Silver (NYSEARCA:SLV) and fluctuations go hand in hand. Despite the fact that silver has never come out with earnings, the price of silver is affected by numerous fundamental factors including but not limited to supply/demand economics, the value of the dollar, national/international economic performance, inflation and to certain extent trading that at times smells of manipulation.
Most recently SLV just experienced a quick sharp downward swing last week of almost 20%, and is currently looking for support at around $22. This is 20% lower than its previously developed support of $28. In other words, in the event of a sudden sentiment reversal in silver, there should be very little resistance until SLV gets back up to the $28. See chart below.
- While the market for silver is experiencing the aforementioned downturn, the U.S. Mint sales of silver bullion coins so far this year are 17 million oz, up roughly 48% year over year. In other words, while the price of silver is falling, there is a noticeable increase in the demand for physical silver.
- The debt ceiling debate. If you recall, the debt ceiling debate, which was rampant around the New Year, was never actually dealt with. Instead it was "suspended until May 19, 2013." Kicking the can down the road only works for so long. At some point we will have to responsibly deal with this, and almost any meaningful manner of dealing with our spiraling debt problem represents potential trouble for our economy, thus fueling further need for Fed stimulation and price appreciation of silver. Alternatively, without further Fed stimulation, silver appreciation is a likely outcome of a flight out of stocks and into precious metals, which would ensue.
- The longer-term economic factor to consider is inflation. To be sure, the Fed stimulation so far has not lead to significant inflation. In fact interest rates remain near zero. Nonetheless, the fact remains that as money supply is increasing, unless increased economic activity can keep up with the increased money supply, inflation will follow. Economists can and will debate forever the theories of inflation and velocity of money etc., but at its core if the money supply is increased then if demand doesn't keep pace, inflation will follow. Inflation, while a dangerous scenario for retirees, represents a boon for precious metals.
- A large part of the recent pullback in silver, was due to the simultaneous run on gold. This run on gold has in part been attributed to Cyprus being forced to hold a fire sale on its gold in order to finance its bailout. The important thing to note is that Cyprus is a small country, and its gold holdings in total are less than $700 Million. Unless the US government or other governments plan to follow suit and hold a fire sale on gold as well, the recent price plunge has been way overdone. Outside of some fringe reporting this seems unlikely.
Given the current volatile state of affairs I am considering taking a moderate position in SLV while leaving some money on the sidelines in the event of a continued drop in price, at which time I may add to the position to further lower my cost basis.