From the May 01, 2011 issue of Futures Magazine • Subscribe!

Metals outlook: Are the best years past?

Silver shines

While gold made record highs in 2010, silver posted even more impressive returns with an 82% increase by year-end (see "Silver spoon fed"). "Silver is basically gold on steroids," Nadler says. "In a recent webinar I hosted, it was almost unanimous that everyone on the panel felt that the ‘specs’ had invaded the silver space, and they are quite possibly going to offer some ‘surprises’ for small investors." (See "Gold & silver: Always a good option").

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The result has been silver donning its precious metal hat more so than its industrial hat. "Silver is still a combination of both, but more of the precious metal has been a driver of it because we’ve seen more days where gold and silver work together as opposed to silver and platinum/palladium," Streible says. "Although we’re at the higher end, $37 is still much easier for a person to part with than $1,400 for an ounce of gold."

If silver were mostly playing an industrial role right now, Winmill and Nadler both say price would be under $20 an ounce. This has led some to suspect manipulation.

While no formal inquiry has been reported, some analysts say that what appears to be manipulation can be explained by other factors. "Silver is a relatively small market of about $25 billion, so it’s basically like the whole world wondering what’s going to happen to a medium-cap stock," Winmill says. "It’s kind of divorced of its fundamentals, and price largely is being driven by speculative activity. That is pushing this relatively small market even more than other commodities."

Further, while prices are approaching the 30-year record high set in 1980 when the Hunt brothers definitely were trying to corner the market, Winmill reminds that prices today would have to be around $100 to be on a comparable scale, taking inflation into account (See "Jarecki’s law").

Looking forward, analysts warn that silver could be more volatile in 2011. "Silver is the single riskiest asset you can own. It’s something that easily can outperform nearly everything else, but the risk factor is at least twice that of holding gold or most other asset classes," Nadler says.

Streible puts support at $32.50 and $26.50 with resistance at the Hunt brother top of $42. "If we take that out, it’ll go at least to $50," he says.

Winmill expects $30 an ounce by year-end, but price could be anywhere between $28 and $40 for much of the year. "Ultimately, speculative fever tends to wash out. It could get to $45 or $50, but it will probably spike up and spike back down," he says.

Nadler expects the same pullback in silver as he envisions in gold, with silver prices dropping to near $20.

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