Last week we saw some interesting action in the silver futures market traded on Comex, a division of the New York Mercantile Exchange.
Silver prices surged during the later part of week after reversing a potential 23-cent loss into a 35-cent gain on Tuesday. This was followed through with a 56-cent advance on Wednesday. And, for the week silver soared USD $1.07, an advance of 5.9%, strongly outperforming its larger cousin gold, which added $10.15 to $1,237.88, up 0.8%. Silver for immediate delivery climbed to $19.11 an ounce, the highest price since June 28.
For the past week, the price of silver has remained above US$19/oz, and this is providing some very bullish technical signs. What is also interesting is the upward move in silver prices coincided with the expiration of the August options and futures contracts. In the past, and almost without fail, as these contacts expire, the large bullion banks have used their CFTC-granted position limit exemptions to overwhelm the buyers and keep prices suppressed. But, this didn’t happen this time around. In addition to this, silver is soaring because investors are realizing that silver is a hard asset, it is money and it is historically very inexpensive compared to gold. I have often mentioned that silver is significantly below all time highs while gold has already broken into new highs. Silver has outperformed the yellow metal since Aug. 23, gaining just over 10% compared with gold’s 2% gain, as investors bought the grey metal because of its relative cheapness to gold.
While it is known that the fundamentals influencing the price of silver are extremely bullish, since April this year the price of silver has been trapped in a range between $17.50/oz and $18.50/oz. And, on previous occasions, any break to the upside has been a false break. However, this time the technicals look more positive than they have appeared for a long time. And, with the price of silver remaining well above $18.50/oz, there are signs that the price is consolidating and setting up for the next leg upwards.
The gold to silver ratio dropped to a three-week low after gold’s rally to the highest level in eight weeks prompted some investors to buy the grey metal. The current price ratio of gold to silver is about 65 to 1. Historically, it has been as low as 15 to 1. As this bull market in gold and silver unfolds, I believe that the gold/silver ratio is going to fall fairly significantly from 65. If that happens, you’re going to have a better percentage gain in silver than you are in gold.
Silver is unique in that it is both a precious metal as well as an industrial metal. The metal is a store of value for investors concerned about the economy and is also a raw material for a wide range of industrial applications. Holdings in the iShares Silver Trust, the biggest exchange- traded fund backed by silver, increased on Aug. 24 for the first time in six weeks. Silver supplies are very tight and pure silver discoveries are very rare. Silver supply is mostly produced as a byproduct which makes supply very inelastic.
According to Dick Poon, a Hong Kong based manager of the precious metals trading at Heraeus Ltd., “Silver is looking cheap and we’re seeing strong investment demand for small ingots, as well as good industrial demand from solar-panel makers.” The solar industry will consume up to 1,500 metric tons (48 million ounces) this year, Poon estimates. “Even if investors are expecting another downturn, there will always be demand for alternative sources of energy,” said Poon. “We could see prices back up above $20 very soon.” Silver last traded at more than $20 in March 2008. I believe that this price prediction is conservative and as I mentioned at the beginning of the year, my target for the end of 2010 is around $25/oz.
While I have never recommended to investors to put all their money into silver, I certainly suggest that they have a reasonable exposure to this metal. And, I would definitely recommend accumulating the physical metal over and above the other instruments. Once you have a built up a core holding of the physical metal, then you can look at the other instruments.
TECHNICAL ANALYSIS
Since April this year, the price of silver has battled to stay above the US$18.50/oz level. And, each time the price has broken through this key resistance, it soon traded back down to around US$17.50/oz. As silver can be volatile, I am going to wait about 7 more days before I declare this to be a break through the key resistance of $18.50/oz. However, this time I believe we will see that break and the beginning of an explosive move to the upside will soon follow.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.