Silver Price - Boom or Bust?

Trading Silver – Boom or Bust?

The price of silver has been unusually volatile this last year, with some calling for the bubble to collapse and others predicting silver prices to reach $50 per troy ounce in the medium term. My mood is certainly more silver than gold this week (with bronze being the only worse alternative), so please excuse my complete lack of humour, but hopefully my focus remains intact.

Silver Price Action

Silver is a very interesting metal. I mean, not only can it be used for water purification, but it’s illegal to use as a food decorative here in Australia. On a technical note, the silver bears have hit a significant amount of resistance around the 2860 mark, and the rebound to the top of the range (around 3285) has been swift, particularly in these last few days. What does that tell us? The buying power may be with the bulls in the short term, whose marketing focuses on the metal’s duel uses as an inflation hedge and component in industrial manufacturing. The 4 hour chart below highlights this latest move, but the big picture is a little different.

A daily chart provides a better medium term outlook for the silver price, and since 2010 the metal has rallied from $20, peaked at $48 in April 2011 and failed to retest $44 during the remainder of the year. Its correlation with equity markets is far stronger than that of gold, refuting a portion of the claims that it could benefit from a safe haven status, and considering the size of the selloff in April/May 2011 (those on the wrong side of the trade won’t need reminding of the numbers) $50 per troy ounce looks to be optimistic at best. Whilst the metal is used in industrial processes, they are not numerous (jewellery, photography, making some alloys) and assuming that silver hasn’t been grossly underpriced for the past 10 years, the price has no fundamental reason to almost double in the next few.

Short term is a different picture, and I would suggest trading rather than investing in the metal. Its correlation with equity markets should see it benefit from any European improvements, whilst the downside is limited by the large buyers that have recently made themselves known to the market. The selloff early last year was due to traders needing to cover positions by selling their most liquid investments (silver and gold), and so a repeat of this is relatively unlikely assuming that the European Union doesn’t decide to substitute Greece for North Korea. Similarly there may be a strong short trade on should the silver price fail to break above $33, but whilst it sits comfortably between bear ($20) and bull ($50) price targets, a long term investment appears unwise unless you have some strong views on the precious metal.

In the pipeline: US inflation waiting to spike

Bullish on: Mining stocks (Chinese easing of monetary policy to spur growth in the mining sector)

Bearish on: USDJPY (Japanese fundamentals and safe haven nature of Yen to drive the pair lower)

As always, please leave any questions or comments that you may have. If you would like some more information on the basics of trading, try www.tradingpimm.blogspot.com.