Is Silver Ripe for a Rally?
Lauren VillagranNEW YORK - Silver has languished through a six-month slump, but with perceptions changing about the direction of interest rates, some analysts say the metal's fortunes may soon improve.
Silver has two faces: It's both a precious and industrial metal and, as such, its price is affected by both physical supply and demand, and the inflationary forces that lead investors to seek safer havens for their funds. The performance of precious metals this year has been lackluster; in recent weeks, gold and silver have suffered amid the uncertainty plaguing financial markets.
But some analysts say silver and gold - the precious metals leader - are poised for a rally. They're betting that economic growth will slow if problems in the mortgage market persist and spread, and they're banking that the Federal Reserve will trim interest rates to encourage lending and business growth - which could further weaken the U.S. dollar and serve as a boon to silver and gold.
But recently, unraveling problems in the subprime mortgage market and the deteriorated credit conditions that followed have left many investors risk-averse and uncertain about where to stash their funds. Stocks have had an extremely volatile run this month - until calming somewhat this week - while commodities markets have been hit by investors' flight to more stable assets, including Treasurys. Gold, silver and other commodities also sagged as funds came to the markets to raise capital to cover losses elsewhere.
"I expect the moment the dollar starts going down again, gold will attract more speculative money and long-term investors," said Geoff Blanning, head of commodities and emerging market debt at Schroder Investment Management. He expects silver will mimic gold.
Although silver tends to track gold's direction, the recent downward swing in the silver market has been sharper. The silver market is more thinly traded and much more volatile.
Silver prices have fallen about 7 percent this year to just above $12 an ounce, after peaking in February just shy of $15 an ounce. By comparison, gold prices have edged up 5 percent.
"Other commodities have tripled in price," Blanning said. "So far the price of silver has only doubled, so there is a long way to go."
Both silver and gold are up for the week.
Davide Accomazzo, head of trading at Cervino Capital Management LLC, notes that most commodities move in sync with economic growth. If the problems in the credit market hurt the overall economy, then silver will suffer from that point of view, he said. But Accomazzo added that any move the Fed makes to cushion the credit market - whether in the form of cash injections or rate cuts - could undermine the dollar and bolster precious metals.
Silver and gold "reflect inflation in the system," he said. "To the extent the Federal Reserve and central banks will liquify the system massively, I think that eventually plays quite well for gold and silver."
The Fed is scheduled to meet Sept. 18 to discuss the direction of its benchmark federal funds rate, officially unchanged at 5.25 percent since July 2006. Lower interest rates can encourage lending and stimulate growth but also weaken a currency. The central bank has recently deviated somewhat from its long-held view that inflation is the primary concern; the drying up of credit is now also high on the Fed's to-watch list.
"When you get to the point where the Fed will do anything to inject liquidity, that's when precious metals will have a field day," said Axel Merk, president of Merk Hard Currency Fund. "The Fed is more interest in the stability of markets than stability of the dollar."
There are risks to the downside, of course. Should the Fed keep its benchmark interest rate steady or vote for a hike, that could disappoint Wall Street investors and the commodities markets, and pull some support from precious metals. Societe Generale metals analyst Stephen Briggs noted in a client report that silver "may continue to struggle," much as it has since the February peak.