What’s next for the silver price?

Looking back at the articles I’ve written about silver over the years, if there’s one theme that keeps recurring, it’s the word: ‘frustrating’.

Silver can meander about and do nothing for years. Then, when your back’s turned, it’ll suddenly spike to unheard-of levels, making its owners rich.

Then, just as suddenly, it’ll plummet, leaving all those who hold the metal heading for the poor house.

Yet, for all its volatility, for all the dark rumours of shortages and manipulation, it trades in a remarkably symmetrical pattern.

For a few brief hours in the spring 2011, it cost $50 an ounce. Now it’s less than half that price, at $23.

So is it time to be playing the silver game once again?

Silver promises something for everyone

Silver’s unique selling point is that it’s both a monetary and an industrial metal.

If you get terribly excited by the progress human beings are making in the world of electronics, you might want to invest in silver. Its high conductivity means it finds all sorts of increasing usage in computers, mobile phones and screens.

Or perhaps you’re excited by the possibilities in the worlds of nanotechnology, green technology, and even medicine. Well, silver is finding more and more use there too – the path from solar technology to water purification is lined with silver. Then there are the ball bearings, the batteries, the soldering and brazing – silver remains a key industrial metal.

Perhaps you think that soaring stock markets are telling us that the world’s economic woes are now behind us. Greater prosperity leads to greater buying of jewellery, which means greater buying of silver.

Or perhaps you’re more of the mind that systemic debasement of money is going to lead to some kind of currency crisis. In that case you want to be investing in tangible, monetary metals. Cue silver.

You might look at the fact that annual global silver production currently stands at around 24,000 tonnes, but demand stands some 33% higher, at 32,000 tonnes. (The shortfall is met by recycling, scrap sales, stockpiles and central bank sales).

Then you might look at the cumulative effect of this shortfall, as depicted below by Nick Laird (www.sharelynx.com), and once again you’ve got that itch to buy silver.

Global silver production

Cumulative production less cumulative demand = cumulative deficit

Silver demand and production chart

Or you might look at the fact that silver derivative trading can mean that paper representing as much as 100 times physical production can be traded on the futures exchanges in any given period. It’s not hard to conclude that some sort of short squeeze is inevitable, as it would be impossible to deliver all the silver that is actually sold.

You might even consider the fact that there is about 16 times as much silver in the earth’s crust as there is gold. So arguably the silver price is should be 1/16th the gold price: that’s $90 an ounce on current gold prices.

There’s something for everyone with silver. Quick. Buy, buy, buy.

The biggest problem with silver

Of all the investment stories out there silver must be the easiest sell. The problem, however, is a failure to deliver on its potential.

Like I say, the problem with silver is that it is frustrating. In fact, that it frustrates is its single, greatest consistency.

$50 was the high it made in 1980. That price was an aberration, but even so, with all the inflation that’s gone on since, it’s amazing to think that a metal can be trading at less than half its high of 33 years ago.

Copper, for example, even with its current woes, sits at more than double its 1970s blow-off top.

Silver can rise like a rocket and fall like a stone. But if you trade the metal with your eyes wide open, aware of its potential, but also aware of its record, there’s money to be made. There are no hard and fast rules. But the chart is symmetrical.

The chart below shows a monthly price chart of silver since 2001.

Silver price chart

I’ve drawn some dotted lines at key levels. It’s worth having these levels in mind at all times with silver. For all the meandering, the frustration, the rocket launches and the capitulations, these levels are a magnet for silver. It just keeps coming back to them.

You can see there are certain pivot points – lines of resistance and support. $8 was resistance from 2004 to 2005; it became support in the 2008 collapse. $15 was resistance from 2006 to 2008, but in 2010 it became support. $26 was support in 2011 and 2012 – now it’s resistance, as is, higher up, $36.

And of course there’s the great target in the sky, $50.

Watch the $22 an ounce mark closely

At present, on the monthly chart, silver is in free-fall, but it’s sitting just above support at $22. I am watching closely to see if it holds that number. The bounce after its recent collapse has been all but non-existent, which does not bode well. The reality is this is a market that is trending down. I’m in no rush to buy more just yet.

That said, given that silver is trading so close to that key level just now, there’s a case to buy at just above $22 with a stop-loss just below. If $22 breaks, the next line is $19, and after that $15. Similarly, if it rallies to $26, there’s a strong case to short, with a stop just above the $26 mark.

Just remember that a trader needs to be flexible. Accept that the market knows better than you. For all the arguments to buy silver, you can’t argue with the price.

But since I am writing a column, I’ll make a prediction and be willing to be proved wrong. Silver will re-test its recent lows of $22, then rally to $26-$27, before falling to $15. And from there it will rise to $50.

How do you invest?

You can buy physical coins, or bullion from a dealer such as Bullionvault, Goldmoney and Goldcore. There are exchange traded funds such as ETFS Physical Silver (LSE:PHAG).

On the mining side, there are proper legitimate producers such as silver miner Fresnillo (LSE:FRES), First Majestic (NYSE:AG), Silver Crest (TSE:SVL) and Fortuna (NYSE:FSM). Or there are the outside bets, such as Huldra (TSE:HDA). And then there are the Aim explorers. Avoid. Many will cease to exist as public companies within a year or so, if current conditions continue.

And, of course, there’s the antique shop down the road – who knows what you might be able to pick up there? I have some physical silver, which I bought a long time ago. I drink my early morning glass of water from a silver jug. On my desk is a kilo bar. On my mantle piece some high-grade ore from a mine I once visited.

If it has one of its mad rushes up, I’ll always have some exposure. If it goes to one or two hundred dollars an ounce, I’ll sell – but not before.

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

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27 Responses

  1. 15/05/2013, Bob wrote

    Yes, I think it will break 22, perhaps go as low as mid 19s, and then bounce up to around 26 – at which point loads of people burned on silver will be looking to bail out. Then, IMPO, silver will plunge back down below 19 – at which point I am not so bold about predicting where it might then go. It could shoot up to 30 or more but it could also go down to 7 bucks. All depends on how or when such a plunge takes place.

    Gold is going down with it.

  2. 15/05/2013, Malkovich wrote

    Wow, Bob. You must be really excited with the current situation – you are soon to be financially independent for sure.

    I wish I new where the market was going to go with such exactitude!

    M

  3. 15/05/2013, Trudi wrote

    …not a comment, more of a question really, would like others’ views?

    Despite it’s other uses, given silver generally tends to follow gold’s ups+downs, should we really consider it in the same category when re-balancing our portfolios % holdings?

    eg. some suggest a gold holding of 5-10% of your portfolio, should silver also be included within this %…may be platinium shouldbe included as well?

    …what do you think/do?

  4. 15/05/2013, Bill wrote

    So what does the market have to do with the price of silver? It the market set the price there would not be shortages in silver. The price is OBVIOUSLY being manipulated or just set by those in power to do so.

  5. 15/05/2013, Sam Cow wrote

    I guess Nick Laird’s chart line of production does not include recycled scrap? If it does not, there’s no knowing how much scrap is plugging the deficit.
    Otherwise, a very pertinent piece.

  6. 15/05/2013, Tim wrote

    If you do an internet search for: demonocracy silver
    The website has some interesting infographics about physical silver and how much silver they believe exists in the world.

  7. 15/05/2013, nobackmuscle wrote

    Fail.
    There are many metals that can replace Silver and if the price masters keep the price down till there is no more who says Platinum or Palladium could not be priced to replace Silver.
    YOU ALL FAIL.
    Silver is a representation of of REAL money. REAL money comes from work. As long as guys like Dominic have hands softer than my girl Silver will be what ever the guys with the Military Bernankes say.
    Silver will have value for US WASP’s when we are the labor who makes what we wear, drive and live in.
    Until then everyone is just a nagger enslaved to the idea they can take care of themselves yet cannot even do one pull up.

  8. 15/05/2013, Banker wrote

    I would love to own some physical silver just for pleasure but is thre any way to avoid VAT? Also would like some silveware / cutlry at rasonabl prices i.e. price of a good steel set plus the actual silver cost not lik 5-10 times th cost of silver in it!

  9. 15/05/2013, Jim C wrote

    The biggest argument against holding silver is that our overlords hate it because of its history as a monetary metal, and will do everything in their considerable power to keep its price down.

    The biggest argument for holding silver is that our overlords hate it, because of its history as a monetary metal, and will do everything in their considerable power to keep its price down… until they fail, as virtually all price-suppression schemes have done throughout history.

    Whether this failure – and resultant price spike – occurs within your investment timeframe is the real question. If you think you’ll be needing to cash out your silver holdings within the next 3 to 5 years, I wouldn’t hold much of it. People have been forecasting an ‘imminent’ comex default for years and it hasn’t happened, so don’t bank on it happening anytime soon.

    But if you’re thinking 10 – 20 years, owning it is a no-brainer.

  10. 15/05/2013, Colin Selig-Smith wrote

    Mmm. The USD price isn’t so important, USD is strengthening at the moment with the US economy rolling over. Give it a bit, they’ll up QE to keep up with the Asians.

    More importantly the gold/silver ratio is trending higher, so swap your gold out for silver when it goes up. Then swap your silver for gold when it drops back below the average. If it gets to 70 I’m dumping my gold and buying silver.. I’m expecting it to get there as the economy deteriorates further.

    Kitco have some good charts:
    http://www.kitco.com/Gold_Silver_Ratio_Charts/gold-silver-ratio-charts.html

  11. 15/05/2013, Steve wrote

    ”What’s next for the silver price? That’s easy – down then up. Probably alot. Timescale unknown and depends on policians/banksters.

  12. 16/05/2013, Dr Bob wrote

    “Looking back at the articles I’ve written about silver over the years, if there’s one theme that keeps recurring, it’s the word:”

    ‘idiotic’

  13. 16/05/2013, silvio wrote

    You say silver will drop to $15 then rise to $50, but then say you wont sell till it rises to $200. So which is it? Do you expect it to further rise fom that $50, to $200 ??

  14. 16/05/2013, SSS wrote

    From what I know is, silver will stay around 22.5 and then bounce to 30 and fall again to 24 and settle around there.

    This is a good time to buy….

    100 is not possible. Silver will never cross oil!

  15. 17/05/2013, Malkovich wrote

    I know that MW need to keep writing stuff about this, but it is really all very simple.

    Silver is currently trading at around £15. It may fall from this price and it may go up quite a bit too. How it is going to move CANNOT be known. You may have a view but you do not KNOW.

    Rather than wasting time trying to predict where price is going, you need to react to where price IS.

    Silver is a tangible thing that will never have zero value but you have to accept that the price could drop to near zero. You should have an idea of the amount of capital that you wish to allocate to silver and then work out how much you will deploy at each possible price level.

    This is the ONLY way to consistently make money – by reacting to price. Trying to predict price and taking action according to that prediction (going short because you predict a fall to £5 an ounce or ‘backing up the truck’ because you predict a rise to £50) is a sure fire way to lose money.

    Good luck all.

    M

  16. 17/05/2013, Boris MacDonut wrote

    #14 SSS. You suffer from delusions. This is not what it will do, but what you in your limited knowledge think ,or hope,will happen.
    These metal/commodity articles would be funny if they weren’t so sad and tragic. Teeming with know- it-alls. I don’t believe you.

  17. 17/05/2013, pusser wrote

    16. Malkovich. Could you give me a clue as to how or what has to be worked out and how you would allocate the portions of the total sum you have set aside. (Not your real figures of course but examples perhaps based on £50k or maybe £100k will be easier to understand if it involves percentages). Thank you in advance for your time.

  18. 18/05/2013, Segedunum wrote

    @16 Boris: Silver has already been to $30 and I’m afraid the pattern silver is following now is exactly what happened before 2008 – except on a bigger scale. Central banks know the score and silver will follow gold as it always has done. That’s where the smart money is.

    What truly is tragic and delusional is the know-nothings who are utterly desperate to tell us that things are fine and that it will all be OK. Mervyn tried to do that, again, last week, conveniently painting over that all his inflation and growth forecasts have been utterly wrong – by a long way.

    However, if you want to transfer your wealth to the rest of us, who am I to argue?

  19. 18/05/2013, Malkovich wrote

    @16 pusser: There are many ways that you could go about this. The most obvious is to allocate say, a maximum of £100K to silver and draw up a plan to take a £5K position now and then purchase an additional £5K for each £x decline, all the way down to zero. You could also plan to sell some of your purchase at each £x increase from the purchase price.

    This will ensure that if price drops to a level you can hardly believe now that it could go to, you will be in a position to take advantage of the price level.

    M

  20. 18/05/2013, Malkovich wrote

    19…

    You could be a bit more sophisticated and time your buys with levels of support and resistance and maybe rather than equal allocations you could allocate more capital at lower prices.

    Either way, the important thing to do is spread the purchase over the entire price range and do not over allocate at any level.

    With this strategy you do not fear the market, you just react calmly to whatever reality presents itself.

    M

  21. 18/05/2013, Bo wrote

    Good advice by Malkovich.
    Thats the best way to buy it.
    Speaking of which its currently quite cheap so best take advantage of that right now.

  22. 19/05/2013, Boris MacDonut wrote

    The doom-mongers keep telling us houses must go back to their long term ratios to income. If silver goes to it’s long term ratio to gold, it must lose another 15%.

  23. 22/05/2013, Segedunum wrote

    Silver has to lose 15% to get to it’s long-term ratio with gold?! Where do people come up with this tripe? Silver’s historical average to gold has always been 12:1. It’s currently hovering around 60:1.

    As for house prices, even in places in the country where prices have fallen they are still several times that of an average person’s salary and well beyond that of the traditional ratio – and that’s with interest rates at the lowest they are ever going to get. There’s nothing to sustain them apart from monetary inflation.

    Mervyn parted with a warning about another subprime crisis and the printing will really begin once Carney arrives. Those who haven’t converted their wealth into something of solid non-printable value are going to be very badly hit. There’s nothing to be optimistic about.

  24. 23/05/2013, Boris MacDonut wrote

    #23 Segedunum. Like the House Price doomsters you seem to consider the short term to be normal. The Silver to Gold ratio has been around 16 or 17 for much of the last hundred years, but in the previous 500 was more like 45 to 1. I actually miscalculated the necessary drop, it is 25% to return to the LONG term average ratio. But then I don’t really believe this anymore than those who propound a normal level for house prices.Iit could fall, or it could “hi -ho silver away !”

  25. 24/05/2013, Malkovich wrote

    # 22 – 24

    The problem is that there is no such thing as “normal” any more We are now in totally uncharted waters, with an entire global financial system built on shifting sands.

    Ratios of the past mean nothing – certain ratios may look out of whack and conventional wisdom says that a reversion to the average is required. The simple fact is that, in this current wholly dysfunctional financial system, the ratios could just get further out of whack.

    There is little point in sticking your flag to the mast and arguing for relative valuations of this or that asset – this will ultimately be wealth destroying. The only solution to this problem is to embrace the fact that you DO NOT KNOW where the ‘price’ of anything is going. Don’t predict, react to where prices ARE.

    M

  26. 26/05/2013, Segedunum wrote

    @24: No Boris, I’m afraid the average ratio has never been that high and the comment about silver losing 15% to get to its long-term ratio is another sleight figure you pull out of goodness knows where – some dark orifice somewhere. I hate to be impolite but you do this consistently. 25% is…well….. You obviously don’t do maths very well even if you follow your own idea of ratios……

    Inflation is going to continue to happen, as sure as eggs are eggs. Long-term tangible and stable monetary assets (not a house) are where people are going to end up being desperate to be. Sadly, there won’t be any.

  27. 13/06/2013, Boris MacDonut wrote

    #27.Segedoomnumb. The dark orifice to which you refer is a series of history books and even data provided by that dubious domm monger Niall Ferguson in his book about money. Inflation is about to fall below 2%.

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