How the ‘China Money’ Could Push Silver 58% Higher in 2013

If the mainstream perceives gold investors as cranks, they see silver investors as the real nutters out there.

Yet this scorn is misplaced. In the space of just one decade, silver has quietly gained 233% – and that’s even factoring in the rising Aussie dollar.

This 233% gain means that if an Aussie investor had bought A$15,000 of silver in 2003, it would be worth A$50,000 today.

The gains have come in fits and starts – as is the way with silver. However the average gain for Aussie dollar silver has been 16.3% per annum, which puts it well ahead of Aussie dollar gold at 11.6% per annum.

The trick is to maximise your gain by timing your entry.

And the good news is that after two slow years for silver, it now looks more than ready for its next big rally.

In 2012, silver notched up just 5.4% (I’ll refer to all gains in Aussie dollar terms). This was a pretty disappointing year for silver, particularly as it was sitting above 20% as recently as late November.

And back in 2011 (a nightmare year for silver investors) it finished the year with a loss of 10.8%.

So silver has had a couple of years in the wilderness now.

And this could pave the way for a big 2013. Take a look at this chart I’ve put together for you below to show how wildly silver’s performance has varied in the last ten years.

Aussie dollar silver: slow years followed by a few big years
 

Aussie dollar silver: slow years followed by a few big years
Source: Money Morning Australia

The pattern with silver is very much one of a few slow years followed by a few big years. For example, after a dismal 2007-2008, silver went on to gain 15.8% in 2009, then an epic 58% in 2010.

So after enduring a very weak 2011-2012, the chances are now much higher that we see some real action from silver in 2013. Another year like 2010, in which we see silver gain 58% is entirely possible from here.

Technical set says: now is a good time to buy silver
 

Looking at annual performance statistics is a bit misleading of course. Using the 1st of January and 31st of December as start and end-dates respectively is totally arbitrary.

A slightly different picture may emerge if we used May the 7th as our start date, for example. The silver price is dancing to a beat that has little to do with when we celebrate the New Year, after all. An ever increasing amount of silver is bought by China, which observes a totally different New Year.

So looking at annual performance is just a starting point. Taking a step back and looking at a ten-year, weekly silver chart gives a more comprehensive view, as well as a good idea of where we are in the rally.

Aussie Dollar silver up 233% in a decade – and trend intact
 

Aussie Dollar silver up 233% in a decade - and trend intact
Source: stockcharts

Over this time, the 200-week moving average (red line) has been remarkably steady. This strong trend is still very much intact, and has driven Aussie dollar silver to a 233% gain over the last decade.

Even in the chaos of 2008, 2009 and 2010, the price rarely broke below this 200-week level. It has given excellent support. And buying at, or close to, this level has proven to be good timing, and a great opportunity.

And it’s one I think we are looking at again right now.

After slipping in December, the silver price is A$28.70 today, just a few bucks from the current 200-week level of A$26.50.

Last time silver got this close to the 200-week was back in July last year. Without first reaching the level, the silver price took off like a stung cat and soared 28% in a few months.

So I think silver looks like a great entry level around these prices.

Silver has really got close to the 200-week moving average in the last ten years, so it’s hard to see it falling much further. However, if it does fall a few more dollars further to reach A$26.50 (the current 200-week level) then that would be the clearest buying signal for three years.

Silver sailing on the same strong winds

Projecting the trend to continue like this of course assumes that the macro forces that have pushed silver up in the last ten years are still active.

This is absolutely the case.

Investor demand is still raging, and record sales from major mints keep hitting the headlines. Institutional demand for silver is just as active, with institutions now owning around 50-60 million ounces of silver in the silver ETF, ‘SLV’.

Some big silver bets went on when Obama was voted in for a second term, as silver was the best performing commodity during his first term. Investors are betting that his second term will see just as much money printing and debt accumulation as his first.

With QE3 underway, and QE4 to commence presently, they made the right bet. And with Japan now pumping out the Yen too, there will be no shortage of paper, while the global silver inventory is relatively steady – and small too at just A$50 billion in value.

A real game changer the market hasn’t caught onto yet is Chinese silver demand. Although China has a huge silver mining industry, it can no longer meet rapidly growing domestic demand. And in the last few years, it has gone from a serious exporter to a significant importer of silver. This changes the dynamics of the market completely.

You can see the red bars below under the axis (which show China exporting silver) gradually decrease, and then swing above the grey bars (which shows China net importing silver).

China: the new silver elephant in the room
 

China: the new silver elephant in the room
Source: world gold charts

It’s a familiar story. We saw China become a huge importer of gold in recent years as its demand overtook its domestic production. Now China is steadily buying gold on all the price dips, and the same is also now true of silver.

The black line in the chart shows the amount of silver potentially held in China. The rocket-like trend shows no sign of slowing! So, assuming no big jump in domestic production, I’d expect Chinese silver imports to explode very soon.

After a few tough years for silver, including getting beaten up twice in 2011, and a few false starts in 2012, we are now looking at a very cheap entry – and this year looks good for silver to shine brightly again.

Dr Alex Cowie
Editor, Diggers & Drillers

Money Morning Australia