Look what's happening to silver

published 23 January 2012

In the past, I've made the point that I'm not that keen on trading silver. Trading silver is to 'dance with the devil'.

But I never say never. The Right Side is all about looking for ways to make a profit. I'm not fussy about where those opportunities are.

Right now, in this environment, we just can't ignore precious metals. I normally favour gold over silver and I'm still holding my long-term gold position.

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But silver's starting to look interesting to me. Since I gave my last warning on silver, the price has tanked. After nearly hitting $50 in April last year it's had a nasty fall right back to around $26 just before New Year.

But since then, silver's put in an impressive 25% rally that could signal the start of a new bull run. It's up around 10% in just the past week.

When you get a big correction like we did in silver last year, followed by a strong rally, it can be a good sign that the trend has changed. And it strikes me that a near-on 50% retracement followed by a strong showing over the past three weeks could be just what we're looking for.

Here's the five-year chart for silver...

As you can see, long-term silver holders are still doing very nicely. But they'll have suffered some almighty pullbacks along the way.

And it's these sorts of pullbacks that can offer the perfect opportunities for people wanting to buy into a bull market.

But I reckon there are two key questions we need to ask before thinking about joining the silver rise. First, is the bull set to continue? Second, have we seen the bottom of this retracement?

Is the silver bull still with us?

I've made my feelings pretty clear about why I think Western currencies are due a reboot. Modern fiat money (paper without gold backing) seems to have a lifespan of about a working man's life. That's not an academic theory, but it looks about right.

There was a reboot after WWII. That was when the dollar became as 'good as gold' for international trade. That lasted until 1971 when the dollar lost its gold credentials. Since '71 the dollar (and Western currencies as a whole) has only been as good as the Fed's promise to keep it stable.

I suspect we're reaching the endgame for this approach... we're due a system reboot. What can we expect to come next? Who knows... but by my reckoning the transition period is likely to be good for precious metals and tangible assets.

For me that means gold. I'm sticking with my long position. And where gold goes, silver tends to follow. It's just that she's a little more volatile than I normally like.

Of course, volatility can lead to some tidy profits if you get your timing right.

Is now the time for a punt?

Until last week, sentiment on both gold and silver was on the floor. Talk about the end of the bull market in precious metals was all over the New Year press. And that's great. Because, as the saying goes, bull markets need a wall of worry to climb.

Think back to last year, before the fall. Silver was racing up almost every day. There was no wall of worry. Punters were throwing their money down with wild abandon. And that's what made me worry.

I suspect there's a good chance that the 'worry bottom' has passed. Last week was the first time in a long time that I saw greed replacing fear in the silver market.

Everything I see going on in the real world backs up my opinion on regime change in paper currencies. The currency war is still on. Fiat currencies are being destroyed and that's good news for precious metals.

Silver may well fall back a little after last week's cracking run. But if you're happy to live with the volatility then now could be a good time to get some exposure to silver.

Normally I would say that for precious metals physical possession is best. But unlike gold, you need to pay VAT on silver that's a 20% trading fee we can do without!

Though I have some silver tucked away in my safety deposit box, the larger part of my exposure is through spread bets and exchange traded funds (ETFs).

And I'm always very careful not to get carried away with using leverage to bulk up my position when I spread bet. Silver's volatility will almost certainly knock out any tight stop losses.

Spread betting companies won't ask you to put down the full amount of your exposure that means you could be on the hook for more than you put into your account.

Be careful. Work out your exposure first. Most providers quote silver by the cent. With the current price at around $32, that's 3,200 cents. On that basis every pound you bet on silver, gets you an exposure of £3,200 (yes, that's sterling not dollars).

Of course, you don't have to spread bet to get exposure to silver. In the past, I've looked at buying silver antiques.

The trick here is to try to buy as close to the spot price as you can. If you've got time, it's worth going to London's Hatton Garden area and asking a dealer to see their 'silver scrap'.

Yes, you have to pay VAT when you buy this physical silver and yes, you may have to give your stash a good polish every once in a while. But then again, there's plenty of pleasure to be had here. If you can find something you really like in sterling silver and close to the spot price (plus VAT!) then you're in clover.

Let us know how you get on.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.