Silvers Edge in Precious Metals
- Silver is down ~70% from April of 2011 all-time high
- Multiple factors influence the silver prices and supply and demand
- Silvers current potential for long term investment
Precious Metal Recap
The below image reflects the historical price movement of silver, extending back to 1970. We can see from the below chart, the price of silver is down almost 70% since its high in April of 2011. So what happened to silver to cause such a big sell off?
Silver and gold are often seen as hedges for inflation. As inflation begins to increase or decrease we can see a correlation between the prices of silver and gold. The below chart provides a great visual of this. If we review the wild price swings we can see they correlate with inflation. The wild fluctuation in the late 1970’s was driven by the Hunt brothers trying to corner the market in silver, the failure to understand the effects of inflation and interest rates on the precious metals market back fired as prices tanked. This is a separate event then what occurred during the 2011 peak and crash.
In 2011 the US economy was still recovering from its 2008 and 2009 recession that rocked the equity market. As the US economy began to pick up steam fear of inflation took hold. As we can see in the chart, as inflation began to increase we saw are sharp move in silver to the upside. This was then spurred further along with extra demand to hold silver. The sudden increase of silver in the markets forced a supply issue, which saw prices sky rocket to all-time highs. Once the dust settled, we were left with a bubble, which needed to be deflated.
Influencers of Silver
- Inflation – We looked above about how precious metals are affected by inflation. Often seen as a safe haven, precious metals have helped diversify portfolios while helping preserve the value of an account. Precious metals tend to be correlated with inflation.
- Interest Rates – As the US economy adjusts the national interest rate, we see precious metal prices adjust respectively. Precious metal prices are benchmarked by the US dollar, so current increases in the interest rate are seen as head winds to the precious metals market and could mean further decline.
- Industrial Demand – The use of silver in industrial applications has increased over the years. The driving factor for this is the chemical compounds of silver. Without getting into the weeds, the best electrical and thermal conductor is silver. With continued development and advances in technology silver will see its uses increase, more so then gold. However this could be a double edge sword, as a recession would cause less industrial purchases, which could continue to drive down silver prices
- Supply and Demand – There are numinous factors that affect supply and demand. The largest component driving supply and demand are the silver minors. The companies responsible for extracting the metal from the earth. They control the majority supply of the metal which has been relatively low for many years now due to the deflated price of silver. In addition to the minors you have production and recycling companies that process and recycle silver. As recycling continues to grow around the globe we will continue to see silver recycled as well, which will add to the overall supply. On the demand side, we have investors wish to hold physical metal, Industrial applications, as well as jewelry and silverware.
Potential Investment Opportunity
The graph above depicts the prices of gold and silver and how they have trended since 1970. The blue represents the price of Gold, and orange reflects the price of Silver. Initial review of the chart shows that silver tends to be more volatile then goal. The extreme price swings from silver provide opportunities that the other metals cannot deliver.
If we apply technical analysis to the chart we can see that we still have room for a further decline before we reach a bottom. The current silver trend is about to complete the right shoulder of this head and solder formation. This tends to be a bearish signal and looks as though silver prices could venture lower. If silver does move lower, the next support range would be ~ $10 an oz. That said, if market turmoil continues investors could look to alternative investments like precious metals, and we could see silver rally to the ~ $20 range, and if sustained we could see another spike in metal prices.
The below chart iterates an example of why silver could potentially be a better alternative to gold or the other metals. Reflected is golds prices compared to silver. This graph is depicts that current gold prices are approximately 80x above that of silver. The price mean for gold/silver is ~60x, in the chart we can see that once this thresh hold has been broken we see reversals in their values. Current trend could indicate that gold may be overvalued and silver is potentially undervalued. This could be a catalyst for silver and provide a tail wind the silver trend.
Lastly, current political and economic trends are not looking good in the latter half of 2018. With trade war, and a mass selloff in the equity markets, more individuals are going to be looking for another alternative for investing. Silver could potentially provide a valuable safe haven along with gold. However, as an investor it is important to pay attention to all external factors that could affect the price of silver. In this case, the US has begun increasing interest rates. Interest rate hikes, have been correlated with preventing inflation, thus we could see silver remain under pressure and continue to the downside. As a precious metal investor it is important to note what happens with the US economy and interest rates, largely because the dollar is used to benchmark precious metal prices.