With Silver At Lows, What Lies Next?

Bali & World News & Views editor's comments. 

Lawrence watching the markets

Silver is on sale. It is is selling  at the price that it cost to get out of the ground and ship it. 

The downside risk is minuscule the upside potential is phenomenal. 

Anybody can afford it with silver selling as little as $14.50 per ounce. 

Add some to your portfolio now. You won't regret it in coming years. 

Don't worry about daily or weekly swings. Silver always goes up throughout history longterm.

Aug. 20, 2018 3:17 PM ET

Silver has seen a particularly steep drop in the past six years.

However, the metal could be set for significant upside in the event of dollar weakness.

In my opinion, silver is a commodity to watch at this point in time.


Over the past five years, gold and silver have both been trending lower, with silver seeing a relatively larger drop:

Source: investing.com

The current sentiment on silver is quite bearish. Given the low prices of silver, this implies that mining for the metal is likely to be unprofitable when one considers costs of capital and development.

However, the flip side of this is that given the inherently more volatile nature of silver, the investment tends to perform better than gold during periods of rising prices for metals more generally.

Under what circumstances could we see such a scenario unfold? In this regard, it helps to take a look back at the period 2008-2011, where silver significantly outperformed gold as an investment.

Gold is held in high regard as an alternative reserve currency, which is not necessarily the case with silver. Theoretically, silver tends to outperform gold during boom periods, given the wide use of the metal in industrial output.

That said, silver did outperform gold from the 2008 to 2011 period, when global economic output was significantly lower than normal. While this is contrary to what one might expect, silver was particularly buoyant during this period.

There are two possible reasons why this might have been the case:

1. Silver, as well as gold, were in significant demand in the face of U.S. dollar weakness.

2. Additionally, silver has traditionally been seen as a cheaper but more volatile instrument than gold. In this regard, it may well have been perceived as a cheaper alternative than gold with significantly more upside, while remaining a suitable hedge against a weaker dollar.

The main factor holding down metals prices at this point in time is a strong dollar. The greenback is largely being perceived as a safe-haven asset at this point in time, therefore diminishing the demand for gold or silver.

However, it is my opinion that if we do see a rally in precious metals, silver will likely see further upside than gold for the reasons I have outlined.

While rising interest rates in the United States has been lifting the dollar, there will eventually reach a point where rates in Europe and Asia will also start to rise and a limit will be reached on the extent to which the Federal Reserve can raise rates without placing economic growth at risk.

Once this happens - then I anticipate that we will see at least a short-term spurt in demand for precious metals, and silver would be set for significant upside at this point.

When we compare the performance of silver to the USD/EUR, we see that in 2016, silver rallied during a period of USD weakness. In my opinion, silver is poised to rally should we see:

1) A slowdown in the trajectory of interest rate rises in the United States

2) Continued growth in economic output which would concurrently lead to further silver demand

Going back to my previous point, when the dollar had started to weaken against the euro after a period of prolonged strength, we saw silver rally significantly at the same time:

Source: investing.com

It may well be the case that we see a similar pattern emerge once growth in the greenback hits a ceiling. For this reason, silver is a commodity to watch at this point in time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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