Silver has been a top performer among major metals this year, and it looks set to continue to steal the spotlight from gold, with investment and industrial demand for the white metal expected to rise.
“We could see a spectacular performance in silver” during the rest of the year, said Julian Phillips, a South Africa-based editor at SilverForecaster.com. “Silver, in addition to its demand [and] supply disjoint, will attract huge investment demand.”
Already, silver futures prices SIZ2 +3.17% trade above $32.60 an ounce, up about 18% for the quarter to date and up 17% from the end of 2011. Gold GCZ2 +2.01% , at more than $1,700 an ounce, has seen a quarter-to-date gain of 6% and less than 9% rise for the year.
“Investors see precious metals like silver and gold as hedges against the debasement of paper currencies,” said Elliott Orsillo, co-founder and portfolio manager at Season Investments LLC.
Much of the recent move in both silver and gold has been a reaction to rising expectations for more monetary easing on the part of the European Central Bank and the U.S. Federal Reserve, which tend to devalue currencies.
Orsillo warned that the market might have gotten a little ahead of itself regarding those expectations. “We could see a pullback and a better entry point [for silver] in the next couple of weeks,” he said, noting that silver tends to be more of a “high-beta play,” much more volatile than gold.
Overall, however, “quantitative easing acts as a catalyst for precious metals,” said Dawn Bennett, portfolio manager of the Bennett Group of Funds.
The Fed’s second round of quantitative easing, or QE, helped lift gold to a closing record of almost $1,900 and silver near $50 an ounce in 2011.
A third installment of QE will likely have an even greater impact and both metals will “retest, if not surpass, 2011 highs,” added Bennett. “While silver trades more volatile than gold, when the fundamentals for the safe-haven trade are in place, it performs extremely well and is affordable for any investor seeking refuge from the equity and bond markets or looking to hedge the dollar.”
Ratios
Silver’s lofty gain this year may be one that’s built to last, but also one that’s raised concerns over the risk of a steep pullback.
The rally in the precious-metals sector finally getting under way is “likely to be a good one,” with a record high in gold above $2,000 this year “a realistic target,” said James Turk, founder and chairman of GoldMoney.
For silver, although it comes with greater risk because it is not yet seen as money, the upside potential is even greater, he commented. “It is still largely seen as an industrial commodity and with global economic activity weak, people are not paying attention to what is actually happening in silver.”
“Slowly but surely, silver is being recognized as an alternative to owning gold,” said Turk, so around “54 ounces of silver accomplishes for you the same thing as one ounce of gold — it is money outside of the banking system.”
Watching that gold-to-silver ratio is among the things traders can do to help figure out whether silver remains a good value, thereby hedging some risk in the metal’s usually high volatile market.
After Thursday’s rally, the gold-to-silver ratio stood at around 52 ounces of silver for one ounce of gold. Read more on Thursday’s metals trading.
“Silver will outperform gold — meaning the gold/silver ratio will fall,” added Turk.
The historical norm for the ratio is 16 ounces of silver to one ounce of gold, so silver at current levels is undervalued relative to gold, he elaborated. “Because it is better value, silver will attract more money from investors than gold in the months ahead.”
Turk expects the ratio to fall to 30 next year, the same level it approached back in April 2011 when silver prices neared $50. In the longer term, silver will approach its historical 16-to-1 norm, he said.
Open interest
Traders can also look to open interest figures on the Comex division of the New York Mercantile Exchange to help gauge risks.
“There seems to be close correlation between turns in the silver market and speculative open interest,” which is the total number of long and short positions being held through the day’s close by speculators, said Phil Storer, director of trading at Dillon Gage Inc.
“The rationale is that when specs are out of the market, they are just waiting for some movement to draw them back in,” he explained. “The more out, the more back in.”
George Kleinman, president of Nevada-based Commodity Resource Corp., said that on the recent rally in silver to $32 an ounce from under $30, total open interest, which includes both commercial and speculative positions, “collapsed from highs for the year to the lowest levels in four months” indicating that “much of this buying was shorts covering, which is not the strongest kind of buying.”
Open interest peaked at around 129,000 contracts during the second half of August, when silver prices were at about $30.80, Kleinman noted, and recently open interest was at 119,000 when prices were around $32.30, he said.
That’s a fall of 10,000 contracts on a price rise of $1.50 — showing “short covering to a major extent, not new buying,” according to Kleinman. “To sustain a bull market, I would like to see open interest go up as the market goes up.”
For now, that’s not quite the case. As open interest pulled back from their high in August, silver prices gained more than 12% that month.
“Silver has a habit of putting in sharp, deep drops after extended up moves like this, so it can be pretty dangerous, but it also typically recovers the lost ground almost as quickly,” said Dillon Gage’s Storer. Still, “speculators tend to become numb to events rather rapidly so without new fuel to feed the fervor, we could see a roll over fairly soon. I’m happy to see the upward movement, but don’t yet trust it for the long haul.”
‘Zigzag’ rise
Looking ahead, some analysts have some rather grand expectations for silver prices, but also worry about the potential for a big price retreat.
Paul Mladjenovic, author of Precious Metals Investing for Dummies, expects silver prices to “zigzag upward toward $100” an ounce by 2014.
“Oversized short positions in the silver futures, continued industrial demand in Asia, investment demand in the U.S. and the new applications for silver in areas such as solar power, [radio-frequency identification] technology and other new developments” are all a net positive for silver’s price outlook, he said.
Investment demand as well should “take off again as we see more monetary inflation/economic stimulus programs by governments in America, Europe and China,” according to Brad Cooke, chairman and chief executive of Endeavour Silver Corp. EXK +2.42%
He expects silver to retest the $40 mark over the next six months before it backs off to consolidate those gains. “We may have seen the last of $20 to $30 silver for quite some time,” said Cooke. “The main risk to this scenario is deflation if governments choose austerity over stimuli.”
Myra Saefong – MarketWatch – September 7, 2012