iShares Silver Trust (SLV) has been headed down just like gold, but it has more influences upon it than just its appeal as a precious metal that others might invest in for safety in unstable economic conditions. Silver is also very much in demand for industrial reasons. With the global downturn, this may very well have a bearish affect upon the metal much than it would gold.
Influence by Economic Conditions
Since silver is widely used in industrial applications, it is also highly susceptible to economic conditions. Silver prices are going to fall in the climate we are in. With weak global manufacturing; a declining PMI in China and slowing growth in the US, there is no catalyst to turn the price around. Estimates of world growth have fallen and the need for silver to make things continues to slow. So what is left to lift the price of silver? Is it monetary policy? Common sense would tell us that solid industrial demand is the most sensible thing to look for. It should not be forgotten that this source of demand is still key in the silver market. Scotia Mocatta said in an interview:
"We believe a break of $26.00 has the ability to trigger liquidation of silver with it looking for $18.00."
I am of the opinion that silver is not done falling yet and I have read that if the metal dips below '26', even more severe declines may be in store.
A Safe Haven?
Some investors believe silver is still a safe buy because quantitative easing is approaching again. Some investors really believe this and are just waiting for the Feds to flip the switch to make it happen because they believe money will start flowing back in. The only way these faithful are going to stop waiting is if they are convinced the Feds won't do anything, but with the hint that something might happen remains in the air as the Feds leave open the possibility of further easing.
Why Silver will Rise Again
As some investors look at gold for security there are those who look at silver with the same vision. If currency debasement results and trust in the U.S. dollar dries up, silver is a means to protect wealth and preserve value. There is sensible argument that financial instability is eminent thus setting the stage for silver to climb sometime in the future. With central banks purchasing $18 trillion in assets and the real estate markets still struggling-especially the commercial area where lending institutions are turning heads to some who can't repay loans. It's been called "extend and lend," many believe the action cannot be sustained. Potential consequences that are widely ignored and this will eventually lift the price of silver.
Have Strong Stomachs Investors!
Long term investing in silver may also mean results are a long time away. The global market is currently too weak and continues to weaken so silver prices should remain low. What advice can I give? Buy on a dip but do not expect immediate returns. Prices are continuously being challenged and investors need to commit to the long haul. It might see some extreme moves.
The Options Play
SLV is presently trading at 27.49. Since we expect it to continue down, we are looking at a bear put spread very close to the money with about 90 days time decay protection.
- Buy the September 2012 put with a strike of '27.50' (priced at $1.62)
- Sell the September 2012 put with a strike of '27.00' (priced at $1.35)
- Net Debit to Start: $0.27
- Maximum Profit: $0.23
- Maximum Risk: net debit
- Maximum Time for Trade: 3 months
Reasoning behind the Trade
- Silver is very bearish.
- Analysts are not expecting a big turnaround anytime soon.
- Macro-economic conditions keep the need for silver at a minimum.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.