I didn't really pay attention to gold and silver in the early days of my investing. I saw no reason to, as I agreed with Warren Buffett on the issue of the metals:
- No dividend
- Increasing supply of gold and silver from mining makes it not ideal as an inflation hedge
- Better investment opportunities to be found elsewhere
I saw no reason to pay for what essentially amounted to shiny rocks. Time makes fools of us all, I suppose. Six years later, even after a huge correction, I would still be in the black today had I bought gold or silver back then.
Now I find myself looking around and seeing nothing but absurd valuations on stocks and decayed fundamentals for the global economy overall.
Almost every major government is carrying historically high debt-to-GDP ratios, and the reaction to austerity measures has not been the most positive. Some of the more alarmist observers envision China undergoing significant civil unrest should yearly GDP growth in the country fall below 5%.
The United States, while looking relatively healthy amid this mess, is still facing headwinds from sequestration and declining international demand due to a strengthening dollar. Japan is attempting a desperate all-in gamble to break deflation; the strategy appears to be working as planned. This strategy could easily backfire and lock the country into bankruptcy via rising interest rates, however.
On the surface, it almost seems as if the stage is set for a huge silver/gold rally.
Despite all of this happening, silver still has further to fall.
Why silver will continue to fall
- Inflation is not coming to the U.S.
If inflation truly is the driver of silver prices, silver is going nowhere fast. Frankly, silver moves pretty independently of inflation, regardless of what current group think is, but I suppose I need to address the inflation issue.
The stories about hyperinflation being the new normal have not come to pass. Moreover, the Fed needs to be worrying about deflation. With recent cuts to food stamps and other programs, and money moving at a much slower pace through the economy, there simply is no reason to expect inflation to pick up. On top of that, there could be further government spending cuts with the debt ceiling poised to be held hostage soon, only ensuring that inflation remains low.
- Silver is an industrial metal too
Silver prices fall in a weak economy due to the metal not being used for industry, in addition to inflation generally being weak in modern developed economies with weak growth. And it is clear America is going to continue to see weak growth:
Retail sales for general merchandise are down. Mortage loan applications are falling. The Fed can't (or won't) do much more to stimulate the economy, and our politicians have no interest in increasing the deficit. Unless there is a drastic change in policy from our government or the fed, or severe fuel shortages, there is no reason to expect anything higher than 3% inflation in the coming years.
- Miners haven't stopped mining
Miners are still supplying silver to the economy, as they haven't gone bust yet. Global production of the metal is at an all-time high, which essentially represents the inflation that silver is undergoing. High inflation in silver and low inflation in dollars means, by definition, that silver prices will continue to fall.
Rising stockpiles will only exacerbate the already bearish conditions for the metal. I certainly see the argument that silver miners will stop producing if prices fall, causing a rebound in silver prices eventually. Some bulls see the current rebound as that mark, but we're not there yet. We have another fall yet to come for silver before we get the decline in production the silver bulls are looking for.
- Bearish technicals
While not terribly meaningful, the typical technical analysis agrees with the fundamentals here. As you can see, the recent "rally" is nothing but a blip, a bear flag, a bull trap in the grand scheme of things. Whatever you prefer to call it, there is definitely a bearish long-term technical sentiment in addition to the bearish fundamentals.
I cannot give you a price target or timeframe on the bottom for Silver. I think you should be wary of anyone who claims to be able to do so. What I can say is this: silver's moving up only because it has lost over 50% of its value over the last few years, and some view it as a bargain right now. There is little to back up this bull run and thus it will run out of steam quickly. If you want to go long on SLV, now is not the ideal time.