Silver has been used as money in the form of coins since about 600 BC, in what is now called Turkey. In the modern world, silver bullion carries the International Standards Organization code XAG. Numerous currencies have been backed or connected to silver throughout history. The British Pound Sterling originated in 757 AD with the Tower Pound system of measurement. 1 Tower Pound = 12 oz. Silver has a long and storied history as a medium of exchange in addition to it being a popular metal for jewelry and its use in manufacturing.
Since 2003 silver has risen from about $5.00 per troy oz, to a peak of almost $46.00 in early 2011. Its current price is about $29.00 per oz.
In the late 1970s, brothers Nelson and William Hunt tried to corner the world's silver markets. Prices rose from about $11.00 per oz in the fall of 1979 to a peak of about $50.00 in January 1980. At their peak holdings, the Hunt brothers had accumulated about 100 million ounces of silver. The price collapsed a couple of months later, returning to around $11.00 per oz and the Hunts went bankrupt.
Economically, the late 1970s and early '80s were characterized by high inflation and fears of the devaluation and potential collapse of the U.S. Dollar. This drove people to seek out alternative ways of protecting value and caused a spike in precious metals prices. As we can see from the charts, once the inflation fears had passed silver prices returned to their pre-inflation levels.
More recently, we have seen the run-up in silver prices through the 2008-2009 financial crisis. As it became clear that the Federal Reserve was engaged in aggressive monetary easing, people started pouring money into the metals markets (NYSEARCA:GLD), (NYSEARCA:SLV), as once again wide-spread fear of currency devaluation stoked fears of potential hyper-inflation. Silver and gold both rose dramatically as broad-market uncertainty became the new norm in financial markets.
As we can see by comparing the two charts above, the rise in inflation and the rise in silver prices is closely correlated--see the beginning of 2011. As inflation started to decline in late 2011, so did the price of silver.
Monetary easing does not necessarily lead to inflation--at least not as soon as most people expect. Evidence of this can be seen in the effects of the monetary policies that Japan has engaged in over the last two decades. Japan was the inventor of quantative easing back in 2001 and has engaged in more than eight rounds of QE since, yet it has not had even a hint of inflation.
As we can see from the charts above, a run-up in silver prices does not so much correlate with the rate of inflation but more so with the fear of the start of a period of inflation.
The fact is that we are in a long-term de-leveraging cycle from the over-expansion of credit that took place over the last three decades. This credit super-bubble started to burst in late 2005 with the housing bubble. As we go forward, the Fed along with most of the other central banks in the world, are fighting a massive deflationary cycle that is the result of the credit super-bubble bursting. This is further complicated by the demographics of the baby boomer generation retiring at 10,000 per day and a comparative lack of productive workers coming on-line to fill their shoes.
In order for real inflation to take place, the people have to have money to spend to the point where they can bid prices up. The opposite is when people have less and less money and contract their spending as a result (deflation). The latter case seems to characterize the average consumer's financial position as of late.
Conclusion: As the world-wide deleveraging process continues, I would look for the speculative price action in silver that has been predicated on the fears of hyper-inflation to ease.
Technically, silver is sitting just above a major resistance point of about $27.00. Should silver break solidly below that barrier, I would look at shorting it with a target of $20.00 in the short term. If $20.00 is broken to the downside, I would look for silver to go to $10.00 per oz in the longer term.
SLV is the most popular silver ETF.
(NYSEARCA:ZSL) is a double-short ETF. Please remember that leveraged ETFs are designed for short-term trading.
Disclosure: I am short GLD. 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.