Tuesday, May 10, 2011

SILVER OUTSHINES GOLD, BUT FOR HOW LONG?

Silver Outshines Gold, But For How Long?


Silver has outshone gold this year with a spectacular 19% rise in price in April alone. Can silver continue its breathless run, or will it come crashing down?
Jim Rogers, renowned commodity bull who launched the Quantum Fund with George Soros, thinks silver prices will go higher.

"Silver has certainly gone up a lot in the last 9-10 months. There is no question about that, but remember, silver is still 10% below where it was 31 years ago," he said in an interview last week. "I bet you do not know many things that are 10% below where they were 31 years ago."

Despite the rally, the price of silver remains depressed, according to Rogers. "I prefer to look at the things that are still depressed. Natural gas is depressed compared to oil, silver is depressed compared to gold. I would rather look at the things within those sectors to see what are the things that are still depressed and see if, maybe, that is where we should be putting money."

Indeed, Rogers is shorting U.S. Treasuries as he believes they will collapse once the second tranche of quantitative easing (QE2) ends in June and the U.S. Federal Reserve comes back with QE3.

Despite his long-term bullishness, Rogers remains worried about the rapid rise in silver prices. "I own silver, but if it keeps going up, it could turn into a problem if it goes parabolic... I certainly hope silver goes down for a while. I say it as somebody who owns it because if it goes down, I hope I would buy more and if it goes up too much too fast, then I have to sell."

"I do not have any prices in my targets. If suddenly World War III breaks out, then I would not sell silver at $200 this year. So it depends on what's happening and what's causing this."

On April 28, price of silver touched a new 31-year high of $49.82 per ounce, just short of its $50.35 all-time record high in 1980, when brothers William Herbert and Nelson Bunker Hunt famously tried to 'corner the market'. (It did not turn out too well for the brothers as a U.S. court conspired to manipulate the price of silver. The metal had risen from $11 to $50.35, before a hard landing back to $11 soon after).

Silver has gained more than 145 per cent in the past year, and 19 per cent in April alone. On April 7, a GFMS-Silver Institute survey predicted the average price of silver at around $50. "2011 may well see silver reach or even exceed $50/oz, in part basis strong probability of gold peaking comfortably above $1,600/oz."

With silver on the verge of breaching new highs, many analysts are talking about a bubble in the market. It is the same naysayers who have been calling for a gold crash for years.

Certainly, silver does seem to have had a breathless run even compared to other metals:



Here are the key factors that could drive silver prices this year:

1. Fate of the U.S. economy. If the U.S. economy continues to falter and Federal Reserve returns with a third round of quantitative easing, U.S. dollar will fall further, leading to more investment plowing into gold and, as a spillover, into silver.

2. The gold:silver ratio has fallen sharply to 37:1 just recently, compared with an average of 62:1 in 2010. The gold/silver ratio is an important barometer for many commodity investors. If the ratio narrows, silver prices are seen to be doing better than gold prices.

When gold prices hit $850 in 1980 - the last time the price of silver was at this year's level - , the gold/silver ratio narrowed down to 17. The same ratio at these ratios, means silver could hit $80-$100, according to a range of analysts.



3. Like gold, silver is a hedge against inflation. Certainly the European Central Bank is worried and has recently raised interest rates to rein in inflation under its target of 2%. Inflation is already as issue in emerging markets and any sign of more easy money, especially from the U.S. Fed, will depreciate dollar strength. That, in turn, will raise oil and food prices, thus improving the case for commodity buying.

4. Silver is now the poor man's gold, as the high price of the yellow metal has made it difficult for many investors to get in.

5. But silver is also more prone to price volatility than gold. "Silver's traditional high price volatility and trading range are factors to consider: Already year-to-date $13 trading range ($26.68-$39.63) and average Q1 2011 price volatility 39.6% (gold 12.9%)," says GFMS.

"Investment will remain the main driver of the price. Silver's greater volatility in a smaller and less liquid market than gold is attractive to certain investors, with many now eyeing the all-time-high of $50/oz."

6. Suki Cooper, analyst with Barclays Capital, says silver prices could "see a sharper drop" than gold in the event of a precious metals sell-off, as a result of silver's "heavy bias towards retail demand... I think the real concern is if we see a slowdown in coin sales, or a slowdown in ETFs, the fundamental support for prices is much lower than where we are at the moment. I think we could see a much sharper correction in silver if investor interest starts to slow down across gold and silver."

"We think the industrial demand growth looks good, but not strong enough to drive prices where they are at the moment," she said. "We still have a market in a hefty surplus. So we think that support from the fundamentals is going to be much lower for silver in comparison to gold because in gold we've seen good physical demand materializing every time we've seen the price dip, providing a cushion for prices."

7. Demand for silver remains strong. GFMS says industrial demand in 2010 rose 20.7%, "a fraction shy of the pre-crisis record in 2008."

"Main drivers of the strong rise were continued robust emerging market economies growth, industrialized world's recovery from recession and pipeline restocking."

A significant boost in retail silver investment demand paved the way for higher investment in both physical bullion bars and in coins and medals in 2010. Physical bullion bars accounted for 55.6 Moz of the world investment total last year, says GFMS. "Increasing a hefty 47 percent last year to 178.0 Moz, implied net silver investment recorded its all-time high. Much of the increase was due to ETFs, the over-the-counter market, and investment in physical bars."

8. World silver production rose by 2%, or 17.6 Moz last year, to a new record high of 735.9 Moz. Adding to supply are governments who have also been selling silver with Russia leading the way. Government sales estimated at 44.8 Moz in 2010, up by a massive 188% on the previous year's level.

However, the new trend could well be central banks buying gold, which could lead to another bout of silver buying as well.

9. However, many investment banks seem unimpressed by silver's rally. Goldman Sachs price for silver in the next 12 months is $28.2, almost half of its current price. Bank of America Merrill Lynch's silver price forecast for 2011 is $29.5.

UBS analyst Mark Bulsing says: "While further advances in the short run cannot be ruled out, we do not expect current levels to be sustained," adding that he saw prices returning to around $34 this year, even though there may be a spike to US$55."

© alifarabia.com 2011 Original document

1 comment:

  1. This is an older post. Currently, Gold has acquired its place again in the market.

    ReplyDelete

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