The recent move in silver is just a preview of what we can expect in the future.
It was only a little more than a week ago when analysts were wondering if the price of silver was going to break above $20 an ounce. Not only did it blast through this level of resistance, it continued upwards through $21 an ounce, and now it is testing the $22 level.
Like gold, silver is a monetary metal and can be traded around the world. And, like gold, silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty. While it is a lot more volatile than gold, it is the one precious metal that I believe will ultimately yield the greatest return compared to gold, platinum and palladium. Even though the price has touched a 30 year high, it is still way below its all time high. If adjusted for inflation and using the previous high of $50 an ounce achieved in 1980, the price of silver today should be around $130 an ounce.
During the last 25 years the gold/silver ratio has been around 46. If we use this figure and apply it to the current price of gold we get a price for silver around $28 an ounce. While I do not see the ratio falling to this level any time soon, it has come off it recent highs when it was trading close to 70. It is now a fraction below 60.
Recently, a client asked if this move in silver was prompted by the unwinding of the open shot positions on Comex currently held by the bullion banks. Actually, up and until last week these "super traders" were adding to their short positions. According the latest COT reports the current open short position held by these bullion banks increased only marginally. Since the price of silver has traded above the $20/oz level I estimate that the "paper" loss incurred by the 4 or less bullion banks must be over $500 million. This of course does not include losses they must have sustained when the price was below $20 an ounce.
Like I have mentioned, I believe that this price movement was long overdue and have been writing and talking about it for months. I believe that is driven by prudent investors who have seen the potential of this metal and who have also seen how undervalued it has been. I did hear some rumours about some large company based in Germany coming onto the market to buy a large quantity of physical silver, but I have not had this story confirmed. In the meantime, silver still remains way undervalued and should be included in investment portfolios.
Even though the technical indicators suggest an overbought scenario in the silver market, suggesting that a pull back is in the cards, there is a lot of momentum in this move that could take it to higher levels before we see some consolidation. As I have stated in numerous writings I would not be surprised to see the price test $25 before the end of the year.
Even though South Africa was a leading producer of gold, for almost 100 years there was a law in the country that made it illegal for any individual to buy or hold any form of bullion. But, this was finally amended last year and individuals can now own bullion. However, as this is never mentioned on the main stream media, many investors in South Africa are still not aware that they can own bullion bars. And, most of the analysts who appear on the local channels have practically no idea of what is going on in the bullion market. As a result individual investors in South Africa are clueless when it comes to investing in silver. But, no matter where you live, silver is going to be one of the best performing assets over the next few years, and therefore it is advisable to accumulate some of the physical metal.
Even though the indicators such as the RSI, Stochastics and MACD indicate that this current move is over-bought, one must bear in mind that prices can continue to move higher for some time even though these indicators remain in overbought territory. The momentum in silver has been very strong and I would not be surprised to see prices test $23/oz before we see some consolidation.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.