Is Silver The Next Gold?
Abigail F. Doolittle

With gold hitting a historic high this past Tuesday only to have it taken out yesterday, I thought it might be timely to take a look at another precious metal on the move: silver.

Specifically, do the charts and the basic fundamentals support the sense that silver is set to continue its recent run as well? And perhaps more tantalizing, is there any evidence that points to the idea that silver can take out its more than thirty-year-old record high of roughly $50 per ounce?

Based on a scrubbing of the charts and the fundamentals, I am more inclined than not to believe that silver's future may look like gold.

The Charts

The two-year chart of silver is very strong with an even uptrend and several successful tests of support.

The three-year chart of silver shows that the precious metal has recovered from the routing it received mainly in the second quarter of 2008.

While silver's long-term chart (not shown) is one of the more bizarre that I've seen with the precious metal's record high made back in 1980 hanging over it since that time ($50 per ounce to a low of around $4 per ounce), I don't think it means silver will be unable to rise above that shadow and perhaps the case can be made that the peak puts a precedent in the chart for silver to shoot for and overtake.

Overall, the charts of silver look good and support a continued rise, but what about taking out that record price? In my view, the charts fail to provide that answer and so we must turn to the fundamentals.

The Fundamentals

In reading up on silver, it seems as though there are at least six good reasons to think it is set to continue to rise.

  1. Benefits from a Continued Bull Market in Precious Metals - The 10-year charts of both gold and silver (not shown) slope up and to the right and demonstrate that there has been a bull market in precious metals as demand has overpowered supply for at least the last decade. This fact was cemented yesterday with gold closing at an all-time high of $1,275.20 per ounce and silver at its year-to-date high of $20.80 per ounce. Until there is clear evidence of a reversal of this major uptrend in precious metals, it is more likely than not to remain in effect, taking silver with it.

  2. Renewed Jewelry and Silverware Demand - These are the two biggest end-use sectors for silver and both were hit by the global recession of 2008 and into 2009. According to some analysts, there is some evidence, however, of growing demand for silver jewelry and silverware and especially out of China and India.

  3. Rebirth of Silver Industrial Demand - Silver's next biggest end-use sectors are electrical and electronics which were also hit by the recession while the greater use of digital photography also dented industrial demand for silver. Similar to jewelry and silverware, however, there is evidence that demand is coming back from the industrial-side. In addition, silver is likely to find use in a variety of new industrial applications due to its ability to conduct electricity, its unique anti-microbial properties that offer protection against infection and disease, and its reflectivity. According to some experts, there seems the possibility that we will hear more and more about silver's use in solar energy, medical applications, antibacterial textiles, radio frequency identification devices, batteries, water purification, and culinary hygiene.

  4. Rising Investment Demand due to ETFs - Until the advent of silver exchange-traded funds in 2006, investors had to purchase silver from a bullion desk or jeweler or trade in the futures market. Now, however, these physical metal-backed ETFs offer investors a liquid way to invest in silver as a safe haven hedge against other riskier assets.

  5. Economic Fears Fan Renewed Bullion Interest - As the "poor man's gold" silver offers some protection against potential inflation as a physical and transferrable store of value that should retain intrinsic value. However, there's been as much talk about deflation, or a general decline in prices, and while this would likely cut into the value of silver to some extent, on a relative basis, similar to gold, silver would likely shine as a hedge against the fear and uncertainty likely to accompany such a scenario. In addition, even without clear inflation or deflation, there's plenty of fear and uncertainty about the future to go around and silver, especially physical silver, offers a protective investment in such times.

  6. Offers Purchasing Power Against Paper Currencies - Similar to the point above, demand for bullion coins such as Canadian Maple Leafs and American Eagles may increase as investors become increasingly uneasy about the longevity of paper currencies that are chained to unsustainable sovereign debt loads.

Summed up, silver does truly seem like the "dual-purpose" precious metal. Put more eloquently by Jeffrey Christian of CPM Group, "Silver is really attractive because you have strong investment demand and strong fabrication demand. You buy gold when you think the world is going to hell in a hand basket. You buy copper when the economy is booming. In between those two, if you're a bit confused, you buy silver."

Sounds like the perfect precious metal for the present moment.

Will Silver Break Its $50 Peak?

I certainly don't know the answer to that question and I don't think the charts combined with the fundamentals provide it clearly either.

Abigail F. Doolittle
Peak Theories Research LLC
[email protected]

Abigail F. Doolittle is the founder of Peak Theories Research LLC, which is an on-line research firm dedicated to providing investors with a macro long-term view on the financial markets and the economy. The firm's research begins with the analysis of charts and then ties in various economic fundamentals to better understand the trends pointed to in the charts. She has more than 12 years of experience in the financial services industry.

Opinions expressed herein are strictly that of the author and are subject to change without notice and may differ or be contrary to the opinions or recommendations of any professional associations held by the author including the author's employer. The opinions contained herein should not be taken as specific recommendations to be acted upon. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness, reliability or appropriateness of the information, methodology and any derived price contained within this material. The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The author may have or have had interests long or short positions in the securities or related financial instruments referred to herein, and may at any time make purchase and/or sales in them. Neither the author or any person or entity related to the author nor the author's professional associations, including the author's employer, accept any liability for any loss or damage arising out of the use of all or any part of these materials.

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