Silver: Rally Remains Strong As Ever Despite Wednesday's Events

Includes: DBS, GLD, SIVR, SLV, USV
by: Eric Parnell, CFA

Silver is shaking off its latest setback.

Fed Chairman Ben Bernanke rattled the cage of the white metal during his testimony to Congress on Wednesday. During his testimony, he tried to make it clear that the Fed had no plans to launch another round of quantitative easing any time soon. Both gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) were immediately hauled out to the woodshed on the news, with silver in particular declining by -6.8% by the close of trading that day. This caused many analysts to seize the opportunity to declare the end in the rally for silver. Instead, we are likely still just at the beginning of the sustained rally despite the recent setback.

For the purposes of this report, I will be focusing on the iShares Silver Trust . However, the same price principles apply to the ETFS Physical Silver Shares (NYSEARCA:SIVR), the PowerShares DB Silver ETF (NYSEARCA:DBS) and the UBS E-TRACS CMCI Silver Total Return (NYSEARCA:USV).

First, the fundamental thesis for owning silver has not changed at all in the last few days. The monetary spigots from global central banks continue to flow at full blast, with interest rate cuts and new rounds quantitative easing being announced on a regular basis in recent weeks. This ongoing aggressive stimulus and the resulting debasement of fiat currencies continue to support the demand for silver as a hard asset alternative. None of this has changed with Bernanke's testimony.

Second, Bernanke's testimony must be taken with a sizable grain of salt. We have often we heard the Fed Chairman state in the past that no further stimulus would be applied only to soon witness the Fed's readiness to intervene at a moments notice with additional support at the first sign of any traces of market stress. And given the major instabilities underlying today's global markets, the Fed's response is likely to be equally swift the next time around regardless of what they might say along the way. This persistently quick responsiveness is supportive of Silver.

Third, the Fed is already actively engaged in a stimulus program. Operation Twist is not technically QE since the Fed's balance sheet isn't expanding. But it is essentially QE3 by everything but name only. This is due to the fact that the Fed is receiving longer dated Treasuries from the banks in exchange for what is effectively cash equivalents in U.S. Treasuries set to mature in the next three years, for this is about as long the Fed has committed to keep short-term interest rates pinned at 0%. And this latest program is set to run through the end of June. So of course the Fed has no plans to launch QE3. This is because it's been underway in stealth form since early October. The bigger question is whether we'll see what will be known as QE3 but will effectively be QE4 come July 2012. But any flow of stimulus is also supportive of Silver.

Fourth, silver continues to hold technical support at its 200-day moving average. This is particularly important since the white metal recently achieved this critical technical breakout on its recent move higher. Silver holding above this level continues to be a key reading to watch in the coming days in supporting the continuation of the current advance.

Fifth, while the sharp decline on Wednesday was certainly a setback, it simply returned silver to levels it was trading at as recently as a week ago. In other words, Wednesday's pullback simply gave back strong gains from the day before on Tuesday. And silver has already bounced since on Thursday to move above its closing levels from as recently as Monday of this week. So while silver's decline on Wednesday was notable from a headline perspective, it still stands to be higher for the week.

Thus, the silver rally remains as strong as ever despite the events of Wednesday. If anything, the last few days just highlight the underlying volatility associated with owning silver, as it was up +4.28% on Tuesday, down -6.36% on Wednesday and up +2.65% on Thursday. Such is the norm when owning silver. But as long as the fundamental thesis remains in tact and it continues to behave well technically, patience should very well be rewarded by staying the course with the white metal.

Disclosure: I am long GLD, SLV.

Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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