Will silver soon take the lead in precious metals surge?

Silver: Precious metal’s forgotten step-child

Out of all the precious metals, silver is probably the least sexy. In the Olympics, silver always comes in second place. Some say copper has a doctorate in the economy. Platinum endorses the success of musicians. Palladium is used in hot-rods and gold is well… gold.

 The spate of relatively weak economic data we have been receiving in the United States recently is great news for alternative assets, proving the important role they play in diversifying investors’ more traditional holdings such as stocks and bonds. Last week, Janet Yellen proclaimed the recovery in the U.S. labor market is far from complete. Dovish statements like this from the Fed Chair indicate that the Fed is in no real hurry to conclude its bond buying program at a record pace, just for the sake of it. Should this turn out to be correct, we are in for a slow and gradual closing of the drip on the Quantitative Easing faucet. This would be positive for precious metals, including silver.

One factor that many silver traders like to consider is the gold/silver-ratio, so let’s take a brief look at its history. In 1792, with the passage of the Coinage Act, the United States set silver at $1.29 per oz. and gold at $19.39 per oz., giving rise to a gold-silver ratio of 15:1. Over the past decade, the ratio’s been oscillating between 45:1 and 60:1. Currently the ratio is in the 63-65:1 area.

If past cycles persist the ratio should come down. Silver and the silver-mining stocks merit a closer look by investors.

 There is some debate about the actual cost of producing silver. The consensus cost of production hovers around $18 to $22 per oz. David Morgan, the creator of Silver-Investor.com, and Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities Limited both peg production costs at $20. In general, commodity prices have a tendency not to stay below the cost of production for an extended period of time. In addition, the world’s demand for silver currently exceeds annual production levels, and it has done so for the past three decades. Perhaps adding merit to these observations, silver broke above $21 on Feb. 14, a resistance level it had not been able to break for the past three months.

Silver’s strength, malleability and conductivity explains the wide range of applications for the shiny metal that span computer chips, water filters, medical applications and solar power generators to name a few. While Germany has long been the leader in solar power, China and Japan are soon set to take hold as the world’s leaders in photovoltaic installations. Since 2011, prices of solar panels have fallen some 60%, with the average price of an installation projected 30% lower. As the price for consumers continues to drop while inversely solar power efficiency rises, we should see large growth in both the popularity and accessibility of solar power. Adding validity to this notion, IKEA and Home Depot have begun positioning themselves to start selling solar panels, which could be seen as further bullish news for silver. And on Wednesday Feb. 12, the Energy Department announced that the U.S. solar industry is more than 60% of the way to achieving cost-competitive utility-scale solar photovoltaic electricity.

 To round things off, let’s look at gold. You really can’t talk silver without considering movement in gold.

Gold has definitely been one of the better performing assets in 2014, up 9.5% for the year. On Feb. 13 gold reached three-month highs by moving above $1,300 and today on Friday gold passed its 200-day moving average at $1,311.80. This is significant because gold has not moved above its 200-day moving average in over a year. Silver has a tendency to follow the action of gold on safe-haven moves, but that has not been the case recently. Based on this, if silver can break out of its choppy, sideways trading range of the past three months, there could be momentum to send it higher. We could see silver reach $25 (see chart) in the short term and push to $30 longer-term.

About the Author
Jack Malone

Jack Malone is a Futures and Options Advisor at RCM Asset Management with a focus on the metals and energy markets. Jack can be reached at jmalone@rcmam.com 


TRADING FUTURES, OPTIONS ON FUTURES AND RETAIL OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES. YOU MAY LOSE ALL OR MORE THAN YOUR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 


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