How to play a dip in the silver price

Silver has been a one-way bet for several years now. The price hit a new high at just below $40 an ounce this week. That’s a 31-year high. Just a few years ago the metal was trading at one third of that price. What’s going on?

Fears that global inflation may be about to lift off have helped silver’s cause. Like gold, it’s seen as an inflation hedge – mainly because central banks can’t print more of it on a whim.

Also, there are tentative signs that the US economy may be struggling out of recession. That, alongside growing emerging markets, could spur industrial demand – silver is still heavily used in semiconductor production for example.

And then, as the Telegraph’s Garry White notes, there’s investment demand – as more retail investors pile into exchange traded funds more silver is pulled out of the market by ETF custodians.

Yet despite all this there are reasons to be cautious short term even while remaining bullish further out. Here are three reasons why.

First off, rumors abound that central banks may put the brakes on quantitative easing and may even send money printing (as it has become known) into reverse gear. That would cut off the flow of hot money into commodities in general, including silver.

Next the gold to silver ratio (the number of times the price of one ounce of gold can be divided by the price of one ounce of silver) is now below 40 having been much higher just recently. So short term silver has surged relative to gold and may be due a pull back having taken the ratio below its long-term average of 40.

Finally if the US dollar rises, commodities priced in dollars will suffer.

Anyone looking to play a short-term silver dip can do so easily and cheaply via a spread-betting broker. But don’t forget to use a stop loss incase the silver surge continues.