Thursday, August 11, 2011

The Silver price tug-o-war‏

One question I have received a few times over the past couple of weeks is “Why isn’t Silver rising with the price of Gold?”

In all honesty there are probably a variety of factors at play which is causing the price of Silver to diverge from Gold’s amazing rise. I would suggest the main reason currently is that Silver is in the middle of a price tug-o-war.

Unlike Gold, Silver’s primary demand comes from its industrial uses. Given the recent astockalypse I suspect the world is coming to the realisation that we are staring down the barrel of a global recession (potentially depression in parts). I think this reality (reduced industrial Silver demand due to economic slow down) is weighing heavily on the price of Silver and trying to pull the price down.

On the other side of the equation we have systematic risk steamrolling through the Eurozone as the sustainability of sovereign bailouts is questioned, the confidence in their banking system is eroded and rumours/reality of rating downgrades rolls through from country to country. It’s the systematic risk in Europe, US and elsewhere, as well as the search for a currency that is not plagued by an incompetent government/reserve bank that is pushing investors to look for monetary alternatives. Gold has been that alternative safe haven for the last couple of months, making impressive spikes higher as the crowd looks for somewhere other than a crashing stock market and currencies that are being debased. Silver also has history of use as money, so the monetary aspects of Silver are currently trying to pull the price higher with Gold.

So in short:

Silver’s industrial demand & properties are pushing the price down.
Silver’s monetary demand & properties are pulling the price up.
So it sits in limbo, trapped within a small price range.

My concern is that if the nature of metals as a safe haven is questioned (even short term) causing Gold to correct significantly, then we are likely to see Silver get SMASHED. A falling Gold price could also come around from the collapse under the weight of its own parabolic rise or maybe the just announced (or future) CME margin hikes (Gold’s just increased by 22%) will push the price down.

As I have pointed out in the past… following similar price spikes (in Silver) to the one we saw earlier this year, in 2004, 2006 and 2008, the price of the metal remained subdued and consolidated at lower levels for a lot longer than 4 months before moving onto new highs. There’s no reason to expect any different this time around unless we are heading into the final parabolic peak of this bull market.

David Morgan was recently quoted as saying: “You could see gold and silver react to the downside, perhaps dramatically—$5/ounce (oz.) silver is not entirely out of the realm of possibility”.

We need to consider that in the event of another destructive banking or sovereign collapse the instinct of many won’t necessarily be to buy metals for protection straight away. A lot of Silver ETF owners may need to liquidate as margin calls are made on their other assets, which will reduce the amount of Silver held by these funds and increase supply to the market at the same time as industrial demand is waning. This could be the driver of a price collapse and while I think $5 is extremely unlikely (but possible), I do think Silver under $30 is likely at some point in the near future (as previously discussed in this post) when this crisis escalates and before the final parabolic blowoff top that will come later as the public rush in.

All the above said I still hold a core physical position in Silver (roughly 1/3 the value of my physical position is Silver) which I don’t intend on selling until we see much higher prices. I will be looking to add to the position on any significant falls in the price of the metal.


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  1. a tumble in gold will see me smile

  2. Would be healthy to see a correction given the parabolic nature of the last $200 gain in the price of Gold!

  3. I think the another factor is that central banks are generally uninterested in silver and hold little to no silver (and hence while central banks have become net buyers of gold, helping to lift and support gold's new high price, the same is not true for silver).

  4. I've been thinking the same about the tug of war but you explained it so clearly. Thank you for your excellent posts, especially the past few weeks. An aussie perspective is needed and you are doing a great job BB!

    I don't think we will see silver under US or Aus $32 ever again. I will buy if it does go that low again for sure though. No complaints from me there as people will buy more of it once gold gets too expensive.

  5. hungry_jono, definitely think the central bank purchasing is pointing towards a more sustainable rise in Gold, although interestingly there was comments out of China earlier this year indicating they would be adding to their 'Silver Reserves':

    Thanks Dave. You could be right about Silver holding the $32 mark.