Can Silver Drop To Single Digits?

by: Prudent Finances


Silver is now flat for the year.

Silver is on a 4-year losing streak in the month of May.

A long-term investor must have the conviction to hold.

By Ivan Y.

With the recent slide in silver prices, silver (NYSEARCA:SLV) is now flat for the year after having peaked in February a little above $22. As I wrote several weeks ago, March and April are usually losing months for silver and that trend held this year as well. Silver declined 7.1% in March and 0.9% in April. Unfortunately for silver bulls, May historically has been a losing month for silver as well. In fact, silver is on a 4-year losing streak and hasn't increased in May since 2009. The increase that year in silver was due to the positive momentum in commodities and stocks after the Fed announced QE1 in late 2008.

  • May 2009 (up 26.7%)
  • May 2010 (down 1.2%)
  • May 2011 (down 21.2%)
  • May 2012 (down 10.9%)
  • May 2013 (down 8.4%)

Coming back to the present, silver is now testing a support level that held in 2013. $18.40 was the low point in 2013 and so far it has managed to at least stay above that, but it is getting uncomfortably close to that level. I believe that if you look at the long-term chart for silver, as long as it holds above $17.5 the long-term uptrend remains intact.

Last week, Rich Ross, a technical analyst appearing on CNBC, suggested that silver could drop all the way to single digits (video). Anything is possible, but there's a difference between what is possible and what is probable. Even CPM Group, a commodities research firm that is usually bearish, believes silver will average no lower than $18 through 2016.

Silver is a Long-term Investment

If you are a real investor in silver (not a trader) you must look at silver from a long-term perspective. It is a commodity that has had monetary value for thousands of years. Silver is also a commodity that has been needed by civilization for thousands of years. In fact, today, the world would come to a grinding halt without silver because it is the best conductor of electricity and heat out of all the metals and it is the best reflector of light. Almost all electronic gadgets like your smartphones and tablets contain silver. According to Casey Research, a cell phone contains around 200 to 300 milligrams (.007 to .01 oz) and a laptop contains 750 milligrams to 1.25 grams (.026 to .044 oz) of silver. Due to the aforementioned reflective properties, the solar energy industry would not exist without silver. In 2013, over 50 million ounces of silver was expected to be consumed by the solar panel industry. Mined supply of silver is roughly 800 million ounces a year. Without silver, we would be living in the Dark Ages again. I'm exaggerating somewhat, but you get the point.

If you are a long-term investor in silver, you must also have the conviction to hold. This mentality proved to be fruitful in 2008 when silver declined to single digits and quickly rebounded after QE1 was announced by the Federal Reserve. One question you must ask yourself is this: If silver declines to let's say $15 (or even single digits like Ross suggested) would you be able to sleep at night? If you are unleveraged, have a balanced portfolio and have the conviction to believe that the fundamentals are on your side then you should be able to say yes. Though silver has been a losing investment the last three years and could continue to be a loser for a couple more, what will ultimately drive the price of silver higher is the recognition by industrial users, investors, and traders that silver is never going away and there really isn't that much of it around in terms of mined supply and above-ground inventory. Take the U.S. government's inventory as an example. At the end of World War II, the government held 4 to 5 billion ounces of silver in inventory. That declined to 2 billion in the 1950s and eventually went down to zero in 2000. The U.S. government currently buys silver on the open market in order to produce its Silver Eagle and Silver Buffalo coins.

Another issue related to the supply of silver is the question of how much silver is there left to be mined in the ground. Though I am not a geologist, one issue that I have read about is that most of the earth's in-the-ground silver is found in epithermal deposits. A characteristic of epithermal deposits is that the minerals are deposited near the surface of the earth's crust, usually no deeper than 600 meters. This makes it more likely that much of the earth's supply of silver has already been extracted, and future advances in mining technology to explore and dig up materials deeper in the ground will not be much benefit in increasing silver supply. In fact, the U.S. Geological Survey once estimated there were about 8.7 billion ounces of silver remaining in the earth and that silver would become extinct in 2020. I found that hard to believe when I first read it several years ago and still don't believe it now, but the fact remains that a government agency which we assume to be credible once did make that claim.

Silver investors thus must be patient and wait for the long-term supply and demand fundamentals to take hold. This could take years to play out. Traders can make money in any kind of market, but real investors in silver must understand the reasons they own it and have the conviction to hold. Otherwise, your money is probably better invested elsewhere.

For ETP investors like myself, one other point is that long-term investors should only consider unleveraged silver funds like SLV, Sprott (NYSEARCA:PSLV), ETFS (NYSEARCA:SIVR), PowerShares (NYSEARCA:DBS), and ETRACS (NYSEARCA:USV), and avoid the 2x and 3x funds that deteriorate in value over time. My two preferences are SLV and PSLV. SLV provides the ability to hedge with options and PSLV provides the ability to exchange shares for silver bars. Since PSLV is a closed-end fund, the premium (and sometimes discount) to net asset value fluctuates and needs to be considered before making a decision to buy or sell.

Disclosure: I am long SLV. 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.