Thursday, April 2, 2009

Silver looks cheap - but you'll have to be patient

By Dominic Frisby Apr 01, 2009

Dominic Frisby
Molten silver

Silver: disappointing

When you see that silver began 2009 at about £7.50 an ounce and it's now trading above £9 – a 20% rise – you might think it's been a great buy for sterling investors.

But it hasn't. It's been a source of constant frustration, even more so if you measure it in dollars.

According to various analyses, it should be going to the moon, particularly now in this time of monetary crisis, but it isn't. Why not – and will it ever?

Investor demand for silver is soaring

According to Jeff Christian of commodities research firm CPM Group, investors bought 70m ounces of silver in 2007; 100m in 2008; and based on current trends, they're on track to buy 180m ounces in 2009.

That would be the third largest annual amount of silver bullion ever bought by investors. The only two years in which investors bought more were 1965 – when the US Treasury's hold over the silver market was being broken - and 1980, the year of silver's historic rise to $50.

Yet despite this amazing statistic, silver is still trading at $13.

Indeed, according to Gene Arensburg of, who put the chart below together, based on data from the Barclays iShares Silver Trust, the silver ETF (NYSE:SLV) has 'completely filled up all the storage space foreseen in its custodian agreement with JP Morgan Chase, London. In fact, as of this past week SLV reported its silver holdings exceeded the amount of silver JP Morgan is obligated to store for SLV.' Goodness knows where SLV are going to put all that extra silver, but the point is, investor demand is soaring and the price is not.

SLV silver ETF

To put this disappointment into some kind of perspective, every significant metal, be it base or precious, broke out to all-time highs at some stage during the recent run-up in commodities. Silver, however, is still trading at barely 25% of its 1980 high of $50 an ounce.

Let's look at some charts. Firstly, a long-term silver chart (below). You can see how far it has to go to make its all-time high of 1980.

Long-term silver price

(Thanks to Nick Laird of for the chart).

The next chart shows the performance of silver relative to that of gold since 1970. Again, you can see what a laggard it's been. In the top half of the chart you can see the outperformance by gold over silver since 1980. In the bottom half, you can see the ratio of the two.

At present silver is cheap relative to gold. Longer-term we really need to see silver break down below the level of 45 ounces of silver per ounce of gold. Only then will we be seeing outperformance by silver. (The longer-term average by the way is about 15 ounces – there is roughly 15 times as much silver in the earth's crust as gold).

Spot gold price v spot silver price

When you adjust the price of silver for Consumer Price Index (CPI) inflation, the disappointment is even more pronounced.

Inflation-adjusted silver price

Adjusted for inflation, if silver were now trading near its all-time highs, it would be somewhere near $250 an ounce, almost 20 times higher than it is today. We know that in 1980 you could buy the average UK house with 1,000 ounces of silver. 1,000 ounces today is about £9,000 plus VAT, while the average UK house is £150,000. Now 1980 was a price spike, but between about 1974 and 1979 silver traded in a consistent range between about $40 and $60 (adjusted for inflation), still about four times where we are today.

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Industrial demand should stay strong too

Silver sold off in the bust of 2008 as though it were a base metal and, because of its multiple industrial uses, in a way it is. But its industrial uses excite me almost as much as its monetary qualities.

Silver has excellent conductivity. Almost every electrical appliance of quality – be it phone, computer, keyboard, switch, screen, batteries – will contain silver. These are all, depression or no depression, growth areas.

Similarly, more and more anti-bacterial properties are being found for silver, which means it is being used in medicine, hospital equipment – surgical tools, bandages, catheters, needles, stethoscopes, furniture – even paint and clothes. In TK Maxx the other day - I only shop in the best places – I even saw some 'allergenic' pillows that contained silver fibres.

So why isn't its price increasing?

So the investor demand is there and the industrial demand is there. Why the disappointment in the price?

Many will point to that old chestnut, silver price suppression. Some of you will be familiar with GATA – the Gold Anti-Trust Action Committee – and with Ted Butler of Investment Rarities. Both have come up with compelling evidence about manipulation of the silver price on the Comex (the commodities exchange). The short position there accounts for more than annual global production. How could the short-sellers ever hope to deliver?

But famed commodities investor Jim Rogers dismisses these notions, saying that there have been rumours of this ever since he can remember and nothing ever gets proven. And for all we hear about an imminent short squeeze that is going to send the silver price soaring, it never seems to come.

I don't know about suppression and I'm not sure we'll ever get to the bottom of the story. But in any case, what is the point of owning something whose price is deliberately suppressed, when we can do nothing about the suppression except make a lot of noise? All we can do is look at the characteristics silver displays and then trade accordingly. And sadly, most of the money seems to get made trading silver on the short side.

Nevertheless, I've taken a 10-year chart of silver and drawn some trend lines on it. As you can see, for all the volatility, we are still in an uptrend. The lines mark some interesting areas of support and resistance. Note the rising straight red line, drawn along the highs silver has made. The next spike silver makes will probably take us to that line. I don't think we'll see that before spring 2010, but by then that line will be north of $25 which will be a very juicy target. But if it gets there, please, for goodness sake sell, or we'll be playing the silver waiting game all over again.

10-year silver price

As for silver's next super spike, we may be waiting a long time. Some have been waiting since 1981. But I think we'll get there… sometime in the next decade.

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1 comment:

Brad Zurich said...

This is really amazing that when most other commodities and metals are reeling under the global economic melt down the prices of Silver and Gold are scaling great heights. Really difficult to understand the reason. Also I read that India, the world's biggest importer of Gold has actually started exporting the yellow metals for the first time this decade.

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