the costs of production spiral forever upwards, not in large part as a rseult of the Queasy Money printing/currency wars all governments, but especially the US/UK/Japan seem to be engage in. Energy & labour costs are on the up and up.

    A refreshing and current look at the fundamentals of the silver market is put forward by Steve St. Angelo and I suggest any interested in silver read his articles for a reality check.


  • Phil

    Any thoughts on Silver Wheaton who trade on the Canada exchange? They are a so-called silver streaming company (as opposed to a miner) who fund actual mining companies and get silver at a very preferential rate (I believe around $5/oz) in return. They are considered in some quarters to be a less risky play than a miner.

  • Tim

    I may be wrong, I calculated that the entire yearly world production 0f 24000 tonnes of physical silver at current prices comes to around £16 billion pounds.
    Which is really quite a small value compared to the amount of money printing taking place around the world.

  • Marcus : Soyke-Matthews

    – My mantra is “if you can’t touch it see it feel it, you don’t own it” so until one own’s physical, ‘playing’ a trade should be secondary.
    – there is a huge difference between PAPER and REAL silver. There is apparently 400x as much PAPER silver as there is PHYSICAL silver available for delivery ie a fractional reserve scenario/ponzi scheme depending on your point of view
    – there is no true price transparency of the REAL metal we have price supression
    – manipulation by HSBC/JP Morgan of short positions further supresses the (paper) price
    – whatever ‘the government’ says, gold and silver are still REAL money which holds its VALUE (as opposed to price)
    Given extra money being created (fraudulently) by private banks’ ‘lending’ (& QE) the fundamentals suggest a switch of paper ‘investments’ to real money – ie physical gold and silver.
    To my mind, this is the greatest wealth transfer opportunity in this lifetime.

  • optimus prime

    the silver crash is imminent judging from the chart that is just too obvious to ignore. if that really happens you guys heard it here first.

  • Martin

    Silver has been fairly static now for about a year. There was huge global physical demand back in late 2010/early 2011. Here in the UK bullion dealers were actually running out of 1kg bars! However, what we need to remember is that physical buying of the metal has, little if any effect on the actual price. It is only countries and traders who buy and sell ETFs (Exchange Traded Funds) that can really make the price move up or down. The metal is unlikely to see $50 now for some years in my opinion as prices of both silver and gold have, for the time being, settled to the levels of $30 and $1675 respectively.

  • Pon Da

    Interesting article – thanks. I too would be very interested in your opinion on the Silver explorer Arian Silver (AGQ). It seems to be heavily oversold and is about to start small scale production.

  • Marlon

    Stay tuned into to where silver is trading. I use Coininfo they have brand new charts that are awesome!

  • Boris MacDonut

    Since 1st March 2012 Commodities index as a whole is down 20% but Silver is only down 14%, so it may be able to hold a bit of value.

  • 4caster

    An interesting article about this interesting metal. Two comments:
    1. For an ETF I prefer PHSP, which is traded in sterling and can be held on more ISA platforms than PHAG, which is traded in US Dollars. PHSP holds physical silver, just like PHAG.
    2. Another way to hold silver long-term is in the Perth Mint Certificate Program. I held silver there from 2003 to 2011, but took my profits too early (in two batches to avoid CGT)! UK buyers should buy in sterling through GoldCore Ltd. You can even buy your own numbered bar, which they will store for you in their vault owned by the Government of Western Australia. You have to pay a little for insurance and storage. There is also a purchase premium, but you get the premium back when you sell too. You can take delivery of your silver bar whenever you want, but VAT would be charged if you bring it back to the UK!

  • Craig

    Hi Dominic,

    I do enjoy generally reading your articles but I think I have learnt over the years that you sir are merely a postman for others insight, which is fine because it’s my choice whether to read your stuff.
    However what is annoying is the boastful mention of previous tips (First Majestic) in light of the majority of dogs that you previously “tipped”. As they say “even a blind squirrel will find a nut” eventually.

  • Nick Fury

    From reading around a bit it does seem that Gold and Silver prices are being controlled, as ETF’s and other B/S paper representations are massively & corruptly being over subscribed/sold. What’s worse is people are actually being charged storage and insurance for bars of it that don’t even exist! it’s a good business in itself; no overheads! If everyone who has been promised a bar of Gold/Silver actually tried to demand delivery the game would be up! but like our bank combined deposits it rarely happens and we allow this scum to play their game and line their pockets!

  • dialucrii

    Whilst I enjoy Dominic’s writing style, I find it very difficult to extract any meaningful advice from his articles on precious metals, mostly due to his his reliance upon charting. While I appreciate that charts can be incredibly useful in anticipating and timing the markets, it seems to me they have very little use in the current uncharted territory our economy is in. As such his articles tend to read along the lines of “last time x reached that level it was a tuesday and it immediately dropped to x”, followed by ” but then again this or that might happen which would result in y”.

  • dialucrri

    If there is one thing anyone take from the last 6 years it is that our markets are undoubtedly manipulated to varying degrees, such that charting can be relied up on as it might be in a more stable economy. These days the markets’ directions are dictated by the motivation of those with the, now unarguable, power to manipulate them. There are just too many powerful parties with an interest in suppressing gold and silver just now that it seems inmpossible to predict how things will go in the short term. I do think the grip those parties have over the PM metals will be lost at some point, no doubt when this fiat house of cards falls and people panic into them. I just wish I knew when that would be.

  • dialucrii

    That should have read “charting canNOT be relied upon”

  • Ben

    Even some of the smaller silver explorers (like AGQ Arian) are dual listed and as such can be held within your share ISA, making profits exempt from CGT. These cheap silver explorers on the verge of production (like Arian) with a strong resource are perhaps worth a special feature? btw many thanks for your articles.

  • aff

    If you look at silvers bull run on a logarythmic scale the orderly nature of its rise is much more apparent with a clear trend in place over longer time scale. This correction is nowhere near as deep as some previous ones but has tested my patience no end. Price looks poised to climb in the near future. If it does fall to $15 dollars I’ll sell everything i have to buy as much as possible.

    I agree that there are bullion banks trying to keep the price down but to me that is ultimately a futile exercise and just builds more pressure for a bigger siesmic move up eventually. Manipulation can only work short term.

  • Lone Ranger

    Lest we forget, another factor for the case of owning silver is the Chinese are stock piling it for use in photo voltic technology. No matter how much the powers to be on Wall St. or in government continue to murder the market price of silver, ultimately the laws of supply and demand will ensure that the price for silver rises upward.

  • Segedunum

    I never quite understand why people who appear to be quite bullish on gold suddenly recoil in fear when it comes to silver. Yes, silver is a monetary metal Dominic and there has always been two.

    So, if you believe in gold then silver inevitably has to follow with it, and it has to multiply several times over just to keep pace with gold at all. There is absolutely no way it can possibly go back to $26 or below. No chance. It retested that and not even all the millions of ounces of paper silver in the world could get it lower. Every man and his dog goes on to places like the Kitco forums to talk about a silver crash that simply can’t and won’t happen. It’s hilarious to see.

    You buy it to hold on to for years to come. You don’t measure little percentage changes here and there over a few months or even a year or two. That’s where the big investments are made.

  • Boris MacDonut

    #24 What nonsense. How can Silver never return to $26? It has fallen from $38 to $30 in the last 11 months, why not further?

  • Boris MacDonut

    Having done Gold to death there is little mileage in it’s unlovely cousin. I note the Gold price is now down almost 10% in a year. A bit like Tesco, Waitrose, et al you are flogging a dead horse.

  • aff

    #24 – I also think it is highly unlikely silver will fall further. They could manipulate the price down further using naked shorts in the futures market or whatever, but in doing so the already seriously diminished stockpiles of real physical metal would be ravenously bought up. As we know silver has many industrial uses as well as monetary value. If the industrial consumers of it cannot get hold of it there will be chaos and possible default on the comex.

  • pon da

    re. arian silver – today’s rns is well worth a read – great news

  • kevin

    gold and silver are real money we keep makeing and printing more paper money which buys less and less I paid for a book resently wich exsplans all of this writen by michael maloney rich DADS ADVISORS i would recomend it though out history world powers have tried to get more from gold and silver by mixing other metles with gold and silver which as turned out to be the end of word powers we just print more money today which buys less and if you look at how much silver is left the is a lot less than gold and silver is used for a lot more things

  • Mios


  • foga boy

    if 2 million people across the globe buy just 200-250 oz of silver every year i belive silver will hit 1-10 with gold if gold is at $5000 by then silver will be near $500 i think silver under $70 might be a good buy for me and gold under $1500 if it does come back to that level