- Money Morning Australia

What’s Next for the Silver Price?


Written on 16 May 2013 by Dominic Frisby

The problem with <b>silver</b> is that it's frustrating. The <b>silver price</b> will re-test its recent lows, then rally, before falling and then rising again...

Looking back at the articles I’ve written about silver over the years, if there’s one theme that keeps recurring, it’s the word: ‘frustrating’.

Silver can meander about and do nothing for years. Then, when your back’s turned, it’ll suddenly spike to unheard-of levels, making its owners rich.

Then, just as suddenly, it’ll plummet, leaving all those who hold the metal heading for the poor house.

Yet, for all its volatility, for all the dark rumours of shortages and manipulation, it trades in a remarkably symmetrical pattern.

For a few brief hours in the spring 2011, it cost $50 an ounce. Now it’s less than half that price, at $23.

So is it time to be playing the silver game once again?

Silver Promises Something for Everyone

Silver’s unique selling point is that it’s both a monetary and an industrial metal.

If you get terribly excited by the progress human beings are making in the world of electronics, you might want to invest in silver. Its high conductivity means it finds all sorts of increasing usage in computers, mobile phones and screens.

Or perhaps you’re excited by the possibilities in the worlds of nanotechnology, green technology, and even medicine.

Well, silver is finding more and more use there too – the path from solar technology to water purification is lined with silver. Then there are the ball bearings, the batteries, the soldering and brazing – silver remains a key industrial metal.

Perhaps you think that soaring stock markets are telling us that the world’s economic woes are now behind us. Greater prosperity leads to greater buying of jewellery, which means greater buying of silver.

Or perhaps you’re more of the mind that systemic debasement of money is going to lead to some kind of currency crisis. In that case you want to be investing in tangible, monetary metals. Cue silver.

You might look at the fact that annual global silver production currently stands at around 24,000 tonnes, but demand stands some 33% higher, at 32,000 tonnes. (The shortfall is met by recycling, scrap sales, stockpiles and central bank sales).

Then you might look at the cumulative effect of this shortfall, as depicted below by Nick Laird (sharelynx.com), and once again you’ve got that itch to buy silver.

Global Silver Production


Cumulative production less cumulative demand = cumulative deficit

Or you might look at the fact that silver derivative trading can mean that paper representing as much as 100 times physical production can be traded on the futures exchanges in any given period.

It’s not hard to conclude that some sort of short squeeze is inevitable, as it would be impossible to deliver all the silver that is actually sold.

You might even consider the fact that there is about 16 times as much silver in the earth’s crust as there is gold. So arguably the silver price is should be 1/16th the gold price: that’s $90 an ounce on current gold prices.

There’s something for everyone with silver. Quick. Buy, buy, buy.

The Biggest Problem With Silver

Of all the investment stories out there silver must be the easiest sell. The problem, however, is a failure to deliver on its potential.

Like I say, the problem with silver is that it is frustrating. In fact, that it frustrates is its single, greatest consistency.

$50 was the high it made in 1980. That price was an aberration, but even so, with all the inflation that’s gone on since, it’s amazing to think that a metal can be trading at less than half its high of 33 years ago.

Copper, for example, even with its current woes, sits at more than double its 1970s blow-off top.

Silver can rise like a rocket and fall like a stone. But if you trade the metal with your eyes wide open, aware of its potential, but also aware of its record, there’s money to be made. There are no hard and fast rules. But the chart is symmetrical.

The chart below shows a monthly price chart of silver since 2001.

I’ve drawn some dotted lines at key levels. It’s worth having these levels in mind at all times with silver. For all the meandering, the frustration, the rocket launches and the capitulations, these levels are a magnet for silver. It just keeps coming back to them.

You can see there are certain pivot points – lines of resistance and support. $8 was resistance from 2004 to 2005; it became support in the 2008 collapse. $15 was resistance from 2006 to 2008, but in 2010 it became support. $26 was support in 2011 and 2012 – now it’s resistance, as is, higher up, $36.

And of course there’s the great target in the sky, $50.

Watch the $22 an Ounce Mark Closely

At present, on the monthly chart, silver is in free-fall, but it’s sitting just above support at $22. I am watching closely to see if it holds that number.

The bounce after its recent collapse has been all but non-existent, which does not bode well. The reality is this is a market that is trending down. I’m in no rush to buy more just yet.

That said, given that silver is trading so close to that key level just now, there’s a case to buy at just above $22 with a stop-loss just below. If $22 breaks, the next line is $19, and after that $15. Similarly, if it rallies to $26, there’s a strong case to short, with a stop just above the $26 mark.

Just remember that a trader needs to be flexible. Accept that the market knows better than you. For all the arguments to buy silver, you can’t argue with the price.

But since I am writing a column, I’ll make a prediction and be willing to be proved wrong. Silver will re-test its recent lows of $22, then rally to $26-$27, before falling to $15. And from there it will rise to $50.

Dominic Frisby
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

Join Money Morning on Google+

From the Archives…

Why Small-Cap Resource Stocks Beat Blue Chips Hands Down
10-05-2013 – Dr Alex Cowie

Can Australian Stocks Defy Gravity if The Australian Dollar Falls?
9-05-2013 – Murray Dawes

Build Wealth Fast through the Resource Sector
8-05-2013 – Dr Alex Cowie

36% Potential Upside for Australian Stocks Over the Next Two Years
7-05-2013 – Kris Sayce

The Key to Becoming a Successful Investor
6-05-2013 – Kris Sayce


Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


1 Comments For This Post

  1. jill Says:

    I read somewhere that silver could go as high as $7000.00 an oz. is that possible? and if it is, would it be years?

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery

openX sidebar signup form
Openx pos2
Latest Stock Market Updates
  • ^NDX4317.988+29.759 - +0.69%
  • ^FTSE6723.42-5.75 - -0.09%
  • ^AORD5302.100-79.300 - -1.47%
  • ^AXJO5317.500-83.400 - -1.54%
  • AUDUSD=X0.8491
  • USDJPY=X118.285
openX sidebar banner
Openx pos7
Iron ore leadgen
WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…


Absolutely mind-blowing beyond my expectations

– D.A.C. Hall


The BEST INFORMATION available,
contrary to mainstream economic reporting.

– L. Sceresini


Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay


Click here to watch
the brand new Highlights Reel.

Blue Chips

Receive our unique and useful investments ideas straight to your inbox for FREE, enter your email to sign up:

x