Even as an investor in silver, just about every article or "analysis" I read on silver prices makes me shake my head. The bulls claim it's going to $150 overnight, and the bears claim it's an utterly worthless metal that's going to $0 in a similar timeframe. So I decided to compile a list of the strongest bullish and bearish arguments for silver. Hopefully, after reading, you'll be better able to determine if a long or short position in silver is appropriate for your portfolio.
For this article, I'll be using the iShares Silver Trust (SLV) as a proxy, though the analysis also applies to the Sprott Physical Silver Trust (PSLV) and to a lesser extent, silver mining ETFs like SIL.
1: Supply and Demand
According to The Silver Institute (the nonprofit international association for the silver industry), silver production in 2011 hit a record high of 761.6 Moz (million ounces). On the other side of the equation, total silver fabrication demand fell 1.5 percent to 876.6 Moz due to a sluggish global economy.
Clearly, more silver was used than was produced -- 115 Moz, to be precise. This silver obviously wasn't pulled out of thin air. It was sourced from above-ground stocks (reserves). For 2011, this figure is 278.9 Moz of silver (a significant decrease from 323.3 Moz in 2010).
It's worth noting that out of the 278.9 Moz taken from above ground stocks, 256.7 is in the form of "old silver scrap" -- recycled silverware, jewelry, etc. This is an increase from 228.7 Moz in 2010. The actual amount of bullion taken from above ground stocks was 22.2 Moz at the beginning of 2012.
This disparity between supply and demand could explain why government sales and miner hedging of silver plummeted. When above ground stocks are depleted, silver could be poised for a move up.
2: Technical Support
(click to enlarge. source: FreeStockCharts.com)
Since peaking last May, silver has generally been in a downtrend, although it did make a move to the upside in January/February. However, the downtrend appears to be slowing, and silver has bounced off strong support on several occasions. While it has not recently shown any particular affinity for breaking to the upside, neither has it gone on a freefall like the bears project. The "consolidation" is actually a positive argument for bulls.
3: Monetary Policy
Low interest rates, inflation, and quantitative easing all contribute to a weaker US dollar going forward. While the US dollar looks strong like now in comparison to the Euro-mess, in the long term, current monetary policy is a positive for gold (GLD) and silver.
1: Risk On/Risk Off Trading
This wouldn't matter so much if silver tracked with stocks when they went up. Unfortunately for silver bulls, silver's behavior is a little erratic and notoriously volatile. Silver has missed out on the uptrend in the Dow (DIA) and S&P 500 (SPY).
(click to enlarge. Source: Google Finance)
2: Margin Calls
Especially in the current environment, there's no guarantee that this won't happen again. If it does, it won't bode well for silver.
3: Industrial Demand questions
As Simit Patel noted last month, industrial demand for silver is declining. There are several bearish trends to consider here:
- Global economic downturn is reducing demand
- Recycling of scrap is increasing
- The medical industry is moving towards digital photography
If these demand trends continue, they could offset the bullish supply/demand argument I established earlier.
Wildcard Argument: JPMorgan
There are a lot of claims out there about reasons why silver prices are where they are right now -- one of the most common is that JPMorgan is shorting silver. While the veracity of this claim is as of yet undetermined, if it does happen to be true, silver could see a solid upward move.
Conclusion: Caveat Emptor
In the interests of full disclosure, I'm long silver. However, silver is an extremely volatile investment with a penchant for large swings. As such, it isn't suitable for everyone, but may have a place as a part of a well-diversified portfolio.
For another well reasoned analysis of the silver market, check out this article from Bloomberg.