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 also slay the markets currently?
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 in solar energy collection, a catalyst in chemical production, etc. But silver is also a form of commodity 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. It is not going anywhere and that means there is a limited downside. But this doesn’t mean that an upswing will be in the near future. There could still be years of unseen improvement in the spot price. 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! On the demand side, individual investors and governments are buying record amounts of silver. In 2013, the sales of both silver eagles and silver maple leafs hit new record levels. From 2012 to 2013, silver eagle sales increased 26.4% and silver maple leaf sales increased 55.8%. In fact, silver eagle sales of 42 million exceeded the supply of mined silver in 2013 by 2 million ounces. The trend has continued into 2014. In the first 4 business days of May, silver eagle sales are nearly half of the sales for the entire month of May 2013. It seems that as the price of silver continues to drift under $20, silver coin sales continue to increase. At this rate, the investment demand for physical silver will put a strain on mined supply.
Even more interesting than these individual silver investors is the demand for silver bars by India and China. In 2013, India imported a record 6,125 tonnes of silver. This was up a 189% increase over what India imported in 2012. This was in response to the gold import controls put in place by the Indian Government in July 2013. The 6,125 tonnes represents 21% of the total amount of silver supplied globally from mines, scrap recycling and Government sales. And while India has been importing record amounts of silver, China has been withdrawing extraordinary amounts of silver from both the Comex and Shanghai Futures Exchange; almost 700 tonnes of silver combined was withdrawn between the end of February and the end of April and likely either put in private investment vaults or used in commercial applications inside of China. In my opinion, this withdrawal is an indication of an accelerating silver demand and a tightening silver bar market. To equilibrate a market where the demand exceeds the supply, the price of silver will have to rise because consumers and investors alike must bid higher and higher to attain the scarce resource.
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 rumours about the Europeans getting into quantitative easing, the potential for continued depreciation of these currencies may cause them to become seen as a poor store of value and investors will look instead into commodity money. While gold is the ultimate hedge against inflation, silver’s tendency to move higher when inflation creeps up offers higher returns when considering how reasonable it is for the price to even just double. 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. People also run to silver and gold when there is economic and political uncertainty. With the violence heating up in Ukraine and Iraq, the market uncertainty that comes along with it should be met with a positive impact on the price of silver as investors seek a safe haven.
Above all else, gold is silver's primary driver, dominating sentiment in the market for precious metals. Capital seems to only flood into silver when gold is decisively rallying, that's always been the universal silver buy signal. Gold is impacted by pretty much all of the price changing catalysts that I discussed for silver. Charles Oliver, lead portfolio manager with the Sprott Gold and Precious Minerals Fund, made an interesting note about the relationship between silver and gold in a recent 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. Over the next couple of years, I expect to see that 67:1 ratio migrate toward 16:1.” With recent major analyst long-run gold price forecasts nearing the $2,000/ounce gold mark, the sentiment is very hopeful.
“Sell in May and go away” is a well- known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November - thereby avoiding the typically volatile May-October period - would be much better off than an investor who stays in equities throughout the year. Many silver bulls find it unfortunate that historically, May has been a losing month for silver as well. In fact, silver is on a 4-year losing streak and hasn't increased in May since 2009. The increase that year in silver was due to the positive momentum in commodities and stocks after the Fed announced QE1 in late 2008. The good news for Contrarians is that this fairly predictable trading strategy offers an opportunity to buy and hold silver when everyone else is selling it; filling their pistols with cheap silver bullets.
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 trusty stock sidekicks.
Kal Kotecha MBA
www.JuniorGoldReport.com
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