Chairman Ben Bernanke has sent his troops to drum up support for the next QE. Just last week, two senior Federal Reserve officials, Fed Vice-Chairman Janet Yellen and Fed Governor Tarullo, have strongly hinted that QE III was a distinct possibility. The Fed wants to reduce the stubbornly high unemployment. Chairman Bernanke is probably also getting pressures from the White House to do more in an election year as the President’s hands are tied on the fiscal front. As I mentioned in my previous article, the iShares Silver Trust ETF (SLV) will benefit the most from the inevitable QE III. Let’s explore how silver has performed in the last two QEs and if it has become too speculative.
Silver and QEs
When the Fed first embarked on QE I in November 2008, silver started rallying right away. It touched a bottom in late October, five months before the stock market did, and has rallied along with the QE announcement and implementation. Unlike Treasury that rallied into the announcement but sold off after, silver has seen a sustained rise in prices even after QE I finished. Despite the volatility in the economy and other asset classes, silver had gone up nearly 100% during QE I vs 20% for the Dow during the same period (From QE I announcement in October 2008, to the QE I finish). When QE II was announced in August 2010, silver started its second leg up. This time, investors had realized silver’s QE potential and bid the price up 161% before peaking in late April, 2011. Since the April peak, the silver price has corrected about 30% but is still up 83% from when QE II was announced. The Dow is up 17% during the same period. I believe speculators bid up the price of silver to an unsustainable level earlier this year. Much of the speculation has come out of silver, judging from the decreasing volume from 400 million a week earlier this year to 82 million in the week ending Oct 14th. Additionally, as the Fed increases its balance sheet, the threat of future inflation increases exponentially, a factor that’s very bullish for silver. With the decreased volatility, it is now a good time to consider buying silver before QE III. The QE hints from the Fed should give silver support at the $30 ounce level.
Silver and Gold Conclusion
Many people think silver is the poor man’s gold and gold is the ultimate hedge against inflation. From October 2008, when the first QE started to now, silver has appreciated 200% vs 98% for Gold. The story gets better. Unlike Gold, where its entire demand is for investment purpose, almost half of the demand for silver is industrial (See blew). Silver coins and investment demands only account for around a quarter of silver’s consumption. With a relatively low percentage of silver demand for investment purpose, we can see that the demand for silver has yet to reach unsustainable levels. When investors start to increase silver in their portfolios, the price of silver will skyrocket and QE III could be that trigger.
While silver might still have room to fall, I believe the majority of the pull-back is past us and any dip is a great chance to add this precious metal to your portfolio. Silver should float at around the $30/ounce level before the next leg up, which is when QE III is announced.
Disclosure: I am long SLV.
Silver and Gold