Global economic conditions that have been supportive for silver and gold in the first half of 2016 are still in place – and possibly intensifying. Often, when the price of an asset is up well into the double digits in seven months – like silver and gold are in 2016 so far – it’s a good time to sell. But in this case, it looks like both are only getting started. Of course, no asset moves up in a straight line, and some precious metals might be due for a pullback. But even if they fall a bit in the short term, both gold – and its lower-priced cousin silver – have a lot further to rise in the current bull market. And history tells us that if gold goes up a lot, silver will go up even more. The higher gold goes, the more traders focus on “cheaper” silver.
Even if silver, or gold, prices fall in the short-term, holding some silver along with gold as part of a diversified portfolio still makes sense. Since the economic and political uncertainties in the world will continue to build (as they certainly seem to), it’s logical to assume that the uptrend in silver and gold prices will also continue. And should a full blown crisis hit, you’ll be thankful to have the insurance of silver and gold in your portfolio. Here are some important reasons and viewpoints which justify adding on price dips / holding silver and gold – Especially SILVER.
Says Mark Melin – Silver is expected to stay “well-bid” in the second half of 2016, according to an HSBC Global Commodities report. Looking at supply and demand economics, one side of the equation is anticipated to remain consistent while the other is expected to rise. The positive HSBC comments come over three months after BAML made similar comments on the silver price breakout being real.
After taking a breather much of July, muting the performance of momentum models that had been long silver and gold, the metal has recently been on a continuation pattern and the trend is once again moving higher.
HSBC Chief Precious Metals Analyst James Steel, in a report out July 28, said silver could be “buoyed by gold, a risk-off sentiment and elevated geopolitical risk.”
Silver, for its part, began a move higher Wednesday while gold moved higher earlier in the week. Steel expects this trend to continue, taking the price in the $16 to $21.50 level. He cites “solid fundamentals” that include stable supply in the face of rising demand from both industrial uses and consumer jewelry.
“Our expectation of gold strength is supportive, as are an accommodative Fed policy, negative interest rates, and geopolitical risks,” he wrote, emphasizing the potential for safe haven investors to keep prices high. That said, the force of trend might not be as strong. “Investment demand, which has been strong this year, may cool but should remain positive.”
The slackening of investor demand could be due to the “robust pace” of accelerating exposure in ETF holdings, near record highs, and strong net long futures positioning on the Comex market. Derivatives positions, unlike physical holdings, are more volatile than ETF holdings, Steel noted, as they tend to reflect more short-term positions.
Noting various market environment stimulus, Steel noted the tendency for silver to be a market where momentum begets momentum. “They are also highly responsive to prices, with long positions generally building on rallies and contracting on downswings,” he wrote.
Silver and gold often exhibit close price correlation, but understanding their differences is significant. Silver has an industrial purpose as well as for adornment. Gold, for its part, is a shiny metal without much in the way of practical, economic demand.
While Gold is used by central banks as a component of their foreign reserves, it doesn’t have much practical economic role other than as a store of value, which is based in large part on perception.
The price of both silver and gold is driven by the Fed to various extents. “As with gold, the longer a US rate hike is delayed, the better for silver, we believe,” Steel wrote. “With only one rate hike under the Fed’s belt, and a growing realization that 2016 is unlikely to see many, if any, rate hikes, the market’s view of silver and gold – began to change.”
A key tenant of Steel’s positive analysis that silver remains reasonably well-bid is dependent the silver market adjusting to fewer potential Fed rate hikes. Its not just the number of hikes, but the shape of the model. “A shallower hiking cycle than was considered likely at the beginning of the year,” he wrote. “The scaling back by the market of Fed hike expectations in the wake of the UK vote is also silver and gold-friendly.”
There is also a currency component that comes into play, which is not always friendly, particularly in light of Brexit. HSBC’s currency analysts predict the UK’s vote to leave the EU could lower the GBP-USD currency spread to 1.20 by the end of 2016. This could impact the price of silver, but the price of the euro currency could have more impact. “EUR movements are even more important for silver and gold,” the the HSBC forex team pointing to modeling that projects EUR-USD ending 2016 at 1.10.
Steel also gives investors a volatility heads up, noting that silver can “outperform gold both to the upside and downside.” In other words, the practical metal is also the most volatile.
Says Kim Iskyan – Silver and gold have been the year’s best performing commodities. Silver prices are up over 40 percent so far this year – doing even better than gold, which is up “only” 24 percent year to date.
But as we’ve written before, there is good reason to believe silver prices are headed even higher. Negative interest rates and global economic uncertainty continue to scare markets and investors. Precious metals are great portfolio “insurance” and they have a low correlation to shares.
When silver booms, it really booms
Silver’s most recent peak came in April 2011. From there it tumbled more than 70 percent to its most recent lows reached last December. But since then it has rallied nearly 50 percent.
Here’s why we bring that up… Research shows that after silver drops more than 40 percent, then rallies 25 percent off the bottom, its average bull market gain is 339 percent. So, based on silver’s price history, we’re due for a massive rally in silver prices.
And if you exclude the 1,206 percent gain in the ‘70s bull market, the “booms” have averaged 230 percent.
Silver is still about 60 percent below its last peak. So, there is a lot of room for silver prices to climb before they get back to where they were a few years ago.
Silver mining shares are Superman to silver’s Clark Kent
But if you really want to maximise your returns in the coming silver bull market look at silver mining shares. Their prices explode when silver prices boom.
That’s because running a mine costs the same – whether silver prices are high or low. With fixed costs and low silver prices, miners often barely break even. But when silver prices are higher, and the mining costs haven’t changed, it means bigger profits for the mining companies – and higher share prices.
For example, during the most recent silver bull market from late 2008 through 2011, silver prices rose over 400 percent. At the same time, the Solactive Global Silver Miners Index, which tracks a basket of silver mining companies, gained 595 percent – or 50 percent more.
And some individual silver miners had astronomical gains. From its low in late 2008, Great Panther Silver (New York Stock Exchange; ticker: GPL) rose over 2,800 percent. And First Majestic Silver (NYSE; ticker: AG) rose 3,500 percent.
History shows we’re likely to see more extraordinary gains ahead.
As we said, silver is up over 40 percent this year. GPL is up over 160 percent. AG is up an incredible 415 percent this year alone. But remember, the average gain in the price of silver after at least a 25 percent rise in silver, is 339 percent.
You may think you have missed the boat after the recent strength in the price of silver. But remember, silver is still 60 percent off its 2011 high.
We’re nowhere near the top in this current silver market. If silver passes its $50 peak (which might seem unlikely but is possible), some silver mining stocks may even see their prices worth 50 times more. And this isn’t just hype. These returns happened last time around for a number of silver mining shares. Catching the right silver mining stock on the way up can produce life-changing returns.
We’re potentially on the cusp of this happening once again. There may very well be a slight pullback in silver prices soon. But that will likely be a little speedbump as silver climbs higher.
You should have silver in your portfolio – not just for insurance, but to profit from the coming gains. And if you really want to supercharge your returns, silver mining stocks are the way to go.
The iShares Silver Trust (New York Stock Exchange; ticker: SLV) is the most actively traded silver ETF in the world. It tracks the price of silver bullion. On the Hong Kong exchange, the ETFS Physical Silver ETF (code: 3117) does the same thing.
Says Meera Shawn – Further to Bank of America Merrill Lynch’s take on gold, it’s crucial to consider the bank’s take on silver. Investors around the world have shown keen interest in silver’s rally in 2016. Silver has substantially outperformed gold, and so have silver-based funds such as the iShares Silver Trust ETF (SLV) and the Velocity Shares 3X Long Silver ETF (USLV). These two funds have risen by 40.6% and 147.5%, respectively, on a year-to-date (or YTD) basis.
The bank is placing emphasis on investor demand in its prediction of silver prices. It has provided three predictions for silver:
1] Non-commercial market participants will reduce purchases compared to 2015. Silver could fall to $15 per ounce or below.
2] Investors will increase their purchases marginally. Silver could average $20 per ounce.
3] There will be a rise in non-speculative demand to the tune of 30% year-over-year- Silver could rally to $25 per ounce.
Though the physical demand for silver has been underpinned in the Asian market, silver coin sales have remained high in the United States YTD.
As the Federal Reserve has been continuously trying to elevate inflation numbers, commodities may benefit from rising inflation. Note that gold is used as a hedge against inflation, and a pull on gold’s price most often brings a similar reaction in silver’s price. The correlation between the two crucial precious metals remains high.
Another element that significantly affects silver is industrial demand. Silver is used extensively in many electronics and also for solar panels. This could provide further buoyancy to the metal.
Says Brenton Garen – Some of the shine has recently come off the silver trade as the iShares Silver Trust (NYSEArca: SLV) and ETFS Physical Silver Shares (NYSEArca: SIVR) have pulled back in recent weeks. However, those silver exchange traded funds are still among this year’s best-performing commodities funds, prompting some commodities market observers to view silver’s recent pullback as a buying opportunity.
Silver and gold enjoyed safe-haven demand as the equities market plunged into a correction. The metal also maintained its momentum as the Federal Reserve lowered its interest rate outlook to only two hikes this year from a previously expected four rate hikes. Additionally, with the dovish Fed stance, the U.S. dollar weakened, which made USD-denominated silver cheaper for foreign buyers and a better store of value for U.S. investors.
Silver prices touched two-year highs earlier this month. Traders looking to profit from silvers downside can consider the ProShares UltraShort Silver ETF (NYSEArca: ZSL), which is a double-leveraged product.
Year-to-date, silver has mirrored the surge in gold in response to ongoing market volatility. Silver has exhibited a correlation of over 80% to gold and typically moves in the same direction as the yellow metal but in larger movements.
“It’s very difficult to be bearish on silver and gold — especially silver, which has drawn particular interest from investors this year. With so much pricing momentum, and so many geopolitical and market factors blowing in its sails, there’s no reason to think silver won’t continue to post gains through the end of the year,” according to ETF Daily News.
Looking ahead, the quickly expanding photovoltaic panel or solar industry could continue to drive silver demand. Installations and investment in solar panels, which incorporate silver for its electrical conductivity, are at record levels, reports Henry Sanderson for the Financial Times.
According to Thompson Reuters GFMS, the solar industry’s silver demand increased 23% last year, the second consecutive year of increases.
“Brexit, oil meltdown, global central banking policy, and a whole lot of uncertainty surrounding November’s presidential election could easily push the price of silver not just about $20 an ounce in the near term — how about $30?,” notes ETF Daily News.
iShares Silver Trust
Reuters – Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks. Noting the recent run-up in the benchmark Standard & Poor’s 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.”
The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. gross domestic product in the second quarter grew at a meager 1.2 percent rate.
“The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”
Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent.
“We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and change the duration,” Gundlach said.
Currently, the yield on the 10-year Treasury note is 1.45 percent, which has translated into some profits so far for DoubleLine. “The yield on the 10-year yield may reverse and go lower again but I am not interested. You don’t make any money. The risk-reward is horrific,” Gundlach said. “There is no upside” in Treasury prices.
Gundlach reiterated that gold and gold miners are the best alternative to Treasuries and predicted gold prices will reach $1,400. U.S. gold on Friday settled up at $1,349 per ounce.
Gundlach lambasted Federal Reserve officials yet again for talking up rate hikes for this year while the latest GDP data showed disappointing economic growth. “The Fed is out to lunch. Does the Fed look at what’s going on in the economy? It is unbelievable,” he said. Overall, Gundlach said the Bank of Japan’s decision on Friday to stick with its minus 0.1 percent benchmark rate – and refrain from deeper cuts – reflects the limitations of monetary policy. “You can’t save your economy by destroying your financial system,” he said.
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