Silver

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The SILVER Bullet

Dr. Kal Kotecha PhD

In folklore, a bullet cast from silver was the only weapon that was effective against werewolves, witches, and other monsters. But is silver a great way to currently slay the markets?

The amazing thing about silver is that it has a remarkable dual quality. Like many resources and consumer goods, silver has many practical purposes including its unsurpassed thermal and electrical conductivity for use in electronics, reflectivity solar energy collection, and as a catalyst in chemical production. But silver is also a form of money and like fiat money such as the U.S. currency, it is a store of value and is used as a medium of exchange. Therefore, it is not just the intrinsic value of silver that determines its price but also the state of significant global currencies and economies.

To clarify, if you are an investor (and not a trader) in silver then look at silver from a long-term perspective. Silver has been and continues to be an invaluable resource for the reasons I have outlined. Having the conviction to believe that the fundamentals are on your side while being unleveraged and holding a balanced portfolio should mean you can sleep at night knowing you can sit and wait on your golden (or silver) egg to hatch.

So let’s talk economics. In the market equilibrium model of supply and demand, two things can happen that will cause an increase in the price of a good or service; either an increase in demand or a decrease in supply. In the market for silver, there are both. Focusing on the demand side, individual investors and governments are buying record amounts of silver. According to CNBC.com  http://www.cnbc.com/2015/12/01/us-mint-american-eagle-gold-coin-sales-surge-silver-at-record.html: The U.S. Mint’s sales of American Eagle coins surged in November 2015, with gold nearly tripling month-over-month and silver already reaching a new annual record as bullion prices fell to multi-year lows,. The mint sold 97,000 ounces of American Eagle gold coins in November, up 185 percent from October and 62 percent higher from a year ago, after selling out of most of the 2015-dated coins as falling bullion prices attracted buyers.

Strong demand came as spot gold prices fell around 7 percent to the lowest in nearly six years. This was the gold market’s biggest monthly drop in 2-1/2 years. Demand for American Eagle silver coins has also been strong, with year-to-date sales already reaching an annual record at 44.67 million ounces, breaking the full-year record of 44 million ounces in 2014.

Even more interesting is the demand for silver bars by India and China. According to goldcore.com,  http://www.goldcore.com/us/gold-blog/indian-silver-demand-explodes-to-us-silver-owners-delight: The first four months of 2015 saw India import possibly as much as 3,000 tonnes of silver bullion. If the momentum is maintained India is on track to import a staggering 9,000 tonnes over the course of 2015. This would represent almost one third of total annual mine supply globally. Worldwide mine supply was 877 million troy ounces (27,277 metric tonnes). It would represent a 27% increase in India’s 2014 silver imports of 7063 tonnes which itself was a 13%  increase on the 2013 figure showing a steadily growing demand for physical silver in India with each passing year.

As earlier outlined, I claimed that one of the amazing qualities of silver is that it is a store of value. People have historically trusted it to be a stable form of commodity money. With the aggressive printing of money by the U.S. and the rest of the world to precipitate their economy, a store of wealth in both gold and silver is used as a hedge of protection against a falling economy.

China has trillions of U.S. dollars that it has been converting into hard assets (a.k.a. gold). Considering many countries had silver reserves backing their currencies only 150 years ago, if China ever decided to be a large silver buyer there would be a huge shift in the price of silver, which may come sooner than later as their economy continues to falter. I believe both gold/silver imports will increase.

Above all else, gold is silver’s primary driver, dominating sentiment in the market for precious metals. The ratio of gold to silver is the highest it’s ever been at around 75:1. I believe could see that drop to 40: 1 or less meaning the price of silver should rise 2:1 on a proportion basis to gold.

Charles Oliver, former lead portfolio manager with the Sprott Gold and Precious Minerals Fund, made an interesting note about the relationship between silver and gold in a Q&A session. He pointed out that, “for over 1,000 years, the silver-gold price relationship was close to 16:1, so that implies that if gold is $1,600/oz, the silver price would be $100/oz. The last time that happened was 1980 when the gold price was roughly $800/oz and the silver price was around $50/oz. I expect to see the ratio migrate toward 16:1.”

So what are you packing your pistol with? The market can seem as scary as werewolves, witches, and other monsters. So don’t forget to do your homework and be confident enough to ride out the bumps with undervalued silver bullion and stock holdings. Feel free to join our free newsletter.

Happy Investing!

Kal Kotecha PhD
References

“A Few Reasons to Consider Buying Silver | SilverSeek.com.”SilverSeek.com. N.p., n.d. Web. 23 May 2014. <http://www.silverseek.com/article/few-reasons-consider-buying-silver-13208>.

Hamilton, Adam. “Professional Silver Stealth Buying Underway In Futures And ETFs.” Seeking Alpha. N.p., n.d. Web. 23 May 2014. <http://seekingalpha.com/article/2223163-professional-silver-stealth-buying-underway-in-futures-and-etfs?ifp=0>.

Kranzler, Dave. “Is Something Big Brewing In Silver?.” Seeking Alpha. N.p., n.d. Web. 23 May 2014. <http://seekingalpha.com/article/2207703-is-something-big-brewing-in-silver?ifp=0>.

“Sell In May And Go Away Definition | Investopedia.” Investopedia. N.p., n.d. Web. 23 May 2014. <http://www.investopedia.com/terms/s/sell-in-may-and-go-away.asp>.

The Gold Report. “Time Is The Trigger For Equities And Bullion: Charles Oliver.”Seeking Alpha. N.p., n.d. Web. 23 May 2014. <http://seekingalpha.com/article/2227523-time-is-the-trigger-for-equities-and-bullion-charles-oliver?ifp=0>.

“The Many Uses of Silver.” Uses of Silver in Electronics, Coins, Jewelry, Medicine. N.p., n.d. Web. 21 May 2014. <http://geology.com/articles/uses-of-silver/>.

Y., Ivan. “Can Silver Drop To Single Digits?.” Seeking Alpha. N.p., n.d. Web. 23 May 2014. <http://seekingalpha.com/article/2199373-can-silver-drop-to-single-digits?ifp=0>.

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What’s Next for the Price of Silver per Ounce?

• April 28, 2016

The price of silver per ounce has been on a tear in recent weeks, and no doubt, that has many investors wondering just how high silver can go.

Silver prices hit an 11-month high in April, considerably outperforming the gold price. According to Commerzbank, the silver price per ounce has benefited from a weaker US dollar, strong ETF inflows and purchases from speculative investors. While silver bugs are no doubt happy to see the price of silver per ounce on the rise, the firm suggested in its most recent note that “correction potential has built up in the near-term.”

What is the price of silver per ounce right now? At close of day on Wednesday, the white metal was sitting at $17.21 per ounce, up 0.47 percent for the day. Since the start of the year, the silver price has risen 22.23 percent.

Silver wasn’t doing too well at the start of the year, however. As Commerzbank noted in its report, the gold-silver ratio was at its highest since February 2008 in the first two months of this year. That was largely due to silver being priced too low relative to gold. Thus, the firm sees the relative strength of the price of silver per ounce as of late as a “catch-up effect.”

A weaker US dollar has buoyed gold prices so far this year. The US Federal Reserve once again opted to leave interest rates unchanged this week, providing support for both precious metals.

Where is the price of silver per ounce headed?

There’s plenty to consider when looking ahead at the future for the price of silver per ounce:

  • ETF inflows; As mentioned above, the metal has seen strong ETF inflows—240 tons in the first two months of 2016 and 185 tons in February alone, according to Commerzbank. However, inflows slowed to just 60 tons in March.
  • Correction potential; Commerzbank also pointed out that net long positions are currently worth 10,600 tons of silver. That might sound like good news for the price of silver for ounce, but as the firm states, “this has also generated considerable potential for correction if money managers were to take profits and close their long positions.”
  • A boon for miners; To be sure, a higher silver price would be welcome for many long-suffering silver miners. As Commerzbank notes, a low silver price per ounce has made primary silver production “hardly profitable at all.” However, that scenario changes at the current silver price, meaning more supply could come back online.
  • Higher demand; Of course, beyond its investment appeal, silver has a number of industrial applications as well. On this front, demand from the photovoltaic sector is expected to surge by 10 percent, driving industrial silver demand to its highest level in five years.

Overall, while Commerzbank sees a potential correction for the silver price in the near term, the firm does see additional upside for silver in the medium to long term. Commerzbank has upped its forecast for the price of silver per ounce to $18 from $17 previously.