Silver Prices Are About to Fall

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 |  Includes: ABX, AUY, BHP, CDE, FSM, GG, GLD, GOLD, HL, NEM, PAAS, RIO, SGOL, SIVR, SLGLF, SLV, SLW
by: Avery Goodman

Don’t get me wrong. I love silver. As a very long term investment, you cannot find anything better. If you ignore short and medium term volatility, and simply hold your metal for a long term of years, you will probably do okay. The world is running out of silver. The painful part of this "buy and hold" strategy, however, is in watching prices get periodically clobbered.

Another strategy is to keep a “core” long term portfolio, while, at the same time, keeping a non-core or speculative portfolio. In the speculative portfolio you attempt to profit by buying and selling on the price swings. In both cases, you will buy on the lows, but, instead of just holding for years, you buy low and sell high on a regular basis.

On March 6, 2009, I wrote an article which was titled “Silver Backwardation: Prices About to Soar.” That was the time to buy silver. Now is the time to sell. One of the silver stocks I mentioned was Hecla Mining (NYSE:HL), and it was selling for $1.27 per share, back then. If you had bought Hecla, at that time, your profit now is immense. Don’t get greedy. Greedy investors who cannot part with their investments often lose money. Silver is now much more likely to go down than up, as I will explain.

Gold is mined primarily in specialized gold mines. It is getting harder and more costly to locate new gold mines. In contrast, 60% of all silver is a byproduct of base metal mines, which are abundant. Another 10% of silver is produced as a byproduct of gold mining. After having been devastated in the wake of the post-Lehman Brothers metals crash, base metals mining has made a remarkable recovery, and has ramped up again, by leaps and bounds. Silver production is up again. If base metal prices go down, again, it will take time before mines start closing again, and for silver production to fall. That means there will be a temporary end to the shortages which culminated in the recent big price rise.

Many people will point to the U.S. dollar and use its inevitable implosion as a reason to buy silver. That is true, in the very long run. However, we will not see high or hyperinflation in America until we have a currency event involving the U.S. dollar. There will be no implosion of the currency, right away, in spite of our irresponsible Federal Reserve. The Fed has certainly set the stage for a catastrophic dollar collapse, but European bank demand for dollars, for purposes of covering debts relating to imploding dollar denominated assets is preventing immediate implosion of the currency itself. This same foreign demand will fuel a dollar rally as soon as the Fed slows down its printing press. All assets, including gold, silver and stocks, have been artificially lifted since last March, by an influx of Fed liquidity (newly printed dollars).

Recently, the Fed's FOMC got a bit of "religion", and promised to stop monetizing Treasury bills. It has also slightly reduced the amount of agency debt it will monetize to $175 billion from $200 billion, and it has announced that it will buy agency bonds over a longer period of time. In addition, the rumor is that they will attempt to drain some of the excess reserves in the next few months. I don't think Bernanke and his minions have the stomach for financial Kaopectate, over a long period of time. But, a lot of the "liquidity" that has been driving Wall Street's rally-party could temporarily dry out. I am sure that when the pain starts monetary diarhhea will return. But, in the meantime, silver could fall very deeply.

Interest rates, like LIBOR, are going to start to rise. Most important to precious metals prices, however, is the fact that the steady stream of funny-money dollars is about to slow down. That, in turn, means that fewer newly printed bucks will be making the journey to Europe. European banks will have fewer dollars to buy for purposes of fulfilling their obligations to American banks, on defaulting dollar based assets. This means more will be paid for the dollars that are still available. All the big banks analysts are saying that the dollar will continue down, and most of the banks that are not connected to the Federal Reserve are short on the dollar. However, it seems to me that the dollar is about to go up dramatically, NOT down, at least in the next few months. While I think this will have a marginal effect on gold, it will probably have a profound effect on silver prices.

Normally, gold and silver prices travel together. I feel that this relationship is going to change very shortly, at least for a while. Sovereign demand can potentially support gold against both artificial price suppression, and its inverse relationship to the dollar. There is no sovereign demand for silver, however, and industrial demand continues to be depressed. I do not believe that investors, alone, in the face of a massive rise in the dollar, will be able to stop it from falling substantially. So, while I believe that gold may drop somewhat from its current record high, silver is going to drop much more in percentage terms, both because it is inherently more volatile, and because new fundamentals will be affecting both metals.

I believe we are about to see some temporary carnage in the stock and commodities markets, and that will deeply affect silver prices. There will be a lot of selling to cover margin calls, for example, over lengthy periods of time. I may be overly pessimistic, but, based on charts I've examined, the way I see things, silver prices could temporarily fall to $11 per troy, again, or even lower, before March 2010. Prognostications as to exact prices, of course, are seldom accurate.

All of this being said, in the very long run, silver will be a good investment, regardless of what happens over the next few months.

DISCLOSURE: Author is long gold. Mostly short silver, but with some long-term "core" long positions.