It’s hard to believe that we’re almost halfway through 2012.
There was one metal that I have expected big things from this year.
But so far…its investors are not sitting on any gains at all.
After soaring nearly 40% in the first few months of the year, silver then steadily gave back all these gains over the following 4 months.
It’s famous for this kind of volatility.
And at the current knocked-down price, it’s the perfect time to look at this metal again…
A quick look at the five-year silver chart shows you the kind of ups and downs the price has endured.
Silver – the ‘rodeo bull’ of precious metals
Click here to enlarge
The silver price has come back to the US$27.50 level again in the last few weeks. The good news is that silver has found support around here many times in the last 18 months.
However, our technical guru, Slipstream Trader Murray Dawes, reckons we may see the silver price test this level, with the chance of silver dipping to the low 20′s in the process.
If this were to play out, then the fall in silver would be comparable to the fall in silver during the GFC, when the price more than halved. But don’t forget after that silver then gained 400% over the following 2.5 years.
No Friends for Silver
Silver has fallen out of the spotlight recently. According to Google Trends the volume of media coverage and internet searches are at new lows.
Speculators are out of the market as well. The net non-commercial (trader) silver positions on Comex are nearly as low as they were back in December 2011. When the levels fall this low, it tells you that the speculators have been squeezed out of the market and moved onto other pastures. And last time this happened, it marked the start of that 40% rally we saw in the first few months of this year.
This makes it the perfect time to take another look at silver.
And there are three things to watch for in the second half of the year, which could help silver turn around…
Good News for Silver
The big one is the possibility of more Quantitative Easing (QE) from the US Federal Reserve.
The Fed has hinted that they are still ready to deploy QE3 if the economy needs it. The main indicator Bernanke seems to watch is the flow of new jobs: The ‘non-farm payroll’ (NFP). The pace of new job creation has decelerated so badly that the unemployment rate is creeping back UP again.
We get the next instalment of the NFP numbers next Friday night (July 6th). If it looks like the trend for new job growth is still falling, the chances of the Fed stepping in with QE3 increases.
This matters to silver as it tends to rally strongly on QE – much more so than gold.
During QE1, silver almost doubled in price. Then during QE2 silver rose by around 40%. Should we get a third round, then I would be surprised if silver didn’t rally again.
Industrial Demand for Silver to Increase
Silver isn’t just an investors metal – a lot of it is used by industry too.
The silver institute estimated about 486.5 million ounces of silver is used for industrial applications. That’s out of a total 1,040 million ounces of total supply – so industry uses 46.7% of total supply. That’s nearly half.
Production of photovoltaic cells for solar energy is a big part of this industrial demand.
But very quietly, solar energy has started to take off in a big way.
Solar energy – parabolic increases in power production
Energy production from solar is still a miniscule amount of the global mix. It’s still less than 1%.
But my point here is that it’s rising fast. By the above estimates, it jumped 92% over the previous year.
CPM Group’s analysts reckon that each Megawatt Hour of solar panel production uses 2,000 ounces of silver. In that case, a jump of this size would generate an additional 57 million ounces of silver.
This kind of significant increase can make the difference between a silver market in surplus…and a silver market in deficit.
The world of solar energy is a complex one. I’m not game enough to say that this strong trend in growing solar power production will keep going exponentially. But seeing as we have seen ten years of consistent growth, it’s a brave man who says that the demands on the silver market from solar will ease any time soon.
Indians Switching from Gold to Silver
Aside from that, there is something happening in the gold market that may give silver demand an unexpected extra boost.
India has long been the biggest importer of gold, as well as silver.
But this year, India’s gold imports have fallen dramatically – as the Indian gold price is just too high for most buyers. The main reason for this is a falling Rupee, and also a new 4% import tax in India.
But silver is still affordable, and so Indian demand for silver is getting stronger. Mineweb reported last week that:
‘The high price of gold, however, has many investors betting on silver. “People’s appetite for investing in the white metal has sky-rocketed lately, with most consumers coming in and picking up silver coins in double digits,” said Sonamull Shah, bullion trader.
‘An official at Nakoda Bullion added, “Coin sales are picking up here. Compared to the last two months, sales are showing good recovery, since all those who cannot afford gold are now buying silver.”’
So silver may be going through the doldrums right now. There is little press, hardly any trading, and the price has come fallen dramatically in the last 15 months.
But all this makes it the perfect time to take another look at it.
And don’t forget over the last 10 years, silver has gained an average of 22% per year. Its best runs have always come after a long slow patch like the one that – if I’m reading it right – is drawing to a close now.
Dr. Alex Cowie
Editor, Diggers & Drillers
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
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