Silver's Strength Waning

By Brad Zigler

real-time Monetary Inflation (per annum): 8.5%

There's a little bit of tarnish on silver now. Silver spent the first five months of 2009 building strength against gold. The gold/silver ratio, which started the year at 80-to-1, slumped to a 61 multiple at the beginning of June. It's been rebounding since then and now has breached its former breakout level at 68x.

Gold/Silver Ratio

You can look at this development in a number of ways. As silver has more industrial utility than gold, the white metal's relative weakness could be taken as an indicator of flagging faith in a recovery. Gold's vigor vis-à-vis silver can also be seen as a symptom of capital flight to a safe haven. With both metals in an intermediate downtrend, though, the former scenario seems more apt than the later.

In the June 2 edition of the Desktop, we noted an incongruity in open interest trends for gold and silver: "Not only did the white metal meet and exceed the trading objective forecast by its breakout, it did so while building open interest. That, in a strange way, makes silver even more vulnerable. The silver market may, in fact, be overextended with weak hands now. Near-term support for the July contract is at $15.10 and $14.73."

The following day, the gold/silver ratio reached its year-to-date nadir as silver heeled over into its current swoon.

COMEX Silver (Jul. '09)

In London Thursday morning, the gold/silver ratio touched a 70 multiple when silver was fixed at $13.41 against a $936 gold price. Wednesday, the July COMEX contract settled at $13.75.

Continuing weakness would point bears toward $12.53, the 50% retracement level of July's November-June rally. Support for July contract could have been counted upon at $13.40, but overnight cash dealings as low as $13.27 have turned that into an interim ceiling. Buying now is likely at $13.12 basis July.

For holders of the iShares Silver Trust (NYSE Arca: SLV), the close-in support level translates to a $13.14 share price.

Comments

[AssetReset:]

Silver is more volatile than gold and reacts more harshly to dollar movements. Downward movement of markets are strengthening the dollar and exerting downward pressure of silver.

When the markets stabilize (no improvement needed), the FED's capital injections will hit the streets, and silver will vastly outperform gold.

These "dips" just just entry points for me. Half of my paycheck, every paycheck.

Jul 02 05:28 PM

[Traffic:]

Silver is more of an industrial metal.

Jul 02 06:11 PM

[Kristjan Ve...:]

Silver's strength is not waning, not by a long shot. The upward movement to 68:1 is silver's reaction to the fall of the price of gold. Silver always reacts more violently.

Unless commodity prices don't experience a fast and steep recovery, we are going to see a fall in the supply of silver, because most of the silver is mined as a byproduct of other metals (copper, zinc, lead). A lot of mining companies have closed some of their base metals mines, because of the high spreads between market prices and production costs. A fall in the supply of silver could possibly push the price of silver to the low twenties, but this won't have a large effect on the production side as mining silver only from a mostly base metal ore is simply not economical.

To pull it all together - the fall in the gold:silver ratio is in a downward trend, which will most likely continue.

Jul 02 07:45 PM

[GMiki1:]

And everything I read by the technical chartists says that silver is in an extremely bullish spot right now--as is gold--despite the "dip." I, too, expect silver to outperform, even if it first breaks $13 on the downside.

Jul 02 09:04 PM

[Boot:]

Every trend has an end. I think the recent run-up in commodities had to end, and consolidate for a bit. With the Comex playing their hand, and central banks waging a war of perception, we can't expect commodities to rocket unabated. Now we have a fundamental gut check during the summer. This is not business as usual. The economic times currently cannot be compared to the recession discussions of my time. My step father is scratching his head and he's 84. What should emerge in the fall will be the best in class miners be they explorers, in development or low cost producers. Time will tell. Boot

Jul 02 09:47 PM

[bolt turner:]

great time to but silver 10oz bars for christmas gifts that may be twice their worth by then

Jul 03 12:57 AM

[Ryu Mei Co:]

The rally of commodities are due to "green shoots", China's demand, weak USD, USD reserves currency status, and weak US bond market. Except Natural Gas and Aluminium, commodities prices are declining right now seems more like a profit taking to me as traders take global bad economic news as a reason to sell. I will assume the selling is not over, and I would expect the appreciation of commodities price to resume later since the fundamental reason for the commodities appreciation is still intact. I would expect even worst price appreciation since inflation will sky rocket in the future (next year maybe) ......... yikes!

Anybody heard of the doomsday 2012? Maybe it is the hyperinflation 2012!

Jul 03 12:59 AM

[silverwood:]

I am going to patient with silver. My intuition say that silver will be trading at much higher prices in the not too distant future. So in the meantime if the price gets relatively cheap in the near term I will go shopping for some of my favorite silver coins. Yep pateint that's what I'm gonna be.

Jul 03 02:10 AM

[nobby73:]

I think you are correct to suspect Comex and central banks to be playing a hand here. Particularly with silver, some of the price drops have felt like someone wants to smack it down. Especially with regards bad US data, would seem to be positive for silver as simply adds further evidence that monetization/ depreciation is the only way out.

What makes sense to me is buying the physical stuff, because illusory pricing for something that cannot be delivered cannot go on for ever.

On Jul 02 09:47 PM Boot wrote:

> Every trend has an end. I think the recent run-up in commodities
> had to end, and consolidate for a bit. With the Comex playing their
> hand, and central banks waging a war of perception, we can't expect
> commodities to rocket unabated. Now we have a fundamental gut check
> during the summer. This is not business as usual. The economic
> times currently cannot be compared to the recession discussions of
> my time. My step father is scratching his head and he's 84. What
> should emerge in the fall will be the best in class miners be they
> explorers, in development or low cost producers. Time will tell.
> Boot

Jul 03 08:51 AM

[Spartacuss:]

It would be interesting to see the forward demand supply ratio on silver.

I think we are in a secular bear market with new lower lows coming in the months ahead. Consumer demand will continue to decrease and with it securities. Along with this trend industrial demand will slack for sure.

The saving grace in this would be that miners produce less in lock step with declining demand. Then add the other fact of silver, it is very bulky. The shipping costs for any reasonable quantity of silver is onerous. Thus, on the bullion side, by the time you pay premium and shipping and perhaps storage cost compared to gold, an investor in bullion is far better off with gold.

Of course this leaves us with paper silver as an option but only in the face of evidence that silver is turning around...and that may take quite a while being another reason to avoid silver for now.

We are the the throes of the next leg down with two factors of influence, the increase in mortgage resets and baby boomer retirements; i.e., the recipe for the perfect storm.

Jul 03 03:11 PM

[dcb:]

one can't predict for certain what is going to happen, but I'd say the S&P goes to 750 in the final correction before the real bull market. commodities have dropped first as the leading indicator, bas metal should be a good signal as an entry point because this will lead the up turn again.

Just watch for the S&P.

alternatively follow lqd, when it hits nav that is a good buy signal.

Jul 03 05:47 PM

[dcb:]

I take my LQD statement back, I do not think it will work this time.

Jul 03 05:50 PM

[Larry House:]

Sadly (since I own silver) I have to agree with your conclusion. However, I don't hold silver as a short-term investment. I think we may be shocked to see what economic conditions will be like in 2010, and I think it very premature to give up on silver. Now is the time to dollar-average into more.

Jul 03 06:12 PM

[HA65MPH:]

GOT SILVER ?...GET IT !...EOM

Jul 04 02:38 AM

[FDNY RET:]

Everyone tries to analyze the demand/value of the individual commodity, gold, silver, bushel of corn etc.
The real cause for demand is the humans who follow each sector or in this case, gold and silver. Their values are tied to our perceptions of their worth, now and tomorrow. And perceptions are often not rooted in rationale.

Instead of trying to micromanage the day to day movements, just determine a trend based on hard data comparisons to what options you have. For now, everyone knows the dollar is in the toilet for the foreseeable future. So until change,-(not change as in speeches) --occurs, place what you can spare in either gold or silver, and relax, you are safer than before, now patience reigns.

Remember there was a time when everyone just loved tulips.

Jul 04 10:14 AM

[cameroni:]

Looks to me like a good buying opportunity for silver is coming. In relative terms though and with strong fundamentals indicating we will be needing security against damage to the dollar, silver still appears cheap at current prices. All the better for finding a good entry point if it drops near-term.

Jul 04 10:16 AM

[jhm47:]

I'm beginning to think that the short-term outlook for silver is bleak. However the long-term is very bright. When you have some of the largest banks in the nation using their multi billion $ sledgehammers to illegally (and with the CFTC's compliance) hammer the price of PM's all the time, it's pretty hard to overcome them. But---I do firmly believe that the general public will someday wake up and overcome the power that the big banks currently wield, and silver and gold will then skyrocket beyond our wildest dreams.

When the public realizes just how destructive this Hitler wannabe's (Obama, for those of you on the coasts) policies will be to our economy, I believe that there will be an awakening the likes of which we have never seen. We may be organizing lynch mobs to hunt down those who have "hope and change" stickers on their hybrid cars.

Jul 04 11:33 AM

[montross515:]

Since the US government is behind the manipulation of the price of gold and silver all your article shows is what they are doing. Nothing more. If our government wasn't short a year's worth of silver, short against nothing but paper dollars, then silver would be $25 an ounce---for a minute. And then it would be off to the stars. Imagine if 5% of the money in bonds wanted to get into silver???

Jul 05 08:25 AM

[secmaven:]

What is the one or two year downside for silver compared to upside? What is the one or two year downside for the S & P 500 compared to upside? Where should you invest? Enough said.

Jul 05 11:34 AM

[CyberDivan:]

With a federal deficit of over 2 Trillion, I don't see how the government can borrow all that money. They are going to be forced to print money to handle that amount of debt. The dollar will sink and silver and gold still remain one of the best hedges against this kind of inflation.

Jul 07 06:39 PM