The mighty iShares Silver Trust ETF (SLV) has been on a tear lately and traders are rightfully trying to determine if the course it is on will continue. It seems to be a confluence of positive and negative factors which are unintentionally conspiring to send the price of silver and silver ETFs skyward.
On one side are the economy bulls. Those that believe the U.S. economy is improving, and by extension the global economy, are betting that silver, the precious metal that splits time as an industrial metal, will rise due to demand for products that have components which require silver.
On the negative side are the market participants that believe the economy is about to crash and that the feckless Fed will crank up the money machine to further devalue the dollar while jacking up the price of SLV, the SPDR Gold Shares Trust ETF (GLD) and other precious metals oriented investments.
There are also those who believe the current ratio of silver prices to gold prices will drive the price of silver higher. That being the belief that silver is trading at a lower level relative to gold than the historical norm. Of course it can be argued that the price of gold should decline to normalize the ratio. But silver bulls are often gold bulls and that majority of a minority believe SLV will rise at a greater pace than GLD while GLD also ascends.
Other factors are also in play, such as the ongoing acquisition of precious metals by central banks around the world opting to diversify their cash reserves while hedging against the decline of certain currencies like the U.S. dollar and the marked-for-death euro.
Technically SLV looks like it has room to run.
I've drawn the red line under what I think is a very likely support level. 2011 can be taken as a year of anomalous volatility which was out of line with the fundamentals. The green line is a very steep but confirming drawdown in price consistent with a very wide-range consolidation. The recent spike brings SLV to the top of that range. My expectation is that this consolidation is near the end and SLV should resume a more "normal" uptrend consisting of higher lows and higher highs.
Next I've charted SLV alongside GLD.
Here I've underscored the respective trends for SLV (Red) and GLD (Green). There are many similarities between the two with SLV being far more volatile, in large part due to it being perceived as both a precious metal and industrial metal.
While suffering much greater price swings at times than GLD, SLV can act like a leading indicator for GLD. Here I've circled the peak of SLV in 2011 (Blue) and the peak of GLD in 2011 (Purple) which occurred a few months after SLV's peak.
The bottom line is that I expect SLV, and GLD, to appreciate from here and eventually to much higher prices. SLV will continue to be more volatile but it also presents greater profit potential.