Bargain Hunting For Silvery Opportunities Is A Profitable Idea

May. 5.14 | About: iShares Silver (SLV)

Summary

The price of silver is currently undervalued by historical and technical measures.

Strong support tell us silver can really only go up.

Fundamental reasons why $22 per ounce is a reasonable target.

I've been holding off writing about silver (SLV, AGQ, SIVR, USLV, ZSL, DBS, DSLV, USV, SLVO) because I've been told over and over again by market analysts that we should see it fall $18 per ounce, yet it continuously keeps on bouncing off a support level between $18.2 and $19. I now think the market is sending us a clear message. As a disclaimer, I should mention that with these updates I usually put my money where my mouth is and place trades based on our analytical conclusions, but in this case, I have not taken any positions in silver nor do I intend to because our broker charges a ridiculous spread and the premium is exceptionally high for XAGUSD (I don't have many criticisms of our broker, but that's one of them). Nevertheless, I write this trading opportunity with the firm belief that buying silver is a great idea, and more so at price levels below $19. Here's why:

  1. Silver in the past has been highly correlated to Gold, but that bond is either loosening, or according to the gold:silver ratio, makes silver highly undervalued. Historically, well at least since 1985, the mean ratio has been 45:1. Currently it lies at about 67:1.
  2. Analysts, including David Morgan, believe that silver has bottomed out and is at price below the cost of production. According to various experts, at prices below $20, silver becomes unprofitable to produce (the cost of production depending on who you ask is between $20 and 24 an ounce), mines close, supply dries up and the price goes up. At the very least, production continues, but it not sold on the market until prices rise again.
  3. Silver, unlike gold is a commodity used in manufacturing and this is where the prices diverge in correlation. It is true that growth in Chinese manufacturing has decreased according to recent data, however we are seeing that the consequential drop in global manufacturing being offset by emerging economies and by the economic recovery (albeit a slow one) of the EU and the US. This should prop up the price of silver even if it becomes a less desirable luxury item.
  4. Silver is currently an unfashionable commodity and this makes it a great purchase. Remember, the number one rule of investment; buy low and sell high. The end of American QE sent gold and silver prices tumbling and speculators fled like bats out of hell. It appears they have a yet to return, and by and large, it is off the trader's radar. By reading reports and commentaries, you get the impression that XAGUSD's fundamentals are solid, yet serious buyers continue to stay away.
  5. Support and technical indicators denote lucrative entry points. A number of indicators such as the Stochastic RSI and CCI, consistently signal that XAGUSD is oversold at prices below $19. We just witnessed another one of the entry points occur a few days ago, and indeed, the price moved below that level and predictably, it bounced right back up again. The support has been tested no less than eight times, which to me, makes it very solid and you would have to have an exceptional shock to the market to the price drop below it.
  6. If a long position was placed, a target of $22 is a reasonable and profitable expectation. The market works in cyclical movements and patterns emerge which are represented by valleys and peaks in the price chart. The first drop to the support line was followed by a 2 month period of price stabilisation at a level just above that. Again, it rose up past $22, and fell back down for another two months. We are now into our third cycle where the price has stabilised at a level below $20. We are just one month into this cycle and perhaps by trading according to this pattern, we may see the price rise up again to a minimum of $22 within a month. If the trader would like to trade for an even longer term, $24 or $25 is a reasonable target.
  7. Precious metals have a correlation to inflation. At the moment we are witnessing an exceptional period of low inflation and even deflation across the board. Analysts predict this is only temporary and that we should not expect a deflationary cycle (such as what happened in Japan). Considering the widespread forecast that prices can only go up, we should see silver prices pulled up alongside CPI data.
  8. Silver along with other precious metals is a safe haven. If the geo-political situation continues to heat up in Eastern Europe we should see a higher demand for these commodities. European QE (which is a relatively drastic measure) may also send speculators hunting for silver derivatives.
  9. Peter Schiff says precious metals are undervalued and gold will rise to $5000. We believe that's a huge call, but the overall sentiment felt by the well-known commodity forecasters is the same; silver and rare-earth metals in general can go a lot higher.

In summary, the reasons for buying silver are quite compelling if you're willing to hold it for a few months. At levels below $20, it's a bargain but it only drops down below that level for a short amount of time and you would have to get in quick.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.