Silver in 2015 – the gambler’s precious metal

Silver in 2015 – the gambler’s precious metal

Lawrence Williams

Not for nothing is silver referred to as the ‘Devil’s metal’ or ‘gold on steroids’.  Silver investors during 2014 have seen their holdings dwindle in value – it started the year at close to $20 an ounce and looks like ending it near $16 – a fall of around 20% 0n the year while gold’s year end figure looks likely to be much closer to where it started the year, perhaps down around 2.5%.  During the year silver reached over $21 in July but the metal’s performance since then has been, to say the least, dismal, falling as low as $15.28 in early November.  (Prices are London silver prices as recorded by the London Bullion Market Association).

But there are some major anomalies in silver’s price performance over the year in that sales of American Eagle silver coins hit a new record in 2014, while reports of Chinese and Indian consumption have suggested that investment demand is at very high levels in both the East and the West which flies in the face of the price performance.  There is the suggestion too that silver supply will be in a fairly substantial deficit in 2015 (assuming the largely unpredictable investment offtake remains strong), but still the price falters.

In truth silver’s fundamentals look pretty strong to this observer BUT in today’s precious metals markets real fundamentals seem to have little impact on prices which are increasingly being driven by trading on the futures markets.

Indeed well-known, and well-respected, silver analyst Ted Butler has floated an interesting theory on why silver demand (*for American Eagles) is so high while the price continues to languish and fall.  He suggests that one of the big bullion banks, JP Morgan, which dominates the shorts in COMEX silver, is driving down the price using the futures markets while buying up physical metal against the day when it will change tack and let the price of physical metal rise and make enormous trading gains given that effectively silver will be in short supply.  This may be a stretch too far given that JPM would have been buying the silver at prices all the way down from $20 plus, but there is certainly the possibility that financial institutions have been buying physical metal against the day that futures and physical markets turn strongly positive.  The potential profits could be enormous if there is a strong market turnaround, which many feel is a probability in the short to medium term.

But, it will still take an upwards turn in the gold price to trigger a big advance in silver.  At the moment gold is remaining relatively depressed – at least in US dollar terms – due to the strong performance of the dollar against most other currencies.  This has been exacerbated by the overall strength of the stock markets, buoyed up by talk of economic recovery in the US, which makes gold seem less attractive to the investment public and the institutions.

Stock markets have been boosted by the unprecedented amount of liquidity being pumped into the markets to try and ward off recession through ‘Quantitative Easing’ type programmes.  While the U.S. Fed has effectively ended its most recent easing programme it is still obviously nervous that the markets will stutter and dive once the effects of ending the easing programme begin to impact and consequently is not yet prepared to allow interest rates from their exceedingly low levels in case interest rate rises really spook the markets.  The Fed is aware that the stock market is precarious and may have risen too far too fast (i.e. in a potential bubble situation) and is playing an exceedingly cautious game so as not to rock the boat.  If markets do start to fall they could drop dramatically – the current six year bull market may well have run its course and bull markets usually end  with some very sharp falls indeed.

An end to the bull market is, of course, inevitable but picking exactly when is the real dilemma facing the investor.  If you hang on for the top it may well pass before you realise it and once the market turns round then there tends to be substantial selling pressure as big investors take profits, and this tends to generate the steep downwards spiral in prices which usually signifies the end of a major bull market.  If there is a feeling that the bull market is indeed close to its top this could precipitate a move into gold as an asset class providing some investment insurance – and a move into gold, and a consequent rise in the gold price, could be all that silver needs to take off.  And if silver does start to take off we could see some very sharp gains indeed.  Even a rise back to $20 would be a 25% increase from current levels.  Some may well see that as a gamble worth taking.

Silver bulls – forever optimists – are, of course, looking for a return to its 2011 high of close to $50, and more.  Indeed many look for a return to what they see as the historic gold:silver ratio (GSR) of 16:1 (which would mean a silver price of $75 at a $1200 gold price) but this writer thinks that this GSR level is unlikely, perhaps ever again despite the various arguments supporting this proposition.  But should gold start to move up a return to a GSR of 50 or a little lower would definitely be on the cards as the more volatile silver price gains traction.

So what are the prospects for this kind of upwards performance in 2015?  Downside in the gold price over the year is generally seen as somewhat limited, although a further fall before a major recovery, cannot be ruled out.  This suggests that silver may well provide an interesting gamble (and a gamble it would be) on a gold price rise during 2015.  The downside in silver is probably limited, although some observers still see a drop to around $13 if gold doesn’t pick up, but the upside potential if gold does improve in price is very positive.