Silver: A Goldilocks Moment?

Silver is a fascinating commodity. For it to increase in value significantly, the economy, like Goldilocks’ porridge, cannot be too hot or too cold; it must be just right. The problem is that silver has two functions for an investor. It is a commodity with industrial uses and it is a precious metal.

In the current environment, conditions which would benefit the metal in one role can hurt it in the other. In order for industrial demand to increase, the global economy must continue to grow, and the rate of growth must accelerate. In order for the value as a precious metal to increase, the Federal Reserve must keep on “injecting liquidity”, or printing money as we common people call it. At some point, however, these two scenarios are mutually exclusive. If growth accelerates, the Fed will dial back on QE. Any potential benefit to silver from growth will be offset by the fall in value as an inflation hedge.

It would seem logical, then, that silver will remain stuck in the $30-35 range forever. Except we know it won’t. When I first started writing about silver it was also seemingly stuck in a range, at that time around $25-28. It was driven higher, mainly by the Fed’s decision to pursue another round of QE and possibly by some short covering by major banks. Global growth remained sluggish, weighed down by European austerity and Chinese fear of overheating. The situation was not bad enough to drag the price of silver down, but nor did it provide any significant boost. My belief that silver is about to resume its upward trend is based on my belief that that balance is about to shift.

In Europe, the price of austerity is being felt. Political pressure for a relaxation of policy is increasing around the region. Britain is looking ever more isolated as a vocal hawk at the current EU budget meeting. You may question the long term desirability of easier policy in Europe, but don’t ignore the possibility.

In China there are early signs that the slow-down may be coming to an end. The China HSBC Flash Manufacturing Purchasing Managers Index (PMI) rose to 50.4 in November, the highest reading in 13 months, and a sub-index measuring output rose to 51.3, the highest level since October 2011, according to a report released Thursday. Chinese growth, with their demand for electronics, is a big driver of increased silver demand.

We could well be approaching the desired Goldilocks moment. Growth in both Europe and China could be poised to recover. For a time at least it is fair to assume that the US economy will remain sluggish with stubbornly high unemployment, leading to continued easing by the Federal Reserve. For a while, both drivers of the price of silver, industrial demand and US Dollar supply, will be exerting upward pressure. The white metal looks set for another pop.

If it does break through $35 we will be in “gap territory” with no obvious technical top until around $42. As I mentioned in October, the recent pause in the upward move is a good thing. As with any commodity, sudden moves can be reversed by increasing margin requirements in the futures market. This is what caused the steep decline at the end of April 2011. Such increases are much less likely in the event of a steady rise in prices, complete with pauses.

It would seem to me, then that silver’s next move is imminent. Should you agree, the easiest way for most people to play the move is by an ETF, with SLV being the most popular. The low cost of entry (ETFs are generally subject to equity commissions) make them ideal for what could be a fairly short term play. Whether your preference is for an ETF, futures contracts or bullion, the outlook seems bright for silver, and taking on the bears (I’m sure there are more than three) could pay dividends.

Martin Tillier has been dragged, kicking and screaming into the 21st century, and can now be followed on Twitter @MartinTillier.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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