After topping $40 (U.S.) an ounce this week for the first time since 1979, high-flying silver ran into some turbulence Tuesday as investors cooled on commodity plays. After a remarkable rally that has more than doubled silver’s price in less than eight months, how much longer can the metal shine? David Parkinson gathered a panel of experts via e-mail to discuss silver’s surge.
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David Parkinson, The Globe and Mail: We've seen silver surge 50 per cent since late January – a time when its traditional dance partner, gold, has risen a modest 10 per cent. Why the sudden excitement in silver?
Ross Strachan, commodities economist, Capital Economics: Silver is benefiting relative to gold from improved optimism about the global economy as its industrial uses come to the fore, particularly for photovoltaic purposes [solar power cells]. In addition, the investor community is being drawn to silver for a whole host of reasons, not least the industrial arguments, but also importantly (and in contrast to gold) because it is still comfortably below all-time highs. Furthermore, silver has gained increased retail investor interest, especially in North America and Germany, as small-scale purchases of gold have become increasingly prohibitive, helping silver coin sales to record levels.
John Kurgan, senior market strategist, Lind-Waldock: As a retail adviser, what I’ve been finding over the past year is the retail investor is feeling that gold is “expensive” and silver is a “better” precious metal value play. This is underpinned by the lack of faith in fiat currencies and the need to be in something that will hold value.
RS: I would note, however, that following the more than doubling of silver prices since last summer, the gold/silver price ratio is now substantially below the average of the last 30 years or so.
JK: Good point, Ross. But you would be surprised how many investors either don’t look at that ratio or have the wrong ratio in their analysis. With respect to the doubling of the silver price, that, in some cases, has only encouraged some people to want to be involved.
Andrew Kaip, silver-mining equity analyst, BMO Nesbitt Burns: Supporting a positive outlook for silver in the near term has been some good research from GFMS [Gold Fields Mineral Services] that has published some very bullish demand prospects for silver. This coming from an organization that is traditionally very conservative.
As for near-term trading, silver has run so strongly since the January correction that I am not surprised we are seeing a sell-off in sympathy with other commodities.
JK: We are down $7 in crude oil in the last two days. Metals and specifically silver will continue to come off in sympathy, or at the very least have trouble rallying.
RS: Given the speed and scale of the upward price move in silver, and oil for that matter, the current brief pullback is hardly surprising, as some investors were bound to be looking to take profits. More importantly will be if this leads to widespread change in sentiment toward commodities, possibly generated by substantial fund liquidation, or – more likely in my view – that this is a short-term correction.
JK: One of the technical indicators that I look at is Market Vane’s bullish consensus number, which is at the very frothy level of 95 per cent. Typically when we are greater than 80 per cent, a correction is very possible. The extent of the correction is another matter. As of late, any correction has been a great buying opportunity, and perhaps this is the case again.
AK: I agree that we are seeing profit-taking. Most institutional clients I am in contact with are of this opinion. When we look at silver valuations, they are lofty and gold companies are looking more attractive.
